W20.1 – Offshore Electrical Substation Planning – Part 1 WBS development

Problem Definition

Within the SPJ project, the offshore / Jetty scope requires construction of an electrical Substation comprising of a 2 storey building using precast concrete frame, masonry external and internal walls, various flooring and ceiling finishes, external handrail and escape ladders as well as usual building services (plumbing, electrical, HVAC, etc).

The current programme and budgets only consider this work package at a higher level (Level 2) and we now need to develop a detailed programme and verify budget adequacy as it is now expected that the work package will become time critical and possibly over budget.

To commence this “re-planning” exercise, we will first develop a suitable WBS. Substation Equipment will be ignored.

Feasible Alternatives

  1. Non Standard WBS
  2. Omniclass table 21
  3. Omniclass table 22

Development of the Alternatives

  1. Non Standard WBS

The  WBS is based on an Activity Breakdown Structure where the project phases are identified at 1st Level including Project Management / Engineering, procurement, Construction and Commissioning. Tasks and work packages are then defined under each Phase. For clarity, the WBS has been reduced to level 3 only.

2. Omniclass Tables 

In developing options 2 and 3, it should be noted that the Omni class tables are not program work breakdown structures however at all levels, the element in the structures are candidates for WBS element descriptors, including work packages.

Table 21 – Elements

An Element fulfils a characteristic predominant function, either by itself, or in combination with other elements; Table 21 is organized by elements’ implied functions. Major elements may be composed of several sub-elements. For example, a shell enclosure might be composed of superstructure, exterior closure, and roofing.

Using table 21, the works would be described as follows

Note that breakdown does not consider the phases of a project such as design, project management, procurement, etc and only considers the work scope based on function. If we used table 21 as a reference for describing the physical works and introduced phases at level 2, the complete WBS look something like this;

Table 22 – Products

Using table 22 on the other hand (Work Results), the breakdown of phycial works would be as follows;

 

Again, table 22 does not consider the various phases of works but  represents a completed entity that exists after all required raw materials, human or machine effort, and processes have been provided to achieve a completed condition.

As such table 22 cannot be used in isolation and must be incorporated into the overall project structure as follows;

Selection Criteria

The following criteria will be used to assess the preferred WBS structure;

  • Covers all aspects of the works to a suitable level of detail
  • System or Product Orientated and supports a breakdown of work activities into a logical sequence or work flow
  • Includes major procurement, project management and design phases
  • Supports current project Code of Accounts structure which is split into 3 categories; 1. Building Structures 2. Building Archi works 3. Building MEP

Analysis of the Alternatives

Each WBS will be compared using a Non compensatory Lexicography model. Results are as follows

Selection of the preferred Alternative

From the table 3 above, Omniclass Table 21 is considered the most suitable WBS when combined with

This is due to its superior accuracy compared the non standard WBS as well as its superior work flow compared to table 22 (work results)

By decomposing the work scope using table 21, a methodical sequence can be created within the WBS which should allow for more accurate activity relationship and dependencies.

Performance Monitoring

The above WBS will be further detailed to level 4 and 5 to increase accuracy and definition of work scope – using Omniclass table 21. This may include further physical breakdown of the Building by area or level.

Next blog will use the developed WBS within a PDM analysis for estimation of work duration.

References

  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P.(2014). Engineering economy 16th Edition. Chapter 14 , pp.603
  2. GAO Cost Estimating and Assessment Guide, March 2009, Appendix IX
  3. Omniclass Edition 1.0, May 2, 2006, Table 21 & Table 22
 

W12_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

Berdasarkan Payback Period Method, didapatkan dengan menggunakan owning scheme dalam waktu 9 years the investment can be recovered.

  • Leasing Scheme

Berdasarkan Payback Period Method, didapatkan dengan menggunakan leasing scheme dalam waktu 11 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/

 

 

W11_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


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

 

  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 (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.

