Management Consulting Case Study-Water Utility Company

Case Scenario-
The client is a German-owned water utility that is headquartered in the Northeast United States. An internal financial assessment method known as EVA (economic value added) is used by the customer to assess its performance. This method stresses how earnings and a capital charge affect the company's return.

Operating income (after taxes) plus the fair return on invested capital (WACC*Capital Asset Base) are added up to form the EVA function.

The client's company is now experiencing negative EVA. How would you go about making EVA equal to zero and then making it finally positive?

Additional Information

Due to rules, pricing is dependent on consumption and can't actually be changed considerably. The capital basis, which is mostly made up of water filtration and distribution apparatus and equipment, has not undergone any substantial modifications. Overall, costs have stayed quite steady

Key Questions

The firm has to expand in order to broaden its revenue base. The applicant should consider options for future growth and recover from setbacks.

• Why not provide bottled water instead?
  Although providing bottled water is a nice concept, putting it into practice would probably be challenging without adding more expenses for delivery, packaging, branding, etc.
• What about extending your business to new areas?
  Regulatory issues and other businesses might be obstacles to growing into other locations. History shows that the local community and businesses are opposed to this company's development.

Solutions
Since the WACC makes up the other part of the equation, the first term has the equation's weight, which indicates that Operating Profits have a greater impact on EVA. Once you realise that a significant percentage of EVA is driven by operational earnings, you need to investigate the factors that influence them. However, you shouldn't fully discount the capital asset base since you want to be thorough in your study. The applicant should research what assets are responsible for the capital asset base as a starting point before looking at the consequences for top-line revenue and then the cost components.

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By Vandana