feasibility report (financial assessment)
DESCRIPTION
An economic analysis of the designed plant is very important to assess the profitability of the process design. This governs the cost estimation that primarily focuses on the raw materials, the assigned equipments and the economic parameters and conditions involved in the process. This report evaluates the financial feasibility of the two facilities of the small-scale plant: (1) CHF Processing Facility, and (2) Softwater Production Facility. To decide whether or not these projects should be accepted or pursued, financial assessment for the two facilities employs four key methods:(1) Payback period(2) Net present value (NPV)(3) Benefit/cost ratio (B/CR)(4) Internal rate of return (IRR)TRANSCRIPT
CHF in Cation Exchange for Water Softening:
Performance and Equipment Design
Financial Assessment Report
Maricris A. Alguzar
Keith Arleigh M. Eduava
Lloyd Jim J. Odchigue
This Financial Assessment Report for the study entitled “CHF in Cation Exchange for
Water Softening: Performance and Equipment Design” prepared and submitted by
Maricris A. Alguzar, Keith Arleigh M. Eduava and Lloyd Jim J. Odchigue, in partial
fulfillment of the requirements for the course in Plant Design and Project Study has been
examined, and endorsed for submission and/or oral presentation.
Engr. Melba T. Mendoza
Faculty Research Adviser
INTRODUCTION
For the study “CHF in Cation Exchange for Water Softening: Performance and
Equipment Design”, a small-scale plant that involves the processing of coconut husk to
produce CHF pellets at a rate of 500 kg/day was designed. These pellets will then be
employed in a water softening facility, which is still part of the designed small-scale
plant, as cation exchanger to soften water at a rate of 1000 gal/h.
An economic analysis of the designed plant is very important to assess the profitability of
the process design. This governs the cost estimation that primarily focuses on the raw
materials, the assigned equipments and the economic parameters and conditions involved
in the process. This report evaluates the financial feasibility of the two facilities of the
small-scale plant: (1) CHF Processing Facility, and (2) Softwater Production Facility. To
decide whether or not these projects should be accepted or pursued, financial assessment
for the two facilities employs four key methods:
(1) Payback period
(2) Net present value (NPV)
(3) Benefit/cost ratio (B/CR)
(4) Internal rate of return (IRR)
This report also determines the break-even outputs, sales and prices including the amount
of sales required for these facilities to earn a certain amount of profit for a period of five
years. Furthermore, financial analysis for the entire plant was also performed to assess
the economic feasibility of the whole plant.
FINANCIAL ASSESSMENT METHODS
Payback Period (PP)
The payback period, defined as expected number of years required to recover the original
investment, was the first formal method used to evaluate the capital budgeting projects.
It is calculated as:
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However, there are two main problems with the payback period method: it ignores any
benefits that occur after the payback period and, therefore, does not measure profitability.
It also ignores the time value of money. Because of these reasons, other methods of
capital budgeting like net present value, internal rate of return or discounted cash flow are
generally preferred.
Net Present Value (NPV)
As the flaws in the payback were recognized, people began to search for ways to improve
the effectiveness of project evaluations (Houston et al, 2004). One such method is the net
present value method, which relies on discounted cash flow (DCF) techniques. In
finance, the discounted cash flow (or DCF) approach describes a method to value a
project, company, or financial asset using the concepts of the time value of money. All
future cash flows are estimated and discounted to give them a present value. The discount
rate used is generally the appropriate cost of capital, and incorporates judgments of the
uncertainty (riskiness) of the future cash flows.
To implement this approach, find the present value of each cash flow, including both
inflows and outflows discounted at the project’s cost of capital. The sum of these
discounted cash flows is defined as the project’s NPV. The equation for NPV is as
follows:
NPV compares the value of the amount of money today to the value of that same money
in the future, taking inflation and returns into account. If the NPV of a prospective project
is positive, it should be accepted. However, if NPV is negative, the project should
probably be rejected because cash flows will also be negative.
