- Problem Definition

In the previous chapter we have calculated the economical evaluation of offshore regasification facilities project by using Interest Rate Return (IRR), furthermore this week the analysis of project feasibility will be conducted using External Rate of Return (ERR). The result of this economic modeling is useful for the company as an evaluation material and assist the Board of Direction in decision making.

- Identify the Possible Alternative

Calculations still use 2 business schemes as follows

- Owning

Company purchase newbuilt offshore regasification facility at shipyard or to shipowner

- Leasing

Company leasing the offshore regasification facility to ship management or shipowner

The assumption for offshore regasification capacity is 100 MMSCFD.

- Development of The Outcome for Alternative

Based on Sullivan 16th edition chapter 5, there are 3 (three) alternative methods to determine whether a project is feasible or not, ie

- IRR (Interest Rate of Return) Method – Part 1
- ERR (External Rate of Return) Method – Part 2

The ERR method using the net cash flow generated to be reinvested or borrowed with using external interest rate (€) to get the economical calculation evaluation. At the end, the ERR method produces result identical as same as IRR method.

Step 1 : All of the outflows are discounted to time zero (PW) at €%

Step 2 : All of the inflows are compounded to end period (FW) at €%

Step 3 : Equation the inflows and outflows will be generated the ERR

- Payback Period Method – Part 3

- Selection Criteria

**Owning**

The assumption used in this calculation is

Table 1. Assumption

Table 2. Owning Scheme Cash FlowBased on the above calculation assumption, we get the calculation model as follows

Table 2. Owning Scheme Cash Flow

The following is shown economical project profile based on cash flow above:

Picture 1. Project Net Cash Flow

The table above shows the total outflows and inflows. Next to get the ERR, then both outcomes will be equalized.

Picture 2. ERR Cash Flow

- Leasing

The assumption used in this calculation is

Table 3. Assumption

Based on the above calculation assumption, we get the calculation model as follows

Table 4. Leasing Scheme Cash Flow

The following is shown economical project profile based on cash flow above:

Picture 3. Project Net Cash Flow

The table above shows the total outflows and inflows. Next to get the ERR, then both outcomes will be equalized.

Picture 4. ERR Cash Flow

- Analysis & Comparison of Alternative

The rule of thumb to justify this project feasibility by using ERR method, **ERR Decision rule: If ERR ≥ MARR. **

- Owning Scheme

ERR generated is 31.68%, then ERR (31.68%) **≥ **MARR (10%). Sehingga dapat disimpulkan bahwa berdasarkan perhitungan menggunakan ERR method, the project is economically feasible to being reinvestment.

- Leasing Scheme

IRR generated is 20.14%, then IRR (20.14%) **≥ **MARR (10%). So it can be concluded that based on calculation using ERR method, the project is economically feasible to being reinvestment.

- Selection of the Preferred Alternative

Based on the calculation of the two business schemes which is owning and leasing, it is found that by using both schemes the project can allocate its profits to other projects with interest at (€) 3%.

However, by looking at the generated ERR value, that is ERR owning scheme **≥** IRR leasing scheme, then it can be concluded that ERR with owning scheme or purchase newbuilt offshore regasification facility is more profitable for company compared with leasing scheme.

- Performance Monitoring and The Post Evaluation of Result

In economical evaluation, besides using IRR and ERR method, then will be done the study of calculations using Pay Back Period (PBP) to get more complete economic adjustment in choosing between the two schemes.

**References:**

- Sullivan, G. W., Wicks, M. E., & Koelling, C. P. (2014). Engineering economy 16
^{th}Edition Chapter 5 – Evaluating a single project., pp.237-239. - Paska, H. M. I. (2015). W12_HMIP_Prioritization Project Portofolio using IRR, ERR and Payback Period Method

Retrieved from

- Setyo, U. D. (2017). W8_UDS_Evaluation in Choosing Best Suplly Pattern Part 1

Retrieved from

https://emeraldaace2017.com/2017/09/23/w8_uds_-evaluation-in-choosing-best-supply-pattern-part-1/

Bu Irene whenever you do any calculations like this you MUST justify or explain where you got your MARR. How can your or should you justify using only 10%? Where are your calculations to show us where you got your 10%?

I am going to REJECT this blog posting and make it subject to you FIRST calculating what is an appropriate MARR. http://pmworldjournal.net/article/using-analytical-hierarchy-process-determine-appropriate-minimum-attractive-rate-return-oil-gas-projects-indonesia/

Why is this so important? Because if you use the wrong MARR then all your other calculations will be USELESS. (Garbage in/Garbage out)

Once you have a realistic MARR then you can redo all these calculations and get the 5 stars they should have earned.

BR,

Dr. PDG, Jakarta