1. Problem Recognition, Definition and Evaluation
My company have a plan to upgrade the refinery unit
by constructed a new H2 Plant. We develop the contract strategy using Turnkey
Project which is from FEED, Detailed Design until Construction will be taken by
EPC Contractor. We only seek the performance and the profit.
I have been request to check alternative technology
and calculate which one is more acceptable basically from economical point of
view.
2.
Feasible alternatives
There is two contractor offer difference technology
with different price.
a.
Contractor A use new technology with invest $
1,908,199 and estimate will earn revenue turn over $ 628,395 on the first year,
$ 832,394 on second year and $ 736,290 in the third year.
b.
Contractor B use old technology with only invest
$ 737,921 and estimate earn $ 295.378 on the first year and $ 590,759 in the
second year.
Discount Rate is now at 5%.
Based on those data i was request to check which one
is better investment.
3.
The cash flow for each feasible
alternatives
4.
Selection of the acceptable criteria.
Using the NPV and IRR, we will analyze which one from
both of the Investmentwill give the best profit.
5.
Analysis for the alternatives
From above cash flow calculation we determine that Both
Contractor can be accept since both have positive value NPV > 0, at
MARR 5% and IRR > MARR.
HoweverNPV contractor A > contractor B, and IRR
contractor A < contractor B, as we can describe at below table.
To find out which one is better investment than we
need to deep dive the calculation.
Based from Engineering Economy, chapter 6, Comparison
and Selection among alternatives, we need to find NPV and IRR for the delta ∆(A-B).
6.
Select the preferred alternative
From above analysis we can take conclusion NPV and
IRR for ∆ (A-B) still have positive value, i.e. NPV > 0 and IRR >
MARR. So new technology from contractor
A even almost 2.6 times higher investment than Contractor B is better form
economical point of view.
7.
Performance Monitoring & Post
Evaluation of Result
Performance and the quality of these calculation will
be proposed to management for further decision.
8.
Reference:
·
·
William G.Sullivan, ElinM.Wicks, and
C.PatrickKoelling.Engineering
Economics-Fifteen Edition, chapter 6, Comparison and Selection among
alternatives(London, 2012).
·
Understanding The Time Value Of Money,www.investopedia.com
·
Time value of money,http://en.wikipedia.org/wiki/Time_value_of_money
Mr Felix,
ReplyDeleteI just wondering why do you calculate project economic evaluation only for turn key period (3 years for project A and 2 year for B)? Does it also represent the whole project lifetime?
CMIIW,
BUD
Good question, Pak Budiono!!!
ReplyDeleteI would also like to see Pak Felix using the same case study but this time, using ERR and Payback Period. See if all 4 approaches yield the same results.
Great case study Pak Felix but I'd like to see you do more with it using the tools & techniques you are learning about. For your W10 posting, take this same case study but this time, apply ERR and Payback Analysis. Compare all 4 methods to see if the result is the same.
Keep in mind that if you post a problem from your real life working experience and demonstrate that you understand how to use the tools & techniques from your Engineering Economy, that you can count it BOTH as credit for your blog AND credit for your problem assignments.
A "twofer"- earned value credit for TWO assignments at the "cost" of only one.....
BR,
Dr. PDG, Jakarta