W13_AI_Offshore Regasification Project Economical Evaluation – Part 3

  1. Problem Definition

The previous chapter, economical evaluation offshore regasification facilities project has been calculated by using Interest Rate Return (IRR) and External Rate Return (ERR), henceforth this chapter the feasibility project will be analyze by using Payback Period Method. The result of economical evaluation modelling is providing useful information for Board of Direction as evaluation substance to get the best decision.

  1. Identify the Possible Alternative

The calculation still using 2 (two) business scheme, as follow:

  • 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.

 

  1. Development of The Outcome for Alternative

Refer to Sullivan 16th edition chapter 5, there is 3 (three) alternative method to determine feasibility of the project, as follow:

  • IRR (Interest Rate of Return) Method – Part 1
  • ERR (External Rate of Return) Method – Part 2
  • Payback Period Method – Part 3

Payback period method has been used as a measure of liquidity project, this method shows how fast an investment can be recovered. Low value payback period is considered desirable.

  1. Selection Criteria
  • Owning

The assumption for this calculation, as follow:

Table 1. Assumption

According to the assumption above, the model calculation by using discount factor as follow:

Table 2. Owning Scheme Cash Flow

Here is the cash flow of the owning scheme project profile, as follow:

Picture 1. Discounted Payback Period

  • Leasing

The assumption for this calculation, as follow:

Table 3. Assumption

According to the assumption above, the model calculation by using discount factor as follow:

Table 4. Leasing Scheme Cash Flow

Here is the cash flow of the leasing scheme project profile, as follow:

Picture 2. Project Net Cash Flow

 

  1. Analysis & Comparison of Alternative
  • Owning Scheme

Based on Payback Period Method, using owning scheme in 11 years the investment can be recovered.

  • Leasing Scheme

Based on Payback Period Method, using owning scheme in 14 years the investment can be recovered.

 

  1. Selection of the Preferred Alternative

Based on the calculation of both business scheme which is owning and leasing, found that by using owning scheme the investment can be recovered much faster than leasing scheme.

  1. Performance Monitoring and The Post Evaluation of Result

In economical evaluation, based on calculation using IRR method, ERR method and Payback Period Method resulted that owning scheme more profitable than leasing scheme. The number of IRR and ERR higher and faster to get the investment payback period as well. Furthermore, based on the scheme that has been selected, sensitivity analysis will be done to see the most influencing factor on IRR value.

References:

  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P. (2014). Engineering economy 16th Edition Chapter 5 – Evaluating a single project., pp.239-246.
  2. Paska, H. M. I. (2015). W12_HMIP_Prioritization Project Portofolio using IRR, ERR and Payback Period Method

Retrieved from

https://garudaaace2015.wordpress.com/2015/05/18/w12_hmip_prioritization-project-portfolio-using-irr-err-and-payback-period-method/

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

Retrieved from

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

 

 

W12_AI_Offshore Regasification Project Economical Evaluation – Part 2

  1. 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.

  1. 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.

 

  1. 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
  1. Selection Criteria
  • Owning

The assumption used in this calculation is

Table 1. Assumption

Based 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

 

  1. 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 (14.68%). So, it can be concluded that based on calculation using ERR method, the project is economically feasible to being reinvestment.

  • Leasing Scheme

IRR generated is 20.14%, then IRR (20.14%) MARR (14.68%). So it can be concluded that based on calculation using ERR method, the project is economically feasible to being reinvestment.

  1. 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.

  1. 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:

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

Retrieved from

https://garudaaace2015.wordpress.com/2015/05/18/w12_hmip_prioritization-project-portfolio-using-irr-err-and-payback-period-method/

  1. 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/

 

 

W11_AI_Offshore Regasification Project Economical Evaluation – Part 1

  1. Problem Definition

In the previous chapter the calculation of the capex and opex offshore regasification facilities project has been calculated, so that this week an analysis of the feasibility of the project will be conducted to determine whether or not this project is going forward. The results of the financial economic modeling of this project are useful to the company as an evaluation material and assist the Board of Direction in decision making. So this week the calculation of IRR Project will be applied.

  1. Identify the Possible Alternative

The calculation of project evaluation will be conducted with 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.

 

  1. Development of The Outcome for Alternative

Based on Sullivan 16th edition chapter 5, there is 3 (three) alternative method to determine whether a project is feasible or not, in example :

  • IRR (Interest Rate of Return) Method – Part 1

The project IRR will be calculated using several assumptions that will be explained at a later stage. The IRR represent the internal earning rate of the project. For this calculation the interest is being calculated on the beginning of year investment through the life of this project.

  • ERR (External Rate of Return) Method – Part 2
  • Payback Period Method – Part 3
  1. Selection Criteria

 

Refer to Sullivan chapter 5.6 The Internal Rate of Return Method, the IRR was defined by the present value of net cash flow.

  • Owning

The assumption used in this calculation is

Table 1. Assumption

Based on the above calculation assumptions, calculation model is obtained as follows

Table 2. Owning Scheme Cash Flow

 

The following shows an economical project profile based on cash flow:

Picture 1. Project Net Cash Flow

  • Leasing

The assumption used in this calculation is

Table 3. Assumption

Based on the above calculation assumptions, calculation model is obtained as follows

Table 4. Leasing Scheme Cash Flow

Picture 2. Project Net Cash Flow

  1. Analysis & Comparison of Alternative

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

  • Owning Scheme

IRR generated is 16.31%, then IRR (16.31%) MARR (14.68%). So it can be concluded that based on calculation using IRR method, the project is economically feasible.

