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.