EMBA 21: Quantitative Analysis Case (GROUP 1)

POWERCELL LIMITED
Overview
Powercell Limited is an energy company situated in the South Western part of Nigeria.
Incorporated as a Limited Liability Company in 2012, it has been able to create a niche for itself
in the area of the provision of Power back up systems such the UPS systems and the inverters,
Power protection systems such as the AVRs (automatic voltage regulators), and renewable
energy such as the solar systems, for industrial and home use, having partnership agreements
with known international brands.

About Powercell Limited

Mr. Balogun A. Omotayo, the Chief Executive Officer, of Powercell Limited is a graduate of the
prestigious University of Ibadan where he studied Agric. Economics and graduated in 1985. He
obtained his M.Sc. (Agric. Economics) from the same University. He also attended the UNITEK
School of Renewable Energy, San Jose, California, USA. He is an Alumnus of the North America
Board of Certified Energy Practitioners (NABCEP) which is the gold standard for PV and
renewable energy certification in the world.
His working experience comprises of long stint as Sales Executive in Universal Business
Machines Ltd (Minolta Nigeria) where he rose to the post of National Sales Manager, he also
worked with another reprographic company OPSAM Nig. Ltd as the General Manager Sales.
He is a graduate of NEWAVE ACADEMY Switzerland, in September 2012. He later
became the Managing Director of Popsh Nig. Ltd which was one of the leading UPS companies
in Nigeria then, He later founded and registered Powercell Limited, with Head office in Lagos
located at No 8a Kudeti Street, Akora Villas, off Adeniyi Jones Street, Aba Johnson Crescent,
Ikeja, Lagos, Nigeria.
The company was incorporated in 2005 for the provision of alternative power support to
businesses and homes, by the use of Uninterruptible Power Supply (UPS), Power Inverters, Deep
Cycle Batteries and photovoltaic source of alternative energy.
The Mission of the company includes:
To seek and combine good solar technology with natures most abundant resource to
deliver the cleanest, most affordable and energy efficient solutions for a green future.
To passionately commit to delivering alternative energy choices through lasting
partnerships in order to build a brighter, sustainable future.

To achieve this mission, the Company strives to continuously:

Understand, anticipate and respond effectively to customers changing requirements by

promoting the culture of a User friendly organization where the customer is king;
Improve the quality of products to users through knowledge transfer from foreign
technical partners.

Develop an energy project that will not only be a major supplier of electricity to the
Nigerian populace but will also complement the vision 2020 of the federal Government
Green Power project.

Promote safe working standards that will ensure the safety of personnel and output

The Need for Renewable energy

Powercell Limited was incorporated to take care of renewable energy. Renewable energy is
energy that comes from natural sources like the sun and wind wastes. There is no doubt, that,
Sun and winds are easier to deal with, because, just as the sun must come out every day, so also,
the wind must blow daily. Evidently, Renewable energy is being used as sources of energy
worldwide. Looking at the energy sources in Nigeria and the prevailing power challenges, they
saw a solution that could help in alleviating the power problem. They started by bringing in
inverter from the United States of America, and then battery, as a back-up. They went further to
explore the renewable energy aspect, because they realized that, the world is now focusing more
on the wind and the sun as sources of energy. They felt that Nigeria should not be left behind.
Although, the company has been in the back-up business, (inverter and UPS), for three years
now, but they have been in the renewable energy business for five years.
International Partnership
ABB
As part of the efforts by the Powercell Limited to be a major player in the power sector by
providing consumers with high quality of electricity equipment installed in homes and offices,
the company signed a partnership with ABB as its sole distributor in Nigeria. However, ABB as
a company currently operates in over 20 countries in Africa, they include Algeria; Angola;
Botswana; Cameroon; Cte d'Ivoire; Democratic Republic of Congo; Egypt; Ghana; Kenya;
Madagascar; Mali; Mauritius; Mozambique; Morocco; Namibia; Nigeria; Senegal; South Africa;
Tanzania; Tunisia; Uganda; Zambia and Zimbabwe. They have maintained local presence in
Africa because of the potential of the continent. In order to consolidate their position worldwide, ABB have engaged over 900 employees in three different Research and Development (R &
D) areas in three countries. Considering this type of investment in R&D, the company is
positioned to provide global, regional and local support to all its partners.
Also, ABB introduced the Decentralized Parallel Architecture (DPA) in 2005, because the
Centralized Parallel Architecture (CPA) already in the market has a single point of failure