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Benefit/Cost Ratio (BCR)
Prior to erecting a new plant or taking on a new project, a cost-benefit analysis is
conducted as a means of evaluating all of the potential costs and revenues that may be
generated if the project is completed. The outcome of the analysis will determine whether
the project is financially feasible, or if another project should be pursued. A Benefit-Cost
Ratio (BCR) is an indicator used in the formal discipline of cost-benefit analysis, which
attempts to summarize the overall value for money of a project or proposal. A BCR is the
ratio of the benefits of a project or proposal, expressed in monetary terms, relative to its
costs, also expressed in monetary terms. All benefits and costs should be expressed in
discounted present values. A major shortcoming of BCRs is that, by definition, they
ignore non-monetized impacts. It is calculated as:
Internal Rate of Return (IRR)
The Internal Rate of Return is a capital budgeting metric used by firms to decide whether
they should make investments. It is also an indicator of the efficiency of an investment,
as opposed to net present value (NPV), which indicates value or magnitude. A project is a
good investment proposition if its IRR is greater than the rate of return that could be
earned by alternative investments. Thus, the IRR should be compared to an alternative
cost of capital including an appropriate risk premium. Mathematically the IRR is defined
as any discount rate that results in a net present value of zero of a series of cash flows. Its
formula is:
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PROFITABILITY ASSESSMENT
1. Total Capital Investment
The capital cost, which is the sum of the fixed-capital and the working capital investment,
is the amount of money needed to supply the required manufacturing and plant facilities.
The small-scale plant has two facilities which produce two different products; CHF
pellets as medium for ion exchange, and softwater. The estimated capital cost for the
CHF processing and Softwater production plant are PhP 1,522,147.03 and PhP
1,113,334.87, respectively (See Appendix A).
2. Revenue Implications
Revenue is a crucial part of financial analysis. A company’s performance is measured to
the extent to which its asset inflows (revenues) compare with its asset outflows
(expenses). It comes from sale of the products produced by the plant. The total revenue
for the first year of operation of the CHF Manufacturing and Softwater Production Plant
are PhP 3,816,000 and PhP 1,324,822.20, respectively, with an escalation factor of 5%.
These are obtained by multiplying the unit price of the products, assumed to be PhP
26.50 for the CHF pellets and PhP 62 for the softwater, to the plant’s annual production.
3. Cost upon Implementation
The total product cost (TPC) is the total amount of all costs of operating the plant, selling
the products, recovering the capital investment and contributing to corporate functions
such as management and research development (Peters et al, 2002). The TPC of the CHF
Manufacturing and Softwater Production Plant, which is calculated on an annual basis,
are PhP 3,323,548.00 and PhP 896,295.00, respectively. See Appendix A for the details
of the cost estimation. The increase in inflation rates causes the materials and other
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production inputs to increase, thus, the total production costs is also assumed to increase
by 2% annually.
4. Annual Depreciation
Depreciation is the process of allocating in a systematic and rational manner the cost of a
capital asset over the period of its useful life. It takes into account the decrease in the
service potential of capital assets invested in a business venture, resulting from such
causes as physical wear and tear in ordinary use, as in the case of machinery;
deterioration primarily by action of the elements, as in the case of an aging building or
the erosion of farmlands; or obsolescence that is caused by technological changes and the
introduction of new and better machinery and methods of production (Redmond, 2006). It
is computed as:
The annual depreciation of the two facilities, CHF Manufacturing and Softwater
Production Plant, are 222,666.97 and 304,429.41, respectively. This is achieved by
dividing the capital cost of the project by the life of the assets which is assumed to be 5
years.
5. Incremental Cash Flow
In evaluating a project, we focus on those cash flows that occur if and only if we accept
the project. These cash flows, called incremental cash flows, represent the change in the
company’s total cash flow that occurs as a direct result of accepting the project. There
are several components that must be identified when looking at incremental cash flows:
the initial outlay, cash flows from taking on the project, terminal cost or value and the
scale and timing of the project. A positive incremental cash flow is a good indication that
an organization should spend some time and money investing in the project. The
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incremental cash flow for the two facilities is presented in Table 1 and 2. Because of the
difficulties in estimating the salvage value of the project, it is assumed to be zero (Eskew
and Jensen, 1995).