  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/

 

W10_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


Table 2. Owning Scheme Cash FlowBased 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


Table 4. Leasing Scheme Cash FlowBased 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 (10%). 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 (10%). So it can be concluded that based on calculation using IRR method, the project is economically 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 both schemes are feasilble and workable.

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

  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/

 

W17_TH_LNG ISOTank Feasibility Study: Best Depreciation Method

1. Problem Evaluation

Continue LNG ISOTank evaluation in blog posting W13, this time author want to research what the best depreciation is. The best mean give more benefit of Author Company such as minimize income tax and also give financial projection of LNG ISOTank operational cash flow.

2. Development of Feasible Alternatives

There are four depreciation models that will compare to get best method:

  • Straight Line Method
  • Declining Balance Method
  • Declining with switchover to Straight Line Method
  • MACRS Method
3. Development the Outcome for Each Alternative

Those four method depreciation are choose to compare two group method, commonly use method such as  Straight Line Method and Declining Balance Method, and not commonly use such as Declining with switchover to Straight Line Method and MACRS Method. All method will be compare by depreciation value; bigger depreciation value will get lower income tax.

4. Selection of Criteria

The best method is the method that has the biggest depreciation value. Depreciation value is get from sum present worth of all year depreciation result of each method.

5. Analysis and Comparison of the Alternative

To simulate this depreciation comparison author will use LNG ISOTank 20 feet data. Those data is in table below.

Table 1. LNG ISOTank 20 feet Data

Next step is data calculating of each depreciation method, according to straight line method:

dk = (B – SVN) / N

dk* = k. dk for 1 ≤ k ≤ N

BVk = B – dk*

According to Declining Balance method:

d1 = B(R)

dk = B (1 – R)k-1 (R)

dk* = B (1 – (1 – R)k)

BVk = B (1-R)k

Where:

N               = depreciable life of the asset in years

B                = cost basis, including allowable adjustments

Dk             = annual depreciation deduction in year k (1 ≤ k ≤ N)

BVk           = book value at end of year k

SVN          = estimated salvage value at end of year N

dk*             = cumulative depreciation through year k

The calculation results of four depreciation methods are in table below:

Table 2. Straight Line Method

To demonstrate Declining Balance method, the author use 300% DB equations and result of calculation based on above equation is

Table 3. 300% Declining Balance Method

Method of Declining Balance Method Switchover to Straight Line Depreciation, in this method the first step is the asset would be depreciated by the 300% DB Method (R =3/N). Because the DB method never reaches a zero BV, suppose that author further specify that at switchover to SL depreciation to will be made to ensure a BV of zero (determined salvage value).

Table 4. DB Method Switchover to SL Method

To determine the MACRS (GDS) with half year convention assumption and period of analysis in 6 years based on GDS property class.

Table 5. MACRS (GDS) Method, using Half Year Convention

Table 6. PW(14) Comparison

 

Figure 1. BV Comparison for Selected Methods of Depreciation

6. Alternative Selection

As can be seen above DB Method Switchover to SL Method have the largest PW(14) than other. We can conclude DB Method Switchover to SL Method is the best alternative that more attractive to profitable companies.

7. Performance Monitoring & Post Evaluation Result

To get the best result of method we have to find most appropriate model of depreciation. We should calculate PW of depreciation value of each method, because bigger PW of depreciation value will get lower income tax and more profit of our company.

 

References

  1. Sullivan, G. W. (2014). Engineering Economy 16th Chapter 7 – Depreciation and Income Tax, pp. 332-391
  2. Utomo, Dhanu. (2017). W14_UDS_Fuel Tank Truck Feasibility |EMERALD AACE 2017. Retrieved from: http://emeraldaace2017.com/2017/11/21/w14_uds_fuel-tank-truck-feasibility-study-part-2-best-depreciation-method/
  3. Planning Planet. (2017). Acquiring Equipment for The Project. Retrieved from http://www.planningplanet.com/guild/gpccar/acquiring-equipment-for-the-project
  4. Accounting-Simplified.com (2017). Depreciation Methods. Retrieved from http://accounting-simplified.com/financial/fixed-assets/depreciation-methods/types.html
 

W14_UDS_Fuel Tank Truck Feasibility Study Part 2: Best Depreciation Method

  1. Problem Evaluation

Continue tank truck operation evaluation in blog posting W13, this time author want to research what the best depreciation is. The best mean give more benefit of Author Company such as minimize income tax and also give financial projection of tank truck operational cash flow.