because of its common battery. In DPA, there is no single point of failure because each module
has its own battery. So, if module fails, the system will still be running. A Safe Swap Technology
is available only in ABB technology, adding that since the modules under DPA are not sharing
one common battery or any other equipment, the operator does not need any safety precaution
before he removes one modular while the system is running. So, it is safe to remove UPS with
hands without performing safety procedures, while the system will still be running. This is the
major advantage of ABB UPS. Each module is a mini system. When one master module fails, it
does not affect other modules; rather the next module becomes the master. Each module has the
same capacity. This has been the selling point for Powercell.
Newave Energy
Powercell Limited, an emerging player in the design and installation of solar energy solutions,
signed a partnership agreement with Newave Energy SA of Switzerland to invest in the
renewable energy sub-sector, also to bring Uninterrupted Power Supply (UPS) with outstanding
quality and reliability to the people of Nigeria. The company has invested more than $2m in the
last 5 years while partnering with Newave Energy.
One of the advantages of this partnership is that, Newave merged with ABB Group of
Companies (a big player in the world power industry). The merger between ABB and Newave
came into being on June 2, 2012 and Powercell signed a partnership agreement with ABB UPS as
their sole representative in Nigeria on September 24, 2012. By this synergic effect, Newave being
a member of the ABB Group, with about 20 years of manufacturing experience in UPS and 120
years of quality power products by ABB, customers will not only save money and protect their
capital investment, but also have lower energy usage and protect the environment.
The second advantage is that, Newave Energy is not just a leading producer of UPS in the world,
but also the pioneer manufacturer of modular and transformer-less UPS.
Products and Customer Base
The company provides ABB UPS available in modular and stand-alone series, and the range of
UPS included: 1-phase UPS, 3-phase Stand alone UPS and 3-phase modular UPS. The company
also introduced into Nigeria 1kVA to 5mVA (5000kVA) UPS range. The target customers of the
low end UPS (1kVA to 10kVA single phase), are small offices, individuals and small-scale
enterprises who needed single phase UPS.
For the high end UPS, (10kVA three phase to 500kVA), the target customers are industries and
hotels, retail and commercial computing centres, telecoms/broadcast stations, hospitals, oil and
gas companies, financial and insurance institutions, transport companies, ministries, places of
worship, ministries, departments and agencies, among others.
The company also provides support service to their numerous customers (see Exhibit 3). With
the companys engineers and sales team who are manufacturer-trained from Newave Energy

headquarters in Quartino, Switzerland. This is a proof, that, the company is committed to

ensuring that Nigerians dont waste money on UPS, but have value for their investments.
The Problem
In the last quarter of 2015, the company noticed a significant gap between its targeted revenue
and the actual, due to the economic restructuring that was going on in its country of operation
and the influx of more competitors. The forex issue that has also occurred and greatly affected
most businesses called for concern. Its management therefore considered expanding its business
tentacles into other untapped areas to solve the forex issue and also add more sources of income
for the company.
The following conversation ensued at the last quarter strategic session:
Tayo: Ladies and gentlemen, because of the current economic situation in the country, especially
with the recent dollar scarcity issue, and the need for us diversify our source of income, whilst
still building our core business, which is power solutions, I feel the need for us to go into
exportation. I have done some research with experienced export traders, and have found out
that cashew nut export is one area we can explore; it has very little requirements, compared to
other items like solid minerals which require licenses, huge capital and are usually cartel driven.
Of course, we have opened up a recent line in our power solutions business, which I had earlier
briefed you on (Carbon Management), and we are already working on how to invest in it, but
this is also an opportunity we may want to consider. What do you think?
Dr. Olusegun: While I appreciate your line of thought, I have a differing opinion concerning the
exportation idea. As someone who had gone into exportation myself, some few years back, I
would not advise the company to go into it, as it is not as easy as it sounds. Many business men
have had their fingers burnt because it takes a lot to go into it and be successful. For instance,
you need to know the specific acceptability requirements of the country of destination, and most
times, it is not really certain till the goods get there, and you know what that means if rejected.
Also, from experience, some things just pop up along the way, which were not known before the
investment is made.
Tayo: I had also given it a thought, that is why I had thought of going through someone who is
already into the exportation of cashew nuts, who can lead us through it, so we do not get our
fingers burnt.
Dr. Olusegun: Nonetheless, I still strongly feel that we should stick to what we know best; the
forex issue, am convinced, will not last too long until it is resolved.
Tayo: Ok, lets do more research on the two alternatives and then determine how to go about it.
The Alternatives

