W3_UDS_Terminal Operating Cost Evaluation

  1. Problem Evaluation

Kediri Fuel Terminal was closed on 2009 because it is inefficient. Now this area is distributed from Surabaya, Malang and Madiun Fuel Terminal. Best on future demand estimation, fuel volume of this area will be raising and we need more storage of new product. Those are the reasons why we want to reopen Kediri Fuel Terminal again.

So we need to evaluate Operating cost of Kediri Fuel Terminal quotation from our subsidiary is IDR 130/Liter. Is the quotation appropriate? If it is not, how much is operating cost of Kediri Fuel Terminal?

  1. Development of feasible alternatives

There are three options approach in evaluate Operating cost of Kediri Fuel Terminal :

  • Accept the quotation, as price as IDR 130/liter (Alternative A).
  • Using cost approach estimation. Historically in 2009, Kediri Fuel Terminal cost/liter was about IDR 108 (Alternative B).
  • Using comparison with other Fuel Terminal cost that operated by ourselves. The cost/liter is IDR 157 (Alternative C).
  1. Development the outcome for each alternative

In this evaluation I am using Benefit – Cost ratio method in Evaluating all alternative. This method is very useful to select alternative in economical approach with a simple way, because it compare positive (cash in) and negative (cash out) cash flow of each alternatives.

  1. Selection of criteria

The Rule of thumb in Benefit – Cost ratio method is Alternative will be feasible if B-C ratio greater than one. So in this evaluation we will eliminate alternative with B-C Ratio less than one, because it not economically feasible (their cash out higher than their cash in).

  1. Analysis and comparison of the alternative

This calculation using data as below:

  • discount rate 10.5% (as a Pertamina Hurdle Rate of Investment)
  • Investment Cost (I) = IDR 19,854,221,656
  • Benefit (B) per/year = IDR 100,937,362,800
  • Operation & Maintenance (O&M) /year :
    1. Alternative A = IDR 54,674,404,850
    2. Alternative B = IDR 45,421,813,260
    3. Alternative C = IDR 66,029,858,165
  • There is no market value because we use it until the end of the life cycle (20 years)

Conventional B-C ratio with PW:

Modified B-C ratio with PW:

B-C ratio each alternatives:

Table 1. B-C Ratio Result

All the alternatives are shows B-C Ratio’s calculation greater than one. So all alternative is economically acceptable.

  1. Alternative selection

Base on B-C Ratio Alternative B is preferred to be used because it gives the highest value than other but it use historical data of year 2009. As we know 8 years is a long time and everything has changed, so it would be better if we use Alternative A. This alternative is a second highest value and also more efficient than operating cost that operated by ourselves.

  1. Performance monitoring & Post Evaluation Result

Different alternatives only affect the amount of the B-C ratio, no effect on project tolerability. Extra analysis needs to be done to present input in order to acquire a better conclusion.

References

  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P.(2014). Engineering economy 16th Edition. Chapter 10 – Evaluating Project with the Benefit – Cost Ratio Method., pp.467-491. Prentice Hall.
  1. Planning Planet. (2017). Benefit Cost Analysis. Retrieved from http://www.planningplanet.com/guild/gpccar/managing-change-the-owners-perspective
  2. Mind Tools. (2017). Cost-Benefit Analysis. Retrieved from https://www.mindtools.com/pages/article/newTED_08.htm
 

1 thought on “W3_UDS_Terminal Operating Cost Evaluation”

  1. Pagi Pak Dhanu,
    You were doing REALLY great until you got to Step 6 and then instead of choosing B which is what you told us you were going to do in Step 4, you arbitrarily and unilaterally decided on Option A, but with only vague justification.

    What I suggest you do, is for your W4 blog, take Options A and Options B and show us using financial or multi-attribute decision making, why or how Option A is better than Option B?

    Also because you are working SMART not HARD and demonstrated to me that you know how to use Benefit Cost Analysis correctly, you are able to claim BCWP credit for 1 problem from Chapter 10 in Engineering Economy. Just be sure to allocate your hours as fairly as you can between the Blog Project and the Questions Project, so you end up with realistic SPI and CPI values.

    Other than that, you did a great job and I look forward to seeing your W4 posting PLUS don’t forget that the Introductions to your PAPERS are due this week.

    BR,
    Dr. PDG, Jakarta, Indonesia

     

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