# W13_TH_Selection LNG ISOtank Using Present Worth Method

##### 1. Problem Definition

The decline in world oil prices resulted hard competition between gas and oil fuel. As we know that gas is alternative fuel beside oil. Gas is feasible to use when oil price above 50 \$/barrel. When oil price is around 50 \$ /barrel, gas player need to very efficient on supply chain to make sure gas price is still acceptable for costumer. Indonesia is now developing LNG retail supply chain. One of the critical parts of this supply chain is LNG ISOtank. Author wants to reduce cost by selection on LNG ISOtank Investment.

Figure 1. LNG ISOtank Truck

##### 2. Develop the Feasible Alternative

Manufacturer purpose 2 alternative, among others:

1. Using LNG ISOtank ASME U stamp
2. Using LNG ISOtank that follow ASME U stamp

Compare Value from Present Worth Method approaching will be used to select the best option.

##### 3. Development of The Outcome for Alternative

Calculate all variable including Capital Expenditure/Capex, net income, operating cost, maintenance cost, and salvage value.

##### 4. Selection Criteria

The acceptance criteria when the present worth value or PV ≥ 0 or the large value.

##### 5. Analysis & Comparison of Alternative

Regarding to company data, that we summarize on Tabel-1 which represent for using LNG ISOtank ASME U stamp.

Tabel-1 LNG ISOtank ASME U stamp Cash Flow (in IDR)

Refer to Bank Indonesia Rate at 2017 is 7%, now we can drag Future Value/FV from 10th year to zero (initial) to calculate Present Value/PV, a summarize calculation represent on Tabel-2.

Table-2 PV for all cash flow LNG ISOtank ASME U stamp (in IDR)

Regarding to Tabel-1 and Tabel-2 now we can total Cash Flow in and out IDR. 1,425,478,520 + IDR. (1,080,000,000) = IDR. 345,478,520 (LNG ISOtank ASME U stamp is economically justified because PW ≥ 0 ) but we not finished yet, we have to calculate for LNG ISOtank that follow ASME U stamp.

next step we calculate for LNG ISOtank that follow ASME U stamp, the cash flow show on tabel-3.

Tabel-3 LNG ISOtank that follow ASME U stamp Cash Flow (in IDR)

Regarding to tabel-3, now we can calculate PV for all year cash flow, it shown on tabel-4

Tabel-4. PV for all cash flow LNG ISOtank that follow ASME U stamp (in IDR)

Regarding to Tabel-3 and Tabel-4 now we can total Cash Flow in and out IDR. 1,420,395,027 + IDR. (918,000,000) = IDR. 502,395,027 (LNG ISOtank that follow ASME U stamp is economically justified because PW ≥ 0 )

Now we can compare each PW from LNG ISOtank ASME U stamp and follow ASME U stamp, it shown on tabel-5

Tabel-5 Comparison LNG ISOtank ASME U stamp and follow ASME U stamp Present Worth Value (in IDR)

6. Selection of the Preferred Alternative

Regarding to tabel-5 it shown that follow ASME U stamp has PW Value higher than ASME U stamp, gap value between them is IDR. 156,916,507.08, it can conclude that follow ASME U stamp in economically point of view can justified to select.

7. Performance Monitoring and the Post Evaluation of Result

Management must monitor maintenance cost, because maintenance cost has given effect to select better decision.

References:

1. Sullivan, G. W. (2014). Engineering Economy 16th Chapter 5 – Evaluating a Single Project, pp. 213-215. Pearson. Sixteenth Edition.
2. BI Rate and Primary Reserve Requirement Lowered Again (February, 2016). Retrieved from http://www.bi.go.id/en/ruang-media/siaran-pers/Pages/sp_181416.aspx

## 1 thought on “W13_TH_Selection LNG ISOtank Using Present Worth Method”

1. Great case study Pak Tommy but I do question your use of 7%. Should you be using ONLY the COST of the money or should you be using the Weighted Average Cost of Capital (WACC) or should you be using the Minimum Attractive Rate of Return (MARR) as the basis for your calculations?

Have you read Lita Liana’s paper yet? http://pmworldjournal.net/article/using-analytical-hierarchy-process-determine-appropriate-minimum-attractive-rate-return-oil-gas-projects-indonesia/?lipi=urn%3Ali%3Apage%3Ad_flagship3_pulse_read%3Bzx66NZmmQrKJ3%2BZJpWDqkw%3D%3D If not it is worth reading as many companies in Indonesia are using an unrealistically low interest rate, making their projects seem more attractive than they really are.

BR,
Dr. PDG, Jakarta