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Table 1. Incremental Cash Flow for the CHF Processing Facility (CPF)
Year 0 1 2 3 4 5
(Escalation factor at 5%)
A. Total Revenue 0.00 3,816,000.00 4,006,800.00 4,207,140.00 4,417,497.00 4,638,371.85
B. Less: Total Product Cost 0.00 3,323,548.00 3,390,018.96 3,457,819.34 3,526,975.73 3,597,515.24
C. Less: Depreciation 304,429.41 304,429.41 304,429.41 304,429.41 304,429.41
D. Taxable Income (A-B-C) 188,022.59 312,351.63 444,891.25 586,091.87 736,427.20
E. Less: Income tax at 35% (D * 0.35) 0.35 65,807.91 109,323.07 155,711.94 205132.15 257,749.52
F. Net Income after tax (D-E) 122,215.00 203,029.00 289,179.00 380,960.00 478,678.00
G. Plus: Depreciation 304,429.41 304,429.41 304,429.41 304,429.41 3044,29.41
H. Less: Capital Cost 1,522,147.03 -' -' -' -' -'
I: Plus: Salvage value 0.00 0.00 0.00 0.00 0.00
J. After-tax cash flow (F+G+H+I) 1,522,147.00 426,644.00 507,458.00 593,609,00 685,389.00 783,107.00
K. Discount factor at 15% 0.87 0.76 0.66 0.57 0.50
L. Discounted after-tax cash outflow at 15% (J*K)
1,522,147.00 370,994.86 383,711.13 390,307.37 391,873.45 389,342.63
N. Cumulative discounted after-tax cash flow 1,522,147.00 -1,151,152.00 -767,441.00 -377,134,00 14,740.00 404,082.00
Table 2. Incremental Cash Flow for the Softwater Production Facility (SWPF)
Year 0 1 2 3 4 5
(Escalation factor at 5%)
A. Total Revenue 0.00 1,324,822.20 1,391,063.30 1,460,616.50 1,533,647.30 1,610,329.66
B. Less: Total Product Cost 896,295.00 914,220.90 932,505.32 951,155.42 970,178.53
C. Less: Depreciation 222,666.97 222,666.97 222,666.97 222,666.97 222,666.97
D. Taxable Income (A-B-C) 205,860.23 254,175.44 305,444.18 359,824.90 417,484.16
E. Less: Income tax at 35% (D * 0.35) 0.35 72,051.08 88,961.40 106,905.46 125,938.72 146,119.46
F. Net Income after tax (D-E) 133,809.15 165,214.03 198,538.72 233,886.19 271,364.70
G. Plus: Depreciation 222,666.97 222,666.97 222,666.97 222,666.97 222,666.97
H. Less: Capital Cost 1,113,334.90
I: Plus: Salvage value 0.00 0.00 0.00 0.00 0.00
J. After-tax cash flow (F+G+H+I) 1,113,334.90 356,476.12 387,881.01 421,205.69 456,553.16 494,031.68
K. Discount factor at 15% 0.00 0.87 0.76 0.66 0.57 0.50
L. Discounted after-tax cash outflow at 15% (J*K)
1,113,334.90 309,979.24 293293.77 276,949.58 261,035.75 245,621.06
N. Cumulative discounted after-tax cash flow 1,113,334.90 -803,355.63 -510,061.87 -233,112.29 27,923.46 273,544.52
Table 3. Incremental Cash Flow for the CHF Processing and Soft Water Production Plant (CP&SWPP)
Year 0 1 2 3 4 5
(Escalation factor at 5%)
A. Total Revenue
B. Less: Total Product Cost
C. Less: Depreciation
D. Taxable Income (A-B-C)
E. Less: Income tax at 35% (D * 0.35)
F. Net Income after tax (D-E)
G. Plus: Depreciation
H. Less: Capital Cost
I: Plus: Salvage value
J. After-tax cash flow (F+G+H+I)
K. Discount factor at 15%
L. Discounted after-tax cash outflow at 15% (J*K)
N. Cumulative discounted after-tax cash flow
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The incremental cash flow is the additional operating cash flow that an organization
receives from taking on a new project. Looking at the table above, the projects may both
have negative cash flows from year one to three but these are compensated at the start of
the 4th year of operation. It shows that the cash associated with the reported profit for year
one to three will not fully materialize until the fourth year of operation and that a serious
cash short-fall will be experienced during the first to three years of operations when
receipts from sales of the softwater product will total only PhP 1,324,822.2 for the first
year of operation as compared to PhP 1,533,647.3 for the fouth year of operation. Thus,
this signifies that the company will still be able to cope up its cash shortages and increase
its financial resources or assets because a positive incremental cash flow means that the
company's cash flow will increase with the acceptance of the project. The projected
cumulative positive net cash flow over the fourth period highlights the capacity of a
business to generate surplus cash.