  1. Development of feasible alternatives

There are four depreciation models that will compare to get best method:

  1. Straight Line Method
  2. Declining Balance Method
  3. Declining with switchover to Straight Line Method
  4. MACRS Method

 

  1. Development the outcome for each alternative

Those four method depreciation are choose to compare two group method, commonly use method such as  Straight Line Method and Declining Balance Method, and not commonly use such as Declining with switchover to Straight Line Method and MACRS Method. All method will be compare by depreciation value; bigger depreciation value will get lower income tax.

  1. Selection of criteria

The best method is the method that has the biggest depreciation value. Depreciation value is get from sum present worth of all year depreciation result of each method. 

  1. Analysis and comparison of the alternative

To simulate this depreciation comparison author will use 24 KL aluminum fuel tank truck data. Those data is in table below.

Table 1. Fuel Tank Truck Data

Next step is data calculating of each depreciation method, according to straight line method:

dk = (B – SVN) / N

dk* = k. dk for 1 ≤ k ≤ N

BVk = B – dk*

According to Declining Balance method:

d1 = B(R)

dk = B (1 – R)k-1 (R)

dk* = B (1 – (1 – R)k)

BVk = B (1-R)k

Where:

N               = depreciable life of the asset in years

B                = cost basis, including allowable adjustments

Dk             = annual depreciation deduction in year k (1 ≤ k ≤ N)

BVk           = book value at end of year k

SVN          = estimated salvage value at end of year N

dk*             = cumulative depreciation through year k

The calculation results of four depreciation methods are in table below:

Table 2. Straight Line Method

To demonstrate Declining Balance method, the author use 300% DB equations and result of calculation based on above equation is

Table 3. 300% Declining Balance Method

Method of Declining Balance Method Switchover to Straight Line Depreciation, in this method the first step is the asset would be depreciated by the 300% DB Method (R =3/N). Because the DB method never reach a zero BV, suppose that author further specify that at switchover to SL depreciation to will be made to ensure a BV of zero (determined salvage value).

Table 4. DB Method Switchover to SL Method

To determine the MACRS (GDS) with half year convention assumption and period of analysis in 6 years based on GDS property class.

Table 5. MACRS (GDS) Method, Using Half year convention

Table 6. PW(12) Comparison

Figure 1. PW(12) of each method

  1. Alternative selection

As can be seen above MACRS method have the largest PW(12) than other. We can conclude MACRS method is the best alternative that more attractive to profitable companies.

  1. Performance monitoring & Post Evaluation Result

To get the best result of method we have to find most appropriate model of depreciation. We should calculate PW of depreciation value of each method, because bigger PW of depreciation value will get lower income tax and more profit of our company.

References

  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P.(2014). Engineering economy 16th Edition. Chapter 7 – Depreciation and income tax., pp.332-391. Prentice Hall.
  2. Planning Planet. (2017). Acquiring Equipment For The Project. Retrieved from http://www.planningplanet.com/guild/gpccar/acquiring-equipment-for-the-project
  3. Accounting-Simplified.com (2017). Depreciation Methods. Retrieved from http://accounting-simplified.com/financial/fixed-assets/depreciation-methods/types.html
 

W13_UDS_Fuel Tank Truck Feasibility Study Part 1: Replacement Analysis

  1. Problem Evaluation

Enhancing of My W10 blog posting about car replacement analysis, this time I will evaluate about fuel tank truck replacement analysis. Based on the author company SOP life time 24 KL aluminum tank truck is 15 years, but in years 11th the head truck must be replace with the new one combine with old trailer tank. In this unique situation trigger me to deep dive what the best alternative of fuel tank truck replacement: do nothing (follow SOP), change new all, or leasing?

