W18_TH_Severance Cost Analysis for Regasification Plant Project

1. Problem Evaluation

Currently PLN (Indonesian electricity state owned company) now have tender to build regasification plant which BOT (Build, Operate and Transfer) scheme. Bidder will have 10 years to operate the facilities before transfer the asset to PLN. Due to this scheme, bidder should be calculate the percent of salary cost need to save yearly so by the end of years ten, severance cost will available. Severance pay is the compensation an employer provides to an employee who has been laid off, whose job has been eliminated, who has decided to leave the company through mutual agreement, or who has parted ways with the company for other reasons. In addition to pay, severance packages can include extended benefits, such as health insurance and out placement assistance, to help an employee secure a new position.

2. Development of Feasible Alternatives

This regasification project will cover more than five regasification plant on Kalimantan, NTT and NTB area. Total employee almost 100 employee. The regasification plant will COD on 2020, so the first salary cost will spent on 2020.

Table 1. Salary Cost and Assumption Data

The salary cost is paid at the end of the year, at which point some percentage is placed in a bank account. The interest calculation is based on cumulative deposits and interest in the account at the beginning of the year, but not on the deposits made at the end of the year. The salary cost is increased and the cycle repeats.

In this evaluation there are three feasible options for percentage of salary cost need to save yearly:

  • Option 1 = 12%
  • Option 2 = 13%
  • Option 3 = 14%
3. Development the Outcome for Each Alternative

Author will use Excel spreadsheet to calculate percentage of salary cost need to save yearly.

4. Selection of Criteria

Authors will analysis these three options which percentage is meet with desired amount on 2030 (smallest difference).

5. Analysis and Comparison of the Alternative
  • Option 1 = 12% salary cost save yearly

Table 2. Calculation of 12% Salary Cost Save Yearly

  • Option 2 = 13% salary cost save yearly

Table 3. Calculation of 13% Salary Cost Save Yearly

  • Option 3 = 14% salary cost save yearly

Table 4. Calculation of 14% Salary Cost Save Yearly

  1. Alternative selection

Based on calculation result, 14% salary cost save yearly has smallest difference with desired amount on 2030. So 14% salary cost save yearly will use by bidder to meet with PLN severance cost requirement.

Table 5. Comparison of Salary Cost Save Yearly

  1. Performance monitoring & Post Evaluation Result

Once the problem has been formulated in a spreadsheet, we can determine the impact of different rates, inflation rates, and so on, on the severance cost plan, with minimal changes and effort.

References

  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P.(2014). Engineering economy 16th Edition. Chapter 8 – Price Changes and Exchange Rates., pp.407-409. Prentice Hall.
  2. Investopedia.com (2017). Severance Pay. Retrieved from https://www.investopedia.com/terms/s/severancepay.asp
  3. Investorwords.com (2017). Severance Costs. Retrieved from http://www.investorwords.com/7710/severance_costs.html
 

1 thought on “W18_TH_Severance Cost Analysis for Regasification Plant Project”

  1. Great case study Pak Tommy!!! My only challenge to you is where did you get the 5% inflation rate?

    Here is the OFFICIAL rate- https://tradingeconomics.com/indonesia/inflation-cpi So why didn’t you reference this model in your research?

    See where I am going with this? You are making predictions and you are doing a good job of it, but you never validated or tested your ASSUMPTIONS first.

    Bottom line- you are doing a great job but I worry that so many of you are writing up these postings like they came straight out of the textbook but never took any time to validate any of the percentages that you use. Bu Irene made the same mistake on her blog postings by ASSUMING a MARR of only 10% when that is a really BAD number to be using.

     

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