1
Business Plan on Organization of Production and
Processing of Zirconium-Containing
Scraps
Project Sponsor: VEKS LLC
Development Contractor: OOO SPC Zeolite
Development Contractor: OOO OgneuporPromGroup
This Business Plan is developed by: Legal and Business Consulting, LLC
Moscow, 2017
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Memorandum of Confidentiality
The purpose of this Memorandum of Confidentiality is to prevent those who have read the
Business Plan from disclosure of any information contained therein.
Please, bear in mind that any person who has read the Business Plan shall not disclose the
information contained therein without the prior consent of the management of the project
participants – VEKS LLC, OOO SPC Zeolite, OOO OgneuporPromGroup.
Furthermore, it is prohibited to reproduce the Business Plan or any part thereof or transfer
it to third parties without the express consent of the Development Contractor.
The Project Sponsor considers the following information confidential:
Forms, methods and techniques of business activities,
Marketing information,
Information contained in engineering documentation,
Description of the manufacturing process,
Existence and contents of contracts and agreements with legal entities and
individuals, as well as their projects,
Sales volumes,
Number, names and personal data of employees, their positions.
The information and opinions provided herein are based on the sources deemed reliable
and trustworthy; however, the latter do not fully guarantee the accuracy and completeness
thereof.
The following sources have been used:
Designs, calculations, technical documents provided by OOO
OgneuporPromGroup,
Results of pilot and experimental works performed at the premises of MMK, OJSC,
National University of Science and Technology “MISiS”, Ural Federal
University, Institute of New Materials and Technologies and ООО
SpecOgneuporComplekt,
Mass media and online resources.
All data, assessments, plans, proposals and conclusions presented under this project and
related to its potential profitability, production volumes, costs, profit rate and its future level are
based on the consensus of the project development team members.
The following documents provided a methodological framework for the Business Plan:
Guidelines for Evaluating the Effectiveness of Investment Projects (Second Edition,
revised and amended) (approved by the Ministry of Economic Development,
Ministry of Finance and State Committee for Construction of the Russian
Federation on June 21, 1999, No. VK-477).
477).
Methods of UNIDO (United Nations Industrial Development Organization).
3
Summary
This Business Plan is a description of the project on construction of a processing facility
for zirconium-containing scraps.
The Project Sponsor is VEKS LLC (INN 5018143961; KPP 501801001).
The Development Contractor responsible for chemical processing is OOO SPC Zeolite
(INN 7455007210; KPP 745501001).
The Development Contractor responsible for mechanical processing is OOO
OgneuporPromGroup (INN 7456001130; KPP 745601001).
The project includes construction of two processing shops.
The first cycle shop – RUB 74,000,000
Dimensions of the shop are 24 m (D) x 18 m (W) x 16 m (H)
(hangar and sandwich steel structures) and those of the intake area are 24 m (D) x 18 m
(W) x 16 m (H) (hangar steel structure).
Custom-design processing equipment and its installation.
Ural-Omega, CJSC (www.uralomega.ru) will supply the equipment.
The second cycle shop – RUB 45,500,000
Dimensions of the shop are 18 m (D) x 24 m (W) x 12 m (H) (hangar and
sandwich steel structures).
Custom-design processing equipment and its installation.
OOO TPK SIBMASHPOLYMER (www.sibmashpolymer.ru) will supply the
equipment.
The land plot with facilities and communications is worth RUB 40,000,000.
Address: Industrial Area, Agapovsky District, Magnitogorsk, Russia
The table below presents the key performance indicators of the investment project.
Table – Key Performance Indicators of the Investment Project
(Most Likely Scenario)
Metric Value
Investment costs, thousand RUB 223,950.00
Net present value, thousand RUB 2,029,000,00
Internal rate of return (%) 213
Return on investment 9.75
Payback period (DCF) 12 months
Payback period (CF) 11 months
As we can see from the table, all performance indicators comply with the generally
accepted standards. Therefore, the project can be considered economically viable and feasible for
development.
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Generally, the advantages of the investment project under consideration are summarized as
follows:
1. Great investment potential of the project (see Table “Key Performance Indicators of the
Investment Project”)
2. The underlying business idea is the innovative manufacture of refractories using
zirconium scrap.
3. The project’s environmental component (the source raw material is waste of glass
factories, mineral wool factories and dumping sites). Implementation of the project
under consideration will significantly reduce the accumulated environmental damage.
