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

·         

W10_FELIX_SELECTING INVESTMENT USING ERR & PAYBACK PERIODE

1.      Problem Recognition, Definition and Evaluation

Based from previous blog, we will evaluate the project economy using ERR (External rate of Return & Payback Period.

2.      Feasible alternatives

The alternative is same with previous blog i.e Weekly Blog (W-8) posting.

a.       Option A involves an initial investment of $ 1,908,199; earn revenue $ 628,395 on the first year, $ 832,394 on second year and $ 736,290 in the third year.

b.      Option B requires an initial investment of $ 737,921 and estimate earn $ 295.378 on the first year and $ 590,759 in the second year

Discount Rate  at 5%.

3.      The cash flow for each feasible alternatives

 

 

4.      Selection of the acceptable criteria.

Using the engineering economy ERR and Payback periode, we will analyze which one from both of the Investment will give the best profit.

5.      Analysis for the alternatives

Option A (Contractor A).

 

Option B (Contractor B).

 

As previous outcome Both Option can be accept since both have positive value NPV > 0, at MARR 5% and IRR > MARR.

However as an owner we need to make decision which one is better investment.

Option B only involves an initial investment of $737,921, and gives yielding a return of $900,906 two years in the future.

While option A, have $ 1,170,278 for additional capital cost, but return $2.303.109 in three years in the future.

According Engineering Economy Chapter 6, “Comparing and selection among alternatives” we shall analyses the incremental ∆ (B-A)

 

 

6.      Select the preferred alternative

From above analysis we can take conclusion NPV, for ∆ (A-B) still have positive value, and both IRR and ERR > than MARR (5%). So new technology from contractor A even though require more investment cost can be justified.

Additional question for project lifetime; “why i calculate project economic evaluation only for turnkey period (3 years for option A and 2 year for option B)”.  This question also can be answer by Chapter 6, section 6.5 “Useful lives are unequal among the alternatives”.

 

 

 

The result is same, option/Contractor A have NPV > than Option/Contractor B, thus Option A should be selected.

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, and Elin M.Wicks (2012), Engineering Economics-Fifteen Edition, chapter 6, Comparison and Selection among alternative

·         Comparison by Rate of Return: ensc online. Retrieved from httphttp://www2.ensc.sfu.ca/undergrad/courses/ENSC301/Unit05/lecture5.html

·         Rodelas, JessaMarie. The external rate of Return Method. Retrieved from http://www.scribd.com/doc/80335485/The-External-Rate-of-Return-Method