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

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

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

2 thoughts on “W12_AI_Offshore Regasification Project Economical Evaluation – Part 3”

1. Good case study Bu Irene but whenever you do this kind of assessment you really should include RENTING as one of the options. In this case it probably wouldn’t be the best choice but in order to give your research credibility you really should look at ALL feasible alternatives which includes renting.

BR,
Dr. PDG, Jakarta

2. 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