Information on the experts who provided an expert review of the investment project:
Vitaliy Nikolaevich Merzlyakov – Director, OOO SPC Zeolite;
Evgeniy Valerievich Panov – Director, OOO OgneuporPromGroup;
Vadim Valerievich Sychev – Director, VEKS LLC.
1. Information on Project Participants
The purpose of the proposed Business Plan is to justify the economic efficiency of the
organization of refractory manufacturing using zirconium-containing refractory waste. The
Project Sponsor is VEKS, Limited Liability Company.
Projects Implemented by OOO SPC Zeolite (Development Contractor):
OOO SPC Zeolite – Details:
Legal Address: 32-224, Zeleny Log Str., Magnitogorsk, Chelyabinsk Region, 455034
Mailing Address: 32-224, Zeleny Log Str., Magnitogorsk, Chelyabinsk Region, 455034
E-mail: [email protected]
Phone/ Fax: +7 (3519) 29-03-75
INN: 455007210
KPP: 745501001
OKPO: 37907031
Current Account: 40702810990200003358 in Chelyabinvestbank, OJSC, Magnitogorsk
Correspondent Account: 30101810600000000748, BIC 047516748
Director: Vitaliy Nikolaevich Merzlyakov
2012
1) On the instruction of management of OOO LUKOIL-West Siberia, the lightened cement
for cementing the annulus of barren wells was developed with characteristics (in terms of
both performance and price) superior to its market analogues.
2) Advanced refining technology for the reforming catalyst was developed by OOO Tobolsk
Neftekhim.
5
2013
1) In cooperation with the management of Magnitogorsk Iron and Steel Works (MMK,
OJSC) a testing and delivery schedule for MP-D washing material (developed by OOO
SPC Zeolite) for blast furnace wells was made in order to increase productivity.
2) Together with the management of MMK, OJSC a testing and delivery schedule for
SKHP-95 casting powder (developed by OOO OgneuporPromGroup) for CCM No. 6
was made.
2014
1) A technology for chemical enrichment of oxidized nickel ores, including ore pretreatment,
was developed using the ore-preparation technology designed by OgneuporPromGroup.
The technology is implemented at the premises of OOO Buruktal Nickel Plant.
2) Developed a tungsten concentrate processing and enrichment process.
2015
1) In cooperation with OOO OgneuporPromGroup developed a processing technology for
waste dumps of a gangue quartz deposit to produce high quality refractory linings and
high-purity quartz sand. Implemented at Magnitogorsk Plant of Rolling Rolls, CJSC
(MZPV, CJSC).
Projects Implemented by OOO OgneuporPromGroup (Development Contractor):
OOO OgneuporPromGroup – Details:
Mailing, Legal and Location Address: Room 9, 61/3, Imeni Gazety “Pravda” Str.,
Magnitogorsk, Chelyabinsk Region, 455026 Russia
INN 7456001130/ KPP 745601001
OKPO 65763571, OGRN 1107456001069
Current Account 40702810424021000566 in Chelyabinsk Branch of B&N Bank, OJSC
Correspondent Account 30101810400000000996
BIC 047528996 Phone/ Fax: + 7 (3519) 21-68-99
Director: Evgeniy Valerievich Panov
2010 – A manufacturing process was developed to produce high quality periclase powder from
fused magnesia waste (“the crust”, partially fused magnesia).
2011 – The own pilot production, large-scale manufacturing of periclase powders was launched.
2011. – A manufacturing process was initiated to produce chromium alloyed magnesium-
aluminate powders from ferrous-chromium aluminothermic slags.
2012 – A manufacturing process was developed to produce chromium alloyed alumina powders
from metallic chromium aluminothermic slags.
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2012 – In-process testing of the developed materials was conducted at the major iron and steel
and refractory enterprises of the Russian Federation, such as MMK, OJSC, OOO Ogneupor,
OOO Magnezit Group, and ООО SpecOgneuporComplekt.
2012 – Special materials of different composition for the foundry industry were developed, as
well as manufacturing techniques for their production from secondary raw materials, in
particular, special molding sands, ultrafine fillers for nonstick coatings, etc. The serial production
commenced.
2012 – A technology of dry concentration for low-grade and waste chromium ores of the Ural
area was developed to obtain a commercial metallurgical concentrate.
2012 – A manufacturing process was developed to produce a high-quality chrome concentrate
for the chemical industry.
2013 – A technology of low-grade oxidized nickel ore pretreatment was developed for further
chemical enrichment as requested by OOO SPC Zeolite.
2013 – Industrial tests of alumina and spinel powders in the refractory industry were conducted.
