- Problem Evaluation
Kediri is a city in east java; My Company has a Fuel Terminal in this city but was closed on 2009. Kediri consumes fuel almost 4% around east java region. And from the fuel consume forecast it will be growing up 3% each year.
Phenomena appear in Indonesia and Kediri also, which non subsidiary fuel consumption rise significantly and lead in the market. It is very different condition than few years ago. In this unpredictable situation, we need to prepare the facility of non-subsidiary fuel to catch the opportunity.
- Development of feasible alternatives
There are three alternative Fuel Terminals as supply point to supply Kediri area to catch the opportunity:
- Existing pattern; Surabaya, Malang, and Madiun Fuel Terminal as supply point to supply Kediri area
- Shortcut pattern; Tuban Fuel Terminal as supply point to supply Kediri area. Tuban regularly also supply to Fuel Terminal in Surabaya, Malang, and Madiun
- New pattern; Kediri Fuel Terminal as supply point to supply Kediri area. In this alternative we will reopen the Kediri Fuel Terminal.
Multi Attribute Decision Making Method will use in choosing the best alternative pattern to supply Kediri area not only at economic aspect but also other aspect that influence customer satisfaction such as delivery time, transport loss, operational flexibility, and etc.
- Development the outcome for each alternative
In this part (1st part) I will use method that different from my Company usually used (NPV, IRR, Payback Period and PI) but tension only on economic criteria that are B-C Ratio and ERR.
B-C Ratio 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. This is the process of quantifying cost and benefit of project over a period time.
External Rate of Return (ERR) is also known as the “Modified Internal Rate of Return”. This method measured not only depends on the cash flow from an investment and also on any assumptions about reinvestment rate.
- 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).
ERR decision rule: If ERR ≥ MARR, the project is economically justified. So in this evaluation I will eliminate alternative with ERR value less than 10.5% (My Company Hurdle Rate), because it not economically feasible.
- Analysis and comparison of the alternative
Data of three alternatives that use in B-C ratio calculation are show below:
Table 1. Alternatives data
Figure 1. Profit per year shortcut pattern and new pattern alternatives
Shortcut Pattern and New Pattern have incremental benefit each year because in this alternatives have investment to improve facility to catch increasing demand opportunity. Present Worth of this profit PW (B) is 1,347,925,669,473 IDR.
Calculation result of Conventional and Modified B-C Ratio are in table below:
Table 2. B-C ratio calculation result
There is no B-C Ratio of each alternative that less than 1, so no one will be eliminated. Existing Pattern doesn’t have Modified B-C Ratio (N/A) because this alternative doesn’t have investment cost.
This three alternatives data such as interest, period, investment, benefit and cost to calculate ERR:
Table 3. Alternatives data
Using data in table 3, we get the result of ERR calculation of each alternative:
Table 4. ERR formula and calculation result
Based on ERR calculation table above there is no value less than MARR 10.5% so all alternative economically justified. In existing pattern there is no ERR value because it does not have investment cost so we cannot calculate it.
- Alternative selection
All method show shortcut pattern alternative dominating over other alternative in both B-C Ratio and ERR Method. This alternative is recommended to be used.
- Performance monitoring & Post Evaluation Result
Even I already have the chosen alternative base on economic aspect, I will evaluate this project base on other aspect such as operational and customer satisfaction. In next evaluation (2nd part) I will use AHP method to capture more aspect not only economic.
- 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.
- Sullivan, G. W., Wicks, M. E., & Koelling, C. P. (2014). Engineering economy 16th Edition. Chapter 5 – Evaluating a Single Project., pp.210-263.
- Planning Planet. (2017). Benefit Cost Analysis. Retrieved from http://www.planningplanet.com/guild/gpccar/managing-change-the-owners-perspective
- Mind Tools. (2017). Cost-Benefit Analysis. Retrieved from https://www.mindtools.com/pages/article/newTED_08.htm