6. Financial Feasibility Assessment: PP, NPV, B/CR and IRR
a. Payback Period (PP)
The payback period is calculated as the year before full recovery plus the unrecovered
cost at start of year divided by the cash flow during the year. Below are the expected
discounted net cash flows for the projects: CHF Manufacturing and Softwater Production
Plant. The PP for the CHF manufacturing and Softwater Production are 2.99 and 2.89
years, respectively. This means that by these periods, the two facilities would recover the
costs of the original investment. Thus, the two facilities are economically feasible since a
project can be considered profitable for a payback period of less than 3 years (See
Appendix C for spreadsheet calculations).
Table 4. Summarized Discounted Cash Outflows
Year CPF SWPF Entire Plant
0 -1,522,147.00 -1,113,334.87
1 370,995.00 309979.24
2 383,711.00 293,293.77
3 390307.37 276,949.58
4 391,873.45 261,035.75
5 389,343.00 245621.06
b. Net Present Value
From the incremental cash flow presented in Table 1 and 2, the project’s NPV is
computed by adding the total discounted after-tax cash flow (DCF) at 15% and the capital
costs of the plant which is treated as a negative cash flow. It is expected that a discount
rate of 15% per year will be gained on the capital costs plus the profit generated by the
plant to pay off initial investments including the interests. The two projects should be
accepted because their NPV’s are both positive. The NPV’s of the CHF Manufacturing
and Softwater Production Plant are PhP 404,082.41 and PhP 273,544.52, respectively.
c. Benefit/Cost Ratio
It is simply the total discounted after-tax cash flow of the project divided by the total
capital investment of the project. For the Softwater production Plant, the B/C ratio is
1.25. This signifies that for every PhP 1.00 earned by the company, 1.25 accounts for the
benefit gained. Likewise with the CHF manufacturing plant, this accounts for 1.27 cash
returns.
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d. Internal Rate of Return
The IRR is defined as the discount rate that equals the present value of the project’s
expected cash inflows to the present value of the project’s costs or equivalently, the rate
that forces the NPV to equal 0. This report has adopted the Goal Seek method in solving
for the IRR instead of the more tedious, trial-and error method. Given the incremental
cash flows, the estimated rate of return for the CHF Manufacturing and Softwater
Production Plant are 24.57 and 24.36, respectively. The results showed that the two
projects are really feasible and these are summarized below.
Table 5. Summarized Values of Financial Indicators
Indicators CPF SWPF Entire Plant
Payback period (PP) < 3 years 2.99 2.89
Net present value (NPV) + 404,082.41 273,544.52
Benefit/Cost Ratio (B/CR) >1 1.27 1.245
Internal rate of return (IRR) > 15% 24.57 24.36
7. Break-even Outputs, Sales and Prices in 5 years
Breakeven is a financial term to describe a business or project where the sales revenue is
equal to total expenses. The break even point for a product is the point where total
revenue received equals total costs associated with the sale of the product. A break even
point is typically calculated in order for businesses to determine if it would be profitable
to sell a proposed product, as opposed to attempting to modify an existing product instead
so it can be made lucrative. Table 6 and Table 7 show the break even points of each
considered facility in the plant and Table 8 shows the break even point for the entire plant
(See Appendix D for calculations).