Powercells CEO, Tayo Balogun, on one of his business trips to the UK, hooked up with one of
his entrepreneur friends who introduced him to the carbon management business and with the
world leaders and the Nigerian Presidents recent signing of the COP21 carbon reduction
agreement in Paris, the whole world seemed to be more interested in it. With his friend who is
already into it, and Tayos experience, he knew it would be a good investment opportunity.
However, it was a capital intensive, long-term project with a 50% chance of realizing N15million
annually, and annual operating expenses tuning about N4.5million. Worst-case revenue for a
failure scenario would be N4million annually, for an initial investment of N50million. There is a
25% chance that it will not fall below N10 million and a 25% chance that it will not exceed N25
million. The best-case scenario is that they will make N30 million annually. Figures were
derived from consultants. The company put its hurdle rate at 20%.
Another alternative open to the Powercell management team was an investment in the
exportation of agricultural products, with a special interest in cashew nuts. Apart from the
advantage of generating foreign exchange currencies at cheaper rates, with the dollar rate surge
that occurred in the country recently, its Finance Manager, Dr. Olusegun was pessimistic about
the alternative, from past experience. It was estimated that for an initial investment of
N100million in this project, revenue of about N32million could be generated, with a 50-50%
chance of success. If it fails, it could be disastrous - a loss of about N10million was envisaged.
There is a 25% chance that it will not fall below N5million and a 25% chance that it will not
exceed N50million. The highest expected revenue is N70million Expenses relating to business
registration, licenses and permits, sourcing of products, unplanned extra costs, shipping and
logistics would be N8million. This was Dr. Oluseguns dilemma. Tayo, a risk taker, would even
rather go for both options, if possible, while Dr. Olusegun wanted the agriculture product
option struck out.
One of the management team members, Mary, happened to be a current EMBA 21 participant at
the prestigious Lagos Business School; her boss has encouraged her to use the knowledge
gained to help resolve the dilemma within 1 week. After considering the above information,
a) Compose for each decision alternative, using values obtained in the case, the yearly after
tax cash flows for 5 years.
b) Using the appropriate discount factor indicated in the case, calculate the NPV of each
cash flow scenario.
c) Which of the alternatives should Powercell choose? Assume that both taxation and fixed
costs will be unaffected by any decision made. A tax rate of 30% will also apply in line
with government tax regulations. Apply the straight-line depreciation technique.
d) At what cost of capital (percentage rate) would you consider a change in the
recommendation made in (c) above.

Exhibit 1
Profit or Loss Account for the year ended as at 31st December 2015
Revenues
Sales Income
Cost of Sales
Gross Profit
Expenses
Salary and wages
Subscription/Dues
Entertainment
PAYE
Motor running expenses
Interest on loan
Consultancy/Professional Fees
Rent or Lease Expense
Maintenance & Repairs Expense
Licenses and Permits Expense
Printing and Stationeries
Travel Expense
Advertisement/event
Medical Expenses
Telephone and Internet
Subscriptions/Dues
Public Relation/Commision
Director Emolument
Management Expenses
Fuel and Electricity
General expenses
Bank charges
Donation
Insurance Expenses
Finance Charge -Interest
Staff Training
Depreciation Expense
Total Expenses
Net Income

N
209,625,578.35
(168,651,035.51)
40,974,542.84
8,904,972.80
100,000.00
366,390.00
70,900.00
275,000.00
7,200,000.00
456,000.00
2,950,000.00
494,870.00
310,000.00
184,980.00
3,586,536.32
948,800.00
90,000.00
991,245.00
50,000.00
506,450.00
3,067,455.00
165,000.00
490,720.00
1,541,790.00
691,776.05
1,000,000.00
200,000.00
1,657,237.66
110,000.00
732,675.00
37,142,797.83
3,831,745.01

Exhibit 2
Balance Sheet as at 31st December 2015
ASSETS
Current Assets
Cash on Hand
Accounts Receivable
Inventory
Total Current Assets
Property and Equipment
Furniture and Fittings
Office Equipment
Plant and Machinery
Accum. Depreciation - Property & Equipment
Total Property and Equipment

2,580,010.00
169,709,424.35
37,245,152.00
209,534,586.35

2,563,000.00
291,500.00
2,030,000.00
(1,401,675.00)
3,482,825.00

Total Assets

213,017,411.35

LIABILITIES AND CAPITAL

Current Liabilities
Accounts Payable
Director's current Account

115,135,298.50
37,245,152.00

Bank Overdraft
Total Current Liabilities

2,300,000.00

Long-Term Liabilities

47,469,805.83

154,680,450.50

Total Long-Term Liabilities

Total Liabilities

47,469,805.83
202,150,256.33

Capital
Retained Earnings

7,405,210.01

Net Income

3,461,945.01

Total Capital
Total Liabilities & Capital

10,867,155.02
213,017,411.35

Exhibit 3
List of Projects and References
S/N Client

Address

Service Rendered

Central Bank of Nigeria

Lagos Head Quarters,

Marina, Lagos.