  1. Development of feasible alternatives

In this evaluation there are three feasible options:

  1. Follow SOP Policy (only change the head truck at year 11th)
  2. Change all with the new
  3. Leasing

Author will analysis these three options which most efficient and also determine when Economic life of fuel tank truck.

  1. Development the outcome for each alternative

Two common methods in replacement analysis are present worth approach and Equivalent Uniform Annual Cost (EUAC). The reason why I chose those two methods because present worth method can calculate in present time how much the cost of two alternatives during economic life and from EUAC method I can get annual cost of each alternative with equivalent uniform / condition. Comparing the value of present worth and EUAC are the good way to know which the best alternative is.

  1. Selection of criteria

The Rule of thumb in present worth method; choose the Alternative with the highest value. The opposite of present worth method, in EUAC method we choose alternative with smallest value. The highest value of present worth method and smallest value of EUAC indicate the best alternative from economic perspective. And for the economic life is minimum total year by year marginal cost (minimum EUAC) in all period.

  1. Analysis and comparison of the alternative

Defender and challenger data that will be used in PW and EUAC calculation are in the table below:

Table 1. Alternatives data

After that is calculate data using PW and EUAC method. The Calculation result of PW and EUAC method are in table below:

Table 2. PW calculation result

Table 3. EUAC calculation result

Table 4. Economic Life of Alternative

  1. Alternative selection

Based on PW and EUAC calculation result Change All Alternative dominating over other alternative in both PW and EUAC Method. The PW of Change All is greater than PW of SOP Policy and Leasing (IDR -1,687,647,340 > IDR -1,705,410,492 > IDR -2,055,370,427). And Change All has the smallest EUAC (IDR 468,169,796 < IDR 473,097,468 < IDR 570,179,759). Thus, the old Fuel Tank Truck should be replaced immediately with all new product (Head Truck and Tank Trailer). This evaluation result also align my question before about why change head truck only.

From the economic life evaluation we also get the optimum years of the tank truck should be used. SOP Policy Alternative wills optimum in 5 years use and for change all will optimum in 2 years use. Based on PW, EUAC and economic life evaluation we get big picture of alternative sequence there is follow SOP Policy until 10 years then change the tank truck and trailer with the new one for 2 years using only.

  1. Performance monitoring & Post Evaluation Result

Combination PW, EUAC and economic life evaluation will give you complete picture of alternative selection such as best alternative, sequence, and duration. It will help us to prepare all what it need, especially in alternative changing.

References

  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P.(2014). Engineering economy 16th Edition. Chapter 9 – Replacement Analysis., pp.427-466. Prentice Hall.
  1. The University of Tuledo (2017). Replacement Analysis. Retrieved from http://www.eng.utoledo.edu/~nkissoff/lessons/Lesson14.html
  2. Kullabs.com (2017). Note on Replacement Analysis and Economic Service Life. Retrieved from https://www.kullabs.com/classes/subjects/units/lessons/notes/note-detail/6002
 

W16_TH_Cost Analysis of Critical Spare CNG Compressor on Gas Station Project

1. Problem Definition

CNG compressor is one of the critical equipment on gas station. If the compressor fails, gas station cannot sell CNG after CNG storage empty. High level management suggested the project team to analyze the scenario to include spare when running compressor fails. To respond that finding, the Author will do exercise to analyze the benefit to include the critical equipment spare in the cost.

2. Development of Feasible Alternatives

To answer the challenge from the reviewer, we should analyze the benefit if we purchase the critical spare compressor which will be installing if the running compressor fails. To do the analysis, author gathers the equipment data from Gas Station Operation Team and also data form Author`s Blog Week 14 when Brand A Compressor selected as best option. Summary of all data can we see as below:

Table 1. Critical Spare Compressor and Gas Station Operation Data

3. Development of the Outcomes for Alternative

Based on above data, authors need to conduct Life-Cycle Costing calculation.
Life-cycle costs (LCC) are associated with an asset and extend of the cost management information beyond the acquisition (creation) of the asset to the use and disposal of the asset.
The purpose of Life-cycle Cost (LCC) is to optimize the total costs of an asset while satisfying specific performance requirements over a defined period of operational time.