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Table 6. Break-even Outputs, Sales and Prices in 5 years for the CPF
Year 1 2 3 4 5
Break-even Output 68,417.31 70,434.30 72,617.94 74,989.30 77,573.13
Break-even Sales 1,813,058.76 1,741,802.991,677,749.02
1 1,619,880.701,567,364.3
2
Break-even Price 23.08 23.54 24.01 24.49 24.98
Table 7. Break-Even Outputs, Sales and Prices in 5 years for the SWPF
Year 1 2 3 4 5
Break-even Output 7,228.35 7,326.05 7,428.45 7,535.89 7,648.73
Break-even Sales 448,157.97 439,780.32 431,936.61 424,580.35 417,670.30
Break-even Price 41.95 42.78 43.64 44.51 45.40
Table 8. Break-Even Outputs, Sales and Prices in 5 years for the CP&SWPP
Year 1 2 3 4 5
Break-even Output 7,228.35 7,326.05 7,428.45 7,535.89 7,648.73
Break-even Sales 448,157.97 439,780.32 431,936.61 424,580.35 417,670.30
Break-even Price 41.95 42.78 43.64 44.51 45.40
The breakeven amount of sales for a business venture is the amount of sales at which a
business earns neither a profit nor a loss. Annual sales that exceed this breakeven point
generate profit for the business. Annual sales that fall short of the breakeven point result
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in a loss. Breakeven sales can be calculated using information on operating costs such as
the annual fixed cost, variable cost, sales revenue and the contribution margin.
Contribution margin is the amount by which annual sales revenue exceeds annual
variable costs. It is computed as the sales minus the variable costs. This margin
contributes to the payment of annual fixed costs, and if larger than fixed costs, to profit.
Breakeven sales are calculated by this formula: Total annual fixed costs / (Contribution
margin / Total sales). The formula in the denominator is used to calculate the contribution
margin ratio. This is the percentage of each sale available to cover fixed costs and
contribute to net income.
The Softwater Production Plant anticipates fixed costs of PhP 268,883.50 per year,
variable costs of PhP 529,962.23 per year, and sales revenue of PhP 1,688,079.00 per
year. Thus, break-even sales would be 391,926.35 for the first year of operation with a
contribution margin of 0.69. The contribution margin ratio of 0.69 indicates that 69% of
every peso of sales is available to pay fixed expenses. This PhP 0.69 per peso of sales in
excess of breakeven sales is profit. With fixed expenses of PhP 268,883.50, the
breakeven sales analysis shows that the Softwater Production Plant won’t make any
profits until it produces 7,228.35 m3 of softwater to generate PhP 1,688,079.00 in gross
revenue.
Keys to profitability include knowing the break-even price and being realistic in product
costing, price, and sales projections. Break-even sales are computed from the selling
price and from variable and fixed costs to determine the amount of neither revenue
needed so that the business neither makes nor losses money. Break-even price on the
other hand, is referred to as the per-unit cost of production. It is the minimum price that
one can sell a product while covering the costs. Using a break-even price of 41.95 for the
softwater for the first year of operation, the plant is not losing its money, but the hard
work and investments won’t be compensated.
8. Sales, X
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Tables 9 to 11 present the summaries of the sales required to earn a certain amount of
profit in 5 years (See Appendix C for the detailed calculations).