Provisional agreements on commercial-scale deliveries for 2014 were entered into.
2014 – Industrial tests of periclase, chromite and aluminosilicate carbon powders in the chemical
industry were conducted.
2015 – A manufacturing process was designed to produce high-purity quartz sands (SiO2 ≥ 99.9)
using the waste dumps of worked-out gangue quartz deposits in cooperation with OOO SPC
Zeolite.
2. Brief Description of Manufacturing Process
The source raw material for the future enterprise is zirconium-containing scrap provided
by various glass factories.
The investment project under consideration includes construction of two shops based on
payback periods.
The main products of the future plant are as follows: zirconium concentrate (powder) with
ZrO2 contents of with at least 65 % (base product) plus Hf 2.5–3 % with the maximum content
of alkaline earth metals of 1.5 %, and synthetic mold powder (MP). The manufacturing process
uses dry concentration and separation of materials, including selective grinding techniques, dry
magnetic and gravity separation.
The products of the future enterprise are primarily used for manufacture of refractories.
The iron and steel industry may use the products of the future enterprise to manufacture
refractories. These products can be used in the foundry and chemical industries, as well.
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3. Marketing Plan
3.1 General Analysis of Zircon Refractory Market
Due to their great refractory properties and corrosion resistance to metal and mineral
melts, zirconium refractories, in particular, zircon, brazilite and fused-cast brazilite-alumina
refractories are in high demand in the iron and steel and glass industries. Zircon refractories in
the continuous casting process are just an example of their efficient use in the iron and steel
industry. Considering that brazilite-alumina refractories are essential for the state-of-the-art glass
manufacturing processes, new production facilities for these materials were set up in Belgium,
Australia, India, China in the last decade. SEPR Group (France), RHI (Germany) and other
companies produce a wide range of zirconium refractories for the iron and steel and glass
industries. In Russia, Borovichi Refractory Works, OJSC and Dinur, OJSC produce a small
amount of zircon refractories for the iron and steel industry. Moreover, the total amount of
fused-cast brazilite-alumina refractories produced for the glass industry does not exceed 10
thousand tons per year. Since there are no domestic zirconium-containing raw materials
(zirconium and zirconium dioxide), foreign companies provide the bulk of brazilite-alumina
refractories for the glass industry.
Every year approximately 15 thousand tons of zirconium are used in Russia. However,
according to various estimates, the demand is from 40 to 100 thousand tons. The domestic
manufacture satisfies maximum 2–3 % of Russia’s demand in zirconium-containing raw
materials. The Kovdor Mining and Processing Works, the only enterprise in Russia that produces
zirconium raw material (brazilite powder), produces 5–6 thousand tons per year. Most of this
material is exported to Norway, Japan and other countries. One of the most sought-after mineral
raw materials – zirconium concentrate – is not manufactured in Russia. It is imported from
Ukraine and Australia. Ranking third in the world in zirconium reserves, Russia has no
commercially developed deposits with zirconium production. Generally, titanium and zirconium
deposits can be developed only as a whole with mandatory production of ferrous titanate
(titanium oxide) and zirconium concentrates, the demand for which is confirmed by the industry.
As titanium and zirconium are strategically important commercial minerals, it is critical to
develop their supplies base for the self-sufficiency of Russia.
There are titanium and zirconium placer deposits with proved reserves in Russia. If
developed, these deposits could satisfy the domestic demand for zirconium raw material for
decades. They include Tuganskoye deposit (Tomsk Region), Lukoyanovskoye deposit (Nizhny
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Novgorod Region), Tarskoye deposit (Omsk Region), Centralnoye deposit (Tambov Region),
Beshpagirskoe deposit (Stavropol Territory).
• Tuganskoye deposit. In 2002, the Tugansk Ore Mining and Processing Enterprise
“Ilmenite” was established there. It was the first company in Russia that started implementing
the manufacturing program for zirconium concentrate. The zirconium concentrate manufactured
by the Tugansk Ore Mining and Processing Enterprise “Ilmenite” under the pilot production
according to TU 1762-002-581914756-2005 contains Zr02 > 60.0 %, TiO2 ^ 4.0 %, Fe2O3 <
1.0 %, Al2O3 < 1 %. Although the concentrate does not meet the requirements for production of
fused-cast brazilite-alumina refractories in terms of ferrous and titanium oxide content, it can be
widely used in manufacturing of zirconium products.
• Lukoyanovskoye deposit (Itmanovskaya placer). It is ready for commercial development.
The raw material quality is high (zirconium content is 24.32 kg/m3).
