W13_FELIX_APH PROJECT ANALYSIS WITH DEPRECIATION & TAXES

1.      Problem Recognition, Definition and Evaluation

“Supply and Installation of Air Preheater in Furnace Units ARHDM 12/13-F-101”project intended to capitalize on content fuel gas heat to heat combustion air temperature of approximately 34 ° C to> 400 ° C and simultaneously lowering Outlet stack temperature of 570 ° C to 190 ° C. The positive impact of the project (goal) was to reduce the consumption of Refinery Fuel (Fuel / Energy Saving) so that operating costs can be minimized.

Project objective is to reduce operation cost for USD 1,050,000 per year.

Feasibility study release estimate class 4 for budgeting in the amount of USD 3,245,000.

However after finalization of FEED by Engineering Consultant the project cost grow become USD 6,918,800.

Using Engineering Economy we will evaluate whether the project still justified or no.

Pertamina economic MARR = 12.6%, Payback period shall before useful life i.e. 20 years.

This project will be proposed under CAPEX and shall be considered for covering income tax, depreciation and financing costs (interest on loans).

2.      Feasible alternatives

There are two alternative:

a.       Accept the proposal and continue the project or

b.      Doing nothing.

3.      The cash flow for each feasible alternatives

a.      Cash flow with  capital cost = USD 3,245,000

Input Data:

 

Cashflow :

 

 

b.      Cash flow with  capital cost = USD 6,918,800

 

 

4.      Selection of the acceptable criteria.

Using engineering economy we will compare the IRR , NPV, ERR and payback period from above option

5.      Analysis for the alternatives

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

a.       IRR result for capital investment = USD 3,245,000

 

b.      IRR result for capital investment = USD 6,918,800

 

6.      Select the preferred alternative

Based from above calculation we can find that the project is not economical justified, as be seen at below table.

With higher capital investment made IRR become only 9.92% < than Pertamina MARR = 12.6%. NPV also negative.

So it is better to drop the project.

7.      Performance Monitoring & Post Evaluation of Result

Performance and the quality of these calculations can be challenge for further review. The project its self already stop before bidding stage.

8.      Reference:

·         William G.Sullivan, and Elin M.Wicks (2012)  Engineering Economics-Fifteen Edition, chapter 7, Depreciation and Income Taxes. London Pearson Education Ltd.

·         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/