First we need to estimate the annual cost saving by installing the critical spare equipment.
The annual cost saving = Increase production due to higher plant availability – Annual maintenance of critical spare equipment

From Table 1 data above, we calculate:

Saving due to no shut down = 5 days/year x 455.4 million IDR/day = 2,277 million IDR /year

The annual cost saving = 2,277 million IDR – 153.25 million IDR = 2,123.75 million IDR

Calculate LCC using present-worth (PW).

To calculate PW, we need to determine the appropriate discount rate. The appropriate discount rate to be used is MARR = 15%

Calculation examples:

PW cash flow in Year 1 = Year 1 cash flow * (1/ (1+15%)^1)

= 2,123.75 million IDR * 0.8708

= 1,862.94 million IDR

PW for 20 years periods are calculated as below:

Table 2. Present Worth of 20 years Cash Flow

4. Selection of the Acceptable Criteria

The higher total PW is the preferred alternative from an economic perspective.

5. Analysis and Comparison of the Alternatives

From Table 2, the total PW of the “with critical spare compressor” option is 11,001.48 million IDR and PW without critical spare compressor is negative 15,080.87 million IDR. By installing the critical spare compressor will have higher PW than not installing it.

6. Selection of the Preferred Alternative

The estimating team can recommend to install critical spare compressor is the preferred option from an economic perspective, compare with not install the critical spare compressor, since by installing the critical spare compressor will give higher PW of total cash flow balance.

7. Performance Monitoring and Post-Evaluation of Results

When assessing the critical spare requirement, beside the technical analysis, it is important to conduct Life-cycle costs (LCC) analysis to justify how critical the spare requirement is, related to minimize the cost of loss production.

References:

  1. Sullivan, G. W. (2014). Engineering Economy 16th Chapter 6 – Comparison and Selection among Alternatives, pp. 264-331
  2. Wija, Wahyu. (2015). W16_WW_Cost Analysis of Critical Spare Compressor|GARUDA AACE 2015. Retrieved from: https://garudaaace2015.wordpress.com/2015/07/31/w16_ww_cost-analysis-of-critical-spare-compressor/
  3. Hendarto, Tommy. (2017). W14_TH_Analyzing Cost Only Alternative|Emerald AACE 2017. Retrieved from: http://emeraldaace2017.com/2017/11/19/w14_th_analyzing-cost-only-alternative-using-equivalent-worth-for-cng-compressor-with-electric-motor-prime-mover/
 

W15_TH_Investing vs Renting vs Leasing Studies for Gas Transport Module (GTM)

1. Problem Definition

One of the critical phases on gas station project is commissioning phase. If the gas station not already connects with gas pipeline, gas station will commission using gas from Gas Transport Module (GTM). Gas will directly inject to scrubber. GTM also have function for deliver gas from mother station to daughter station. Author Company`s will assess the most economical way to use from GTM.

2. Development of feasible alternatives

Alternatives for GTM:

  1. Investing new GTM and commission by company resources
  2. Hire third party specialize on GTM for commissioning phase
  3. Leasing GTM as commission tools and commission by company resources

It is important to choose which most efficient way to commission gas station, especially with numerous number of gas station project.

3. Possible Solution / Alternative

Calculation of investment, maintenance cost, operating cost and rent cost based on inquiry from GTM Vendor for new equipment or leasing and Third Party specialize in this field.

4. Selection of Criteria

The acceptance criterion is the option with lowest total net worth.

5. Analysis and Comparison of the Alternatives

Table 1. Summary result of investing, renting, and leasing (Operating Lease Scenario) data

The scenario for leasing is “Operating Lease”, with lease rental payment is 65% of investment price, based on internal author company data.