• Tarskoye deposit (zirconium content is 4.7 kg/m3). Provided significant reserves of rare
earth elements of lanthanum and cerium groups are confirmed, the value of the deposit will
increase exponentially. Experimental batches of zirconium concentrate produced in small
amounts by the Tarsk Mining and Processing Works according to TU 1762-003-79932362-2007
contain Zr02 > 60.0 %, Р205 < 0.2 %, А1203 < 2.5 %, Si02 < 37.0 %, TiO2 < 0.8 %, Feo6l4 <
0.15 %. A concentrate of such quality can be widely used for manufacturing of refractories,
ferrous-based alloys, abrasives, etc.
• Centralnoye deposit. The Eastern section (7 km long and 5 km wide) is the best explored.
There are high concentrations of useful components (zirconium content is 7.28 kg/m3) sufficient
to establish a large mining and processing enterprise.
• Beshpagirskoe deposit (Stavropol Territory). It is located in an economically advantageous
area with developed infrastructure, and in 2006, the State Commission for Reserves booked it.
The estimated forecast resources of the deposit are 4.0 million tons of zirconium oxide. Primary
exploration targets are reserves amounting to 22.535,000 m3 with zirconium content of 11.29
kg/m3.
Due to frequent changes of ownership, lack of funds and failure governmental attempts to
implement the targeted integrated programs, all of the above-mentioned deposits have not been
commercially developed for decades. Taking into account the high costs, first, based on
comparison of economic parameters of development of these deposits, it is required to identify
the most promising one for organization of commercial zirconium concentrate and zirconium
dioxide manufacturing. The problem of creating titanium and zirconium supplies base in Russia
is nationwide. The economic stability of the country in terms of providing various industries,
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including the nuclear, iron and steel and refractory industries, with zirconium-containing raw
materials depends on the solution of this problem.
3.2 Pricing Policy
It is expected that prices for the products of the future plant for producing materials from
zirconium-containing waste will be determined based on the cost of foreign analogues, because
such material made of waste is not manufactured in Russia. This pricing method is essentially as
follows. The manufacturer determines the price based on the present value of imported products
minus 20 % to improve the price competitiveness. Then it compares the estimated price to that of
the closest analogue.
Table 3.1 presents the estimated minimum price limit values for the main products of the
future plant. As mentioned above, a similar material of foreign manufacture was taken as an
analogue.
Table 3.1 – Price Limit Values for Main Products of the Future Plant.
Item No. Product Price, RUB/ ton
1 Zirconium concentrate 165,000
2 Mold powder (MP) 46,000
4. Organizational Plan
The project includes construction of a plant consisting of two shops.
The first cycle shop is a hangar (24 m (D) x 18 m (W) x 16 m (H)) with an intake area
(24 m (D) x 18 m (W) x 16 m (H)).
Complex of mechanical processing equipment based on patented innovative solutions.
The second cycle shop is a hangar (18 m (D) x 24 m (W) x 12 m (H)).
Complex of chemical equipment based on patented innovative solutions.
A base in the industrial area in Agapovsky District, Magnitogorsk, Russia that meets all
the project requirements will be purchased.
Summing up what has been said, the investment project for construction of a
manufacturing facility to produce refractories from aluminothermic slags provisionally consists
of the following principal stages:
a) Stage 1 – purchase of the land plot (1 month).
a) Stage 2 – construction and fabrication of the equipment (6 months).
a) Stage 3 – commissioning and startup (1 month).
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5. Financial Plan
The financial plan of the investment project reflects the dynamics of the company’s cash
inflows and outflows at gradual (from year to year) expansion of manufacturing and sales
capacities.
5.1 Investment Costs
Tables 5.1 – 5.3 show the investment costs for construction of the future manufacturing
facility to produce zirconium concentrate and MP from zirconium-containing scraps.