Installation &
Commissioning of 2MW
ABB UPS.

Akintola Williams Deloitte

235, Ikorodu Road, Ilupeju,

Lagos.

Installation of 2 units of
30KVA UPS.

Procter & Gamble Nigeria

Limited

Agbara Industrial Estate,

Ogun state.

Installation of 2 units of
400KVA UPS.

Olusegun Obasanjo
Presidential Library

Otta, Ogun State.

Installation of 100KVA and

50KVA UPS.

GLO Base Station

Banana Island, Ikoyi,

Lagos.

Installation of 30KVA
Inverter.

Karrington Ltd

10-12, Somorin Okeowo

Str., Ifako Gbagada, Lagos.

Installation of 2 units of
400KVA UPS.

Department of Defence US
Embassy in Nigeria

Abuja.

Installation of 25KVA UPS.

Nigeria Army Medical

Centre (NA44) DOD Project

Kaduna.

Installation of 20KVA UPS.

Waltersmith Petroman Ltd

Ikoyi, Lagos.

Installation of 15KVA UPS.

10

Telligent Engineering Ltd

Dolphin Estate, Ikoyi,

Lagos.

Installation of 100KVA
Modular UPS.

11

Federal Inland Revenue

Service (FIRS)

Awolowo Road, Ikoyi,

Lagos.

Installation of 3 units of
20Kva UPS.

12

MTN Base Station

Banana Island, Ikoyi,

Lagos.

Installation of 30KVA UPS.

13

Champion Fire TV

2, Iyasuna Str., Akiode,

Ojudu Berger Lagos.

Installation of 20KVA UPS.

14

NAF 445 Medical REF

Laboratory

Ikeja, Lagos.

Installation of 20KVA UPS.

15

Ministry of Defence

FCT Abuja.

Installation of 20KVA UPS in

Data Centre.

16

Radiology Dept. Women &

Child Hospital

Ewohimi, Agbor Delta

State.

Installation of 80KVA UPS.

17

IBIS HOTEL

23, Toyin Str., Ikeja Lagos.

Installation of 2 units of
400KVA UPS.

18

ABB NIGERIA

Plot 239, Etim Inyang

Cresent, V/Island, Lagos.

Installation of a wide range

of UPS Systems.

19

ABB COTE D'IVOIRE

Cote DIvoire.

Installation of UPS Systems.

20

Abuja Investment Co. Ltd

Abuja.

Installation of 10KVA UPS.

21

Lightning Network

Ikeja, Lagos.

Installation of UPS Systems.

Appendix 1
The Cashew Nut Export Market
The cashew tree is a tropical evergreen tree that produces the cashew seed and the cashew
apple. It can grow as high as 14 m, but the dwarf cashew, growing up to 6 metres, has proved
more profitable, with earlier maturity and higher yields
Nigerian raw cashew nuts are in high demand particularly in Asia and most sellers will begin to
enter into contracts with their foreign off-takers as farm gate prices become known today.
The cashew nut season which typically lasts till June, is most rewarding in its first three months
when the kernel out-turn ratio (KOR) is highest. Kernel Out turn ratio which simply implies
the percentage of the good cashew kernels recoverable from a lot of raw cashew nuts is higher in
the months before the rains come. And so, better KOR means better money. Typical KOR at the
start of the season is 51 percent but this dips to as low as 44 percent by June so new entrants are
advised not to make ambitious commitments far into the season.
Typically, season flag-off prices start at about N60,000.00 per metric tonne and sell between $900
to $1,500 per metric tonne CNF (Cost and Freight) but could fluctuate upwards or downwards
very quickly based on the workings of the market. Traditional buyers of Nigerian RCN are
Indians, Vietnamese and Chinese.
For the few Nigerians who export cashew, the business has been of instant success. Driven by
the rise in demand from China, India and other fast-growing economies, the global cashew
boom has generated profits at most trading houses. Together, some cashew exporters are worth
millions of dollars in annual revenue. Experienced dealers have said that there are more

opportunities to make money in cashew exports with the reported sharp rise in imported raw
cashew nut prices from East Africa. This is encouraging buyers to look for greener pastures in
other countries.
With the government and the private sector campaigning to farmers to increase
local cultivation, cashew exports could be inching closer to a new peak of 400,000 tonnes, and
with world price rising and expected to remain steady.
Exhibit 4