  • Leasing Scheme

IRR generated is 12.70%, then IRR (12.70%) < MARR (14.68%). So, it can be concluded that based on calculation using IRR method, the project is economically not feasible.

  1. Selection of the Preferred Alternative

Based on the calculation of the two business schemes which is owning and leasing, it is found that owning schemes are feasible and workable.

Hence by looking at the generated IRR value, IRR owning scheme or purchase newbuilt offshore regasification facility is more profitable for the company.

  1. Performance Monitoring and The Post Evaluation of Result

In economical evaluation, other than using IRR method, then a calculation study will be conducted using External Rate of Return (ERR) and Pay Back Period (PBP) so that the company get a more complete economic adjustment in choosing between the two schemes.

References:

  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P. (2014). Engineering economy 16th Edition Chapter 5 – Evaluating a single project., pp.210-237.
  2. Prasetio, H. (2013). W7.1_HPO_Determining The Contractor’s IRR in Production Sharing Contract.

Retrieved from

https://simatupangaace2014.wordpress.com/2013/11/17/w7-1_determining-the-contractors-irr-in-production-sharing-contract/#more-1975

  1. 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/

 

 

W10_AI_Minimum Attractive Rate of Return (MARR) for Offshore Regasification Project in Indonesia using AHP

  1. Problem Definition

Related to the investment rule in company, they are using single hurdle rate for all project. In this blog, the appropriate MARR will be developed to find whether 10% is an appropriate rate. MARR calculation will be using Analytical Hierarchy Process (AHP) to determine range of project risk covers activity, technology type and demand (project location). Hence as the result, we can find the highest and lowest MARR for offshore regasification project.

  1. Identify the Possible Alternative
  • Estimating the Hurdle Rate

A company will invest to a project or execute a project which gives grater expected return than company cost of capital or WACC. WACC formula:

While the cost of equity is calculated by using CAPM formula:

  • Develop offshore regasification project risk

To cover all the MARR offshore regasification project scheme, there are 3 categories to be analyze which are:

  • Activity: Development and EPC
  • Technology Type: Floating Storage Regasification Unit (FSRU), Floating Storage Unit (FSU) – Floating Regas Unit (FRU), Floating Storage Unit (FSU) – Jetty
  • Demand: Sumatera Island, Java Island, Kalimantan Island, Sulawesi Island, Papua Island

 

  1. Development of The Outcome for Alternative
  • Estimating the Hurdle Rate
Item Value Source
Risk Free Rate 2.16 Damodaran 2017
Market Risk Premium 9.01 Damodaran 2017
Beta 1.07 Yahoo finance
% Debt 0.18 Public Financial Report
% Equity 0.82 Public Financial Report
After Tax Cost of Debt 4.4  

 

CAPM = 1.07 x 9.01 + 2.16
  = 11.8%

 

WACC = (0.18 x 4.4) + (0.82 x 11.8)
  = 10.47 %

 

 

  • Develop offshore regasification project risk

To purpose is to determine range of project risk based on activity, technology type and demand.

Picture 1. Hierarchical Tree

  1. Selection Criteria

Refer to Hierarchical Tree above, next step is to synthesize the relative ranking for each sub criterion using Analytical Hierarchy Process (AHP).

Table 1. The relative score

Based on the table above, hence the relative score result for each sub criterion as follow:

Table 2. Pairwise comparison matrix of offshore regasification project

Table 3. Project risk matrix algebra

  1. Analysis & Comparison of Alternative

Based on the table 3 above, the hierarchical tree with matrix rank result, as follow:

Picture 2. Matrix rank result

Refer to picture 2 above, the risk for each category will be scoring.

Table 4. Project Risk Scoring

The riskiest of offshore regasification project is EPC FSRU to supply Papua island with 8.35% and the least risky is Development FRU-Jetty to supply Kalimantan island with 0.91%.

  1. Selection of the Preferred Alternative

The MARR for offshore regasification project in Indonesia can be calculated by adding that risk scoring and country risk with formula:

WACC + Risk Scoring + Country Risk

MAX : 10.47% + 8.35% + 3.3% = 22.12%
MIN : 10.47% + 0.91% + 3.3% = 14.68%

The appropriate MARR for offshore regasification project in Indonesia should be around 14.68% to 22.12%.

  1. Performance Monitoring and The Post Evaluation of Result

To get more accurate WACC, the calculation and country risk data should be updating periodically. Project risk scoring will be updated due to change of Indonesia political and economic condition.

References:

  1. Liana, L. (2012). Using Analytical Hierarchy Process to Determine Appropriate Minimum Attractive Rate of Return for Oil and Gas Project in Indonesia
  2. Nunug, O.A. (2017). W12_OAN_Car Selection using AHP

Retrieved from

https://emeraldaace2017.com/2017/11/05/w12_oan_car-selection-using-ahp/

  1. Setyo, U.D. (2017). W9_UDS_Evaluation in Choosing Best Supply Pattern Part 2

Retrieved from

https://emeraldaace2017.com/2017/09/23/w9_uds_-evaluation-in-choosing-best-supply-pattern-part-2/