Figure 4.1 – Organizational Structure of Future Enterprise
Director
Deputy Director for Production
Chief Engineer
Power
Engineer
2
El
Electricians
in rotating
teams
Fitters 2 in rotating
teams
Chief
Process Engineer
Lab Technicians 2
in rotating
teams
Sales
Engineer
Deputy Director for Economics and Finance
( appointed by the investor )
Mechanic
2 Loader
Operators
in rotating
teams
Truck
Driver
Shop
Foreman
Operators 2
in rotating
teams
Shop Workers 4
2 in
each rotating team
Purchasing
Specialist
Chief
Accountant
Commercial Department
Manager
Accountant
Secretary
Chief Security
Officer
12
Table 5.1 – Investment Costs for Construction of First Cycle Shop
Cost Item Amount, thousand
RUB
Basic process equipment (in 2016 prices). 49,000
Main shop building and warehouses 25,000
TOTAL 74,000
Table 5.2 – Investment Costs for Construction of Second Cycle Shop
Cost Item Amount, thousand
RUB
Basic process equipment (in prices for 2011) 31,000
Main shop building and warehouses 12,000
Production project 2,500
TOTAL 45,500
Table 5.3 – Investment Costs (General)
Cost Item Amount,
thousand RUB
Construction of the primary cycle shop 74,000
Construction of the secondary cycle shop 45,500
Land plot with provided utilities (S = 7 ha4) 40,000
Commissioning permit 5,000
General project 5,000
Contingencies, 10 % 16,950
Machinery and vehicles 15,000
Operating expenses 22,500
TOTAL 223,950
5.2 Cost Budget for Daily Operations of Future Plant
Table 5.4 presents the operating costs associated with daily operations of the future plant for
manufacturing of refractories using zirconium-containing slags.
A month is taken as a reporting period.
Table 5.4 – Operating (Monthly) Costs for Manufacturing of Basic Products – Zirconium
Concentrate and MP.
Item
No.
Description Quantity, pcs. RUB/ ton Amount, thousand
RUB
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5.3 Expected Revenue from Project Implementation
Table 5.6 shows the operating revenue associated with daily operations of the future plant.
Table 5.6 – Future Plant’s Operating Revenue from Sales of Basic Products – Zirconium
Concentrate and MP.
Item
No.
Description Value
1
Output of zirconium concentrate (tons) 400
Average cost of 1 ton (rubles) 165,000
2
Output of MP 100
Average cost of 1 ton (rubles) 46,000
Total monthly revenue (rubles) 70,600.000
Note: A month is taken as a reporting period.
6. Economic Feasibility Analysis of the Project
6.1 Cash Flow Generation and Discounting
To determine the predictable future value of “present” money, the cash flow has to be discounted,
which means its value has to be reduced to that of the initial stage.
Discounting is the process of determining the value of tomorrow’s cash flows (future income at
this moment). For accurate assessment of the future income, you need to know the projected values of
revenues, expenses, investments, as well as the capital structure, residual value of the assets and discount
rate.
The discount rate is used to evaluate the efficiency of investments. In economics, the discount rate
is the rate of return on investment required by the investor.
In other words, the discount rate may help to determine the payment that the investor will have to
make today in order to get the estimated return in the future. Therefore, key decisions, including the
choice of the investment project, depend on the discount rate.
1 Raw materials (the price includes grading and
separation)
500.00 13,000 6,500.00
2 Transportation (delivery from the farthest point) 500.00 2,500 1,250.00
Mechanical processing costs
3 Power 500 500 250.00
4 Gas 500 270 135.00
5 Basic spare parts 500 4,000 2,000.00
6 Auxiliary supplies 500 350 175.00
Chemical processing costs
7 Acid 500 13,500 6,750.00
8 Lime 500 500 250.00
9 Extra operating expenses 500 3,500 1,750.00
10 Packaging, FIBC 500 450 225.00
11 Payroll budget - - 3,215.00
TOTAL 38,570 22,500.00
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The simplest practical method to determine the discount rate is to define it as equal to the interest
rate.
The cash flow associated with the implementation of the investment project under consideration
(Table 6) was discounted at the discount rate of 14 %.
