W11_FELIX_EVALUATING H2 RICH PROPOSAL

1.      Problem Recognition, Definition and Evaluation

There is excess H2-rich gas from Plat forming unit as big as 28knm3/day. Right know those excess was sent to the NPU flare. H2-rich gas unavoidably flaring at NPU flare that causing opportunity loss as 3.9 million USD/year.

Base from it, The Plant was considering making a new H2 recovery unit, so the excess could be useful by sending it directly to fuel gas System.

Our consultant who is responsible for the FEED already calculate that budget requires for construct new H2 recovery unit will take USD 18,127,000.

Using Engineering economy method we will describe whether the project is economical justified, how much the profit for useful life and when breakeven.

2.      Feasible alternatives

The analysis will be based for below alternative.

a.       Accept the proposal if IRR, ERR, NPV is positive

b.      Stop and find other alternative.

3.      The cash flow for each feasible alternatives

Based from consultant calculation with new H2 recovery unit we can save USD 3,913,000 per year. 

Useful life of the unit estimated will have 20 years.

Pertamina Hurdle rate for 2012 i.e. 12.6%

Depreciation cost using SL (straight line) method

Income tax rate is 30%

The construction stage estimate will take 2 years.

20% Construction Cost will be provided at first year and the rest on second year.

 

The cash Flow can be shown at below table:

 

4.      Selection of the acceptable criteria.

Using engineering economy we will calculate NPV, IRR, and Payback period.

If NPV or PW > 0 and IRR > hurdle rate than the proposal should be undertaken.

5.      Analysis for the alternatives

Using Ms. Excel spreadsheet we can calculate the proposal as below table:

 

6.      Select the preferred alternative

Based from above calculation NPV or PW was positive i.e. USD 2.695.000,  IRR 15.2% > than MRR (hurdle rate) 12.6%. 

Thus we conclude that new H2 plant is economically acceptable.

7.      Performance Monitoring & Post Evaluation of Result

H2 Recovery project now is under CAPEX and in final bidding stage. Performance and the quality of these calculations will be challenge during the stage of operation.

8.      Reference: 

 

·         William G.Sullivan, and Elin M.Wicks (2012)  Engineering Economics-Fifteen Edition, chapter 11, Breakeven analysis

·         Internal Rate Of Return: An Inside Look. In investopedia online. Retrieved from http://www.investopedia.com/articles/07/internal_rate_return

·         Chapter 6 - Investment decisions - Capital budgeting. In FAO Corporate Document Repository online. Retrieved from http://www.fao.org/docrep/W4343E

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