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