Table 6 – Cash Flow Generation (thous. RUB) – Worst-Case Scenario1 with Basic Taxes Allowed for2
Profit/ Loss
4 months
Item UoM 2017 2018 2019 2020 2021 2022 Total
Production load %% 100% 100% 100% 100% 100% 100%
Processing of raw materials tons
2 000 6 000 6 000 6 000
6 000
6 000 32 000
ZrO2 output tons
1 600 4 800 4 800 4 800
4 800
4 800 25 600
MP output tons
400 1 200 1 200 1 200
1 200
1 200 6 400
Sales revenue MRUB
282 847 847 847
847
847 4 517
Cost value MRUB
(90) (270) (270) (270)
(270)
(270) (1 440)
Gross profit MRUB
192 577 577 577 577 577 3 077
Gross profit, %% %% 68% 68% 68% 68% 68% 68% 68%
Business expenses MRUB
(3) (10) (10) (10)
(10)
(10) (53)
Administrative expenses MRUB
(3) (3) (6) (6)
(6)
(6) (29)
Operating income MRUB
186 564 561 561 561 562 2 995
Operating income %% 66% 67% 66% 66% 66% 66% 66%
Interest payable MRUB
- -
Profit before tax MRUB
186 564 561 561 561 562 2 995
Income tax MRUB
(38) (113) (112) (112)
(112)
(112) (599)
Deferred income tax MRUB
0 - - - - - 0
Net profit MRUB
149 451 449 449 449 449 2 396
Net profit %% 53% 53% 53% 53% 53% 53% 53%
Depreciation MRUB
6 19 19 19 19 19 103
EBITDA MRUB
193 583 580 580 581 581 3 098
EBITDA %% 68% 69% 68% 69% 69% 69% 69%
Cash flow
Operations UoM 2017 2018 2019 2020 2021 2022 Total
Inventory changes MRUB
(38) - - - - - (38)
Changes to accounts receivable MRUB
- - - - - - -
1 The worst-case scenario in terms of cash flow suggested that only 60 % of the future plant’s production capacity is used
within the entire period under consideration. 2 The basic taxes included income tax, property tax and value added tax.
15
Changes to accounts payable MRUB
35 35 - - - - 71
Total cash flow from operations MRUB 190 618 580 580
581
581 3 130
Investments
Acquisition of land MRUB
(40) -
(40)
Construction MRUB
(58) -
(58)
Purchase of equipment MRUB
(94) -
(94)
Reserve
(20) -
(20)
VAT refund MRUB
26 -
26
Total cash flow from investments MRUB (187) - - - - - (187)
Total free cash flow MRUB 3 618 580 580
581
581 2 943
Financing
Flow of shareholders’ funds MRUB
238 - - - - - 238
Flow of borrowed funds MRUB
- - - - - - -
Repayment of borrowed funds MRUB
- - - - - - -
Dividends MRUB
- - - - - - -
Total cash flow from financing MRUB 238 - - - - - 238
Total cash flow MRUB 241 618 580 580
581
581 3 181
Opening cash balance MRUB - 241 859 1 439
2 020
2 600 -
Closing cash balance MRUB 241 859 1 439 2 020
2 600
3 181 3 181
Table 6.1 provides a rationale for the estimate of depreciation.
FOR REFERENCE ONLY:
Table 6.1 – Estimate of Depreciation for Future Plant.
Rate Amount/ month Amount/ year
Depreciation of buildings, RUB 3 % 111,250 1,335,000
Equipment depreciation, RUB 16 % 1,492,667 17,912,000
TOTAL 1,603,917 19,247,000
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6.2 Methods to Determine Key Performance Indicators There are special methods (methods of capital budgeting) used to evaluate the effectiveness of an
investment project3.
In order to use these methods, the investment project shall be represented as a cash flow (Table 6).
Methods to determine key performance indicators of the project (methods of capital budgeting) can
include:
1. The payback period is the length of time required to recover the cost of the project investment using the
revenues from the company’s activities. This method provides only a rough estimate of the project's
liquidity.
2. Net income is an accumulated profit (cash flow balance) of the company for the reporting period.
3. Net present value (NPV) is the main criterion of the investment project’s effectiveness. This is the
algebraic sum of the values of all cash flow elements generated by the project. If the NPV of the
investment project is positive, the project is profitable (at the given discount rate), and it can be
considered for approval. The higher is the NPV, the more profitable the project is. As this metric is
absolute, the NPV method has the advantage of additivity (results for a few projects can be summed up).
4. Return on investment (ROI) is a relative indicator of the investment project’s profitability. The ROI is
compared to one. If the return on investment is greater than one, the project is profitable. If the ROI is
equal to one, the project is neither profitable nor unprofitable. If the ROI is less than one, the project is
unprofitable. The ROI shows the underlying strength of the project. The higher is the return on
investment, the less likely the investment project is to become unprofitable under unfavorable conditions
of its implementation.
5. Internal rate of return (IRR) is a discount rate that makes the net present value of all cash flows from a
particular project equal to zero. On the one hand, IRR shows the maximum possible level of income
associated with the project. This indicator as well as the return on investment is relative. It characterizes
the return on every invested ruble, but the rate of return determined by the IRR corresponds to a period
of one year. On the other hand, the IRR shows the maximum level of expenditure that may be associated
with the project. If it is higher than the cost of invested capital, the project is considered profitable, if it is
lower, the project is considered unprofitable.
6. A discounted payback period is a period required for investments to break even recognizing the time
value of money. This indicator is calculated using a cumulative calculation method.