Table 2. Book Value at the end of life time, using Straight Line Depreciation

Calculation summary :

Table 3. Present Worth for Purchasing

Table 4. Present Worth for Renting

Table 5. Present Worth for Leasing

Table 6. Calculation Net Worth Purchase, with MARR 14%.

Author use MARR 14% based on Lita Liana paper that concludes range of MARR in oil and gas project is 14% to 34%.

6. Selection and Preferred Alternatives

Table 6 show that total cost of leasing GTM is the lowest. For long term use, leasing GTM is the most efficient way.

7. Performance Monitoring and the Post Evaluation of Result

It is recommended to review feasible leasing alternatives, and conduct performance equipment monitoring. For example Net lease scenario, where the payment not include maintenance and insurance, or Capital Lease scenario, where we can buy the asset at the end of lease term.

 

References

  1. Sullivan, G. W. (2014). Engineering Economy 16th Chapter 2,5 and 7, pp. 71-73, 213 – 215 and 332 – 337
  2. Adhi, Oktafianto. (2017). W3_OAN_ Investing vs Renting vs Leasing Studies|Emerald AACE 2018. Retrieved from http://emeraldaace2017.com/2017/08/15/w3_oan_investing-vs-renting-vs-leasing-studies/
  3. Liana, Lita. (2014). Using Analytical Hierarchy Process to Determine Appropriate Minimum Attractive Rate of Return for Oil and Gas Projects in Indonesia, PM Word Journal Vol. III. Retrieved from 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
 

W14_TH_Analyzing Cost-Only Alternative Using Equivalent Worth for CNG Compressor with Electric Motor Prime Mover

1. Problem Definition.

Same case like on W9 blog posting, author plan to install CNG compressor with electric motor prime mover for the gas station and author received a complete offer with the specifications of the three manufacturers of CNG compressor. In this blog, the author wants to analyze cost-only alternatives of the three brands of CNG compressor using equivalent worth. Which CNG compressor should be preferred base on equivalent worth?

2. Identify the Feasible Alternative.

The following table contains data of three brand of CNG compressor that will be selected.

Table 1. The CNG Compressor Data

This CNG compressor will be used for 20 years and the company has a MARR of 15%

3. Development of the Outcome for Alternative.

Using table 1 data, we will calculate the PW (Present Worth), AW (Annual Worth), and FW (Future Worth). The result cans we seen on table below.

Table 2. The Result of Equivalent Worth Values

4. Selection of Criteria.

The pump that will minimize the equivalent worth of total costs over the ten-year analysis period will be used as selection of criteria.

5. Analysis and Comparison of the Alternative.

The comparison of three brand CNG compressor using the PW, AW, and FW methods to minimize total cost as seen as table 3 below.

Table 3. The Comparison of the CNG Compressor

From the table 3, alternative Brand A minimizes all three equivalent-worth values of total costs and is the preferred alternative. The preference ranking (Brand A > Brand C > Brand B) resulting from the analysis is the same for all three methods.

6. Selection of the Preferred Alternative.

Base from above calculation, brand A minimizes all three equivalent-worth values of total costs and is the preferred alternative for the gas station.

7. Performance Monitoring and the Post Evaluation of Result.

Monitoring should be conducted during execution of the project to ensure that all requirements are met.

References:

  1. Sullivan, G. W. (2014). Engineering Economy 16th Chapter 6 – Comparison and Selection among Alternatives, pp. 264-331
  2. Fakhri, Muhammad. (2017). W12_MFO_Analyzing Cost Only Alternative|Emerald AACE 2018. Retrieved from http://emeraldaace2017.com/2017/11/17/w12_mfo_analyzing-cost-only-alternative-using-equivalent-worth-for-selecting-fire-water-pump/
  3. What is the formula for calculating net present value (NPV) in excel. Retrieved from https://www.investopedia.com/ask/answers/021115/what-formula-calculating-net-present-value-npv-excel.asp
  4. How to calculate net present value (NPV) in excel. Retrieved from https://www.youtube.com/watch?v=hG68UMupJzs