6.3 Calculation of Project’s Key Performance Indicators
Table 6.3 presents the calculation of key performance indicators of the project.
3 Guidelines for Evaluating the Effectiveness of Investment Projects (Second Edition, revised and amended) (approved by the
Ministry of Economic Development, Ministry of Finance and State Committee for Construction of the Russian Federation on June
21, 1999, No. VK477).
17
Table 6.3 – Key Performance Indicators of the Investment Project
MRUB
Periods Invest 2017 2018 2019 2020 2021 2022 Total
0 1 2 3 4 5
Free cash flow (224)
3
618
580
580
581
581
2 943
Discount rate
14%
Discount factor 1 1,00
0,88
0,77
0,67
0,59
0,52
Discounted cash flow (224) 3 542 446 392 344 302 2 029
TV discount factor 7,14
Terminal value 4 149
Discounted terminal value 2 155
Total enterprise value (EV), DCF method 4 184
Total investments 201
IRR 103%
EV/EBITDA 8,10
Payback period, years 0,50
EBITDA/ Cost of investments
2,56
Multiplier (M) 6,0
Enterprise value at M 3 098
-
100
200
300
400
500
600
700
2017 2018 2019 2020 2021 2022
EBITDA
18
As we can see from Table 6.3, all the performance indicators comply with the generally accepted
standards. Therefore, the project can be considered viable and feasible for development.
7. Risk Analysis of Investment Project
A risk is a possibility of such conditions in the future that may have adverse impacts.
The probability of a risk event is estimated as:
1) Minor (less than 20 %)
2) Low (20–39 %)
3) Medium (40–59 %)
4) High (60–79 %)
5) Very high (over 80 %)
The possible damage is estimated as:
1) Minor loss (up to RUB 10,000)
2) Insignificant loss (from RUB 10,000 to RUB 100,000)
3) Average loss (from RUB 100,000 to RUB 500,000)
4) Significant loss (from RUB 500,000 to RUB 1,000,000)
5) Catastrophic loss (from RUB 1,000,000 to the amount close to the company's annual profit)
-
100
200
300
400
500
600
700
2017 2018 2019 2020 2021 2022
Free Cash Flow
-
1 000
2 000
3 000
4 000
5 000
6 000
7 000
2017 2018 2019 2020 2021 2022
Processing of Raw Materials
19
Table 7.1 – Risk Register of Future Plant
Risk No. Type of
Risk Risk Factor Condition for Risk Risk Impact
Description of
Damage
Probability of Risk
Event
Possible
Dam
age
Sum
1 External
Risk
1) Environmental
requirements Adoption of regulations,
introducing stricter liability
for violation of
environmental requirements
Reduced
production
volume, shutdown
of the enterprise
Penalties, loss of
revenue, reduction of profits,
shutdown of the enterprise
2 5 7
2) Health and
safety
requirements
Adoption of regulations,
introducing stricter liability
and health safety
requirements
Reduced
production
volume, shutdown
of the enterprise
Penalties, loss of
revenue, reduction
of profits
2 3 5
2 Property
Risk
3) Intellectual
property
management
Reproduction of the
technology, development of
a new more efficient and
cheaper technology
Reduced sales
volume due to lower demand
for the products and new competitors
Loss of revenue,
reduction of
profits
3 4 7
3 Personnel
Risk
4) Low personnel
competence Lack of education, skills Reduced output
and quality of the
products
Loss of revenue,
reduction of
profits
2 3 5
Staff turnover,
shortage Lack of staff Reduced output
and quality of the
products
Loss of revenue,
reduction of
profits
2 3 5
4
Engineeri
ng and
Manufact
uring Risk
6) Physical
deterioration of the
equipment,
outdated
technologies
Long periods of equipment
operation, deferred
maintenance, new models
with better performance and
reliability
Lower
marketability of
the products
Lower revenues
and profits 2 2 4
7) Compliance of
the equipment and
technologies with
the requirements to
the product quality
Low quality of the
equipment and ill-designed
manufacturing process
Lower
marketability of
the products
Lower revenues
and profits 2 2 4
20
8) Production
bottlenecks A production unit that slows down the delivery of
the manufactured products.
Inability to quickly
increase the
production volume
in order to meet
the growing
demand
Loss of revenue,
reduction of
profits
2 2 4
9) Efficient
performance of the
equipment and
technologies
Inferior equipment and
technologies causing a
waste of resources
Overstated
manufacturing cost
of the finished
products
Reduced sales
profits, loss of
revenue
2 2 4
10) Productivity
of the equipment
and technologies
Low productivity of the
equipment and technologies Inability to quickly
increase the
production volume
in order to meet
the growing
demand
Loss of revenue,
reduction of
profits
2 2 4
11) Machinery
and equipment
changeover time
Lack of flexibility in terms
of equipment changeover, Reduced performance and
lower
marketability
Lower revenues
and profits,
penalties
3 4 7
no possibility for repairs
without shutdowns of the products,
failure to fulfill
delivery
obligations
12) Wideness of
the product range Insufficient product range Reduced
performance and lower
marketability of
the products, sales
market decline
Lower revenues
and profits 3 4 7
5 Market
Risk
13) Lower market
value of the
products
Overall market decline Reduced revenues Loss of revenue,
reduction of
profits
1 3 4
14) New strong
competition Rapid industry development Reduced revenues Loss of revenue,
reduction of
profits
2 4 6
15) Lower
consumer interest Decline in the significance
of this product type Reduced revenues Loss of revenue,
reduction of
profits
1 3 4
16) Increased price
of primary
products,
materials, semi-
finished products
Raw material prices
increased by suppliers Increase in
production costs Reduced sales
profits 2 4 6
6 Liquidity
Risk
17) Inadequately
balanced cash flow Unforeseen expenses or lost
revenue Inability to meet
obligations to
creditors
Possible penalties
imposed by
creditors,
including
bankruptcy
2 3 5
21
- The risk is fully (practically fully) controlled.
- The risk is partially controlled.
- No techniques of risk control are available.
Figure 7.1 – Chart of Company Risks
Table 7.2 – Risk Control Measures at the Future Plant
Type of Risk Risk Factor Risk Control Measures
External risk
1) Environmental requirements To consider possible adaptation of the technology in
accordance with the stricter environmental
requirements. 2) Health and safety
requirements To develop measures for adaptation of the production
and technology in accordance with possible stricter
health and safety requirements.
Property Risk
3) Intellectual property
management To patent the idea, to improve the existing technology
in order to increase its effectiveness and efficiency
while maintaining the quality parameters.
Personnel Risk
4) Low personnel competence To introduce a system of measures to improve the
competence and skills of the personnel. To provide
incentive payments for achieving targets.
Staff turnover, shortage To identify the appropriate number of staff for
operations, to regulate the workload.
22
Engineering and Manufacturing
Risk
6) Physical deterioration of the equipment, outdated technologies
To ensure timely repair and renovation of the
equipment in accordance with the state-of-the-art
innovations. 7) Compliance of the equipment
and technologies with the
requirements to the product
quality
To ensure timely repair and renovation of the
equipment in accordance with the state-of-the-art
innovations.
8) Production bottlenecks To identify and eliminate the bottlenecks in order to
increase the production capacity in general
9) Efficient performance of the
equipment and technologies To research a possibility of technical upgrade of the
existing technology and equipment in order to
implement resource-saving manufacturing practices. 10) Productivity of the
equipment and technologies To research a possibility of technical upgrade of the
existing technology and equipment in order to their
productivity. 11) Machinery and equipment
changeover time To introduce flexible methods of the manufacturing
process organization, including a possibility of the
equipment changeover and repair without any
shutdowns, to introduce a modular flow diagram.
12) Wideness of the product
range To search for possibilities to introduce new types of
products in order to spread the risks and increase the
marketability of the products.
Market Risk
13) Lower market value of the
products To seek opportunities to expand the sales market and
reduce the manufacturing cost at the constant product
quality. 14) New strong competition To seek opportunities to expand the sales markets and
reduce the manufacturing cost at the constant product
quality. 15) Lower consumer interest To plan matching of revenue to expenses, to expand the
product sales markets 16) Increased price of primary
products, materials, semi-
finished products
To search for new suppliers, cooperate with several
suppliers simultaneously to reduce the risks of price
increases.
Liquidity Risk 17) Inadequately balanced cash
flow To apply cash flow planning procedures. Self-insurance.
According to Table 7.2 and taking into account the estimated parameters, the most significant risk
factors include
– Environmental requirements
– Intellectual property management
– Machinery and equipment changeover time
– Wideness of the product range
Apart from the environmental requirements, the company can provide a full or partial control of
the risk factors.
There is an adequate system of measures provided for all the types of risk to reduce their adverse
impacts. What is more, even when the company has no direct methods to control any type of risk, it is
possible to avoid the adverse impacts by taking measures to reduce the company’s sensitivity to its
effects.