Table 9. Sales Requirement for the CPF to Earn Profit in 5 years
Year 1 2 3 4 5
X 3,816,000 4,006,800 4,207,140 4,417,497 4,638,371.85
Table 10. Sales Requirement for the SWPF to Earn Profit in 5 years
Year 1 2 3 4 5
X 1,324,822.20 1,391,063.31 1,460,616.48 1,533,647.30 1,610,329.66
Table 11. Sales Requirement for the CP&SWPP to Earn Profit in 5 years
Year 1 2 3 4 5
X
The results showed that the two projects make money if the selling price of CHF pellets
and softwater are PhP 26.50 and PhP 62, respectively. CHF pellets proved to be a
potential alternative to the expensive synthetic resins because they only not exhibit
cation-exchange properties, thus, softening the water, but they are also economically
feasible though further research is still needed in determining the service life of these
pellets to compare with that of the resins. Companies will not only get rid the stress of
disposing synthetic resins which surely are not eco-friendly for they are difficult to
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decompose, but also, they can help in recycling wastes by using environment-friendly
materials, like the CHF pellets, for their boiler operations.
However, the selling price of the softwater, and even the break-even price, is far higher
compared to the industrial rate of the Cagayan de Oro Water District (CDOWD) which is
PhP 25. This is because the capacity of the plant is small and the 300 gal/h, as designed in
the process, can be an additional profit rather than a recycling stream for the final
washing of fibers and regeneration processes. Increasing the quantity of product sold is
not the only option for improving profitability. Cutting either variable costs or fixed
costs, net income will increase because breakeven sales will decline. The plant can
achieve an even greater effect on its net income by raising the price of the product by
25% (from 62/m3 to 77.50/m3). While increasing the sales price of the product produces a
benefit to net income, customers will at some point react negatively to higher prices by
buying fewer units or none at all. Thus, the only option left is to scale-up the capacity of
the plant. Increasing the capacity of the plant will also increase the potential of reaching,
and even competing the rate in the market. It is often necessary to estimate the cost of a
piece of equipment when cost data are not available for the particular size or capacity
involved. Predictions can be made using power relationship known as the six-tenths rule:
if the new piece of equipment is similar to one another of another capacity for which cost
data are available (Peters et al, 2002). According to this rule, if the cost of a given unit
B at one capacity is known, the cost of a similar unit A with X times the capacity of the
first is X0.6 times the cost of the initial unit.
Cost of equipment A = (Cost of equipment B) X0.6
The application of the 0.6 rule thumb for most purchased equipment is, however, an
oversimplification, since the actual values of the cost capacity exponent vary from less
than 0.3 to greater than 1.0. Because of this, the 0.6 power should be used only in the
absence of other information. From Table 6-4 of Peters and Timmerhaus, the typical
exponents for cylindrical shape tanks and pumps are 0.57 and 0.33, respectively, with an
increase capacity from 1000 gal/h to 10,000 gal/h. Below is a graph that shows that
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increasing the capacity of the ion exchangers would reduce the selling price of the
softwater.
Figure 1. Capacity vs. Optimum Price Chart
Figure 2. Capacity vs. Net Present Worth
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Looking at the figure above, the 5,000 gal/h capacity gave a selling price of 16.50 while
the 10,000 gal/h capacity declined to 12.50 from the original price of 62.00 using the
designed 1000 gal/h capacity. Likewise, the net present value is increasing as the project
is accepted. The capacities of the ion exchanger tanks are raised to 5 and 10 (while fixing
the rate for recycling streams) to determine the optimum selling price of the product that
would be comparable to the CDOWD industrial water rate and also to evaluate the
difference in the payback period, NPV, B/C Ratio and IRR of the project, and these are
summarized below.
Table 12. Summary of the Changes in Prices, Profitability Indicators and Break-Even Points with the
Scale-up of Production Capacity
CAPACITY, gal/h
1000 5000 10000
Selling Price, PhP 62.00 16.5 12.5
Payback Period, years 2.89 2.87 2.82
Net Present Value, PhP 273,544.52 598,327.52 970,465.16
Benefit/Cost 1.25 1.23 1.26
Internal Rate of Return, % 24.36 23.92 24.92
Break Even Outputs, PhP 7,228.35 38,383.03 70935.26
Break Even Sales, PhP 448,157.97 633,320.01 886690.75
Break-Even Price, PhP 41.945 9.4 7.409217
The results show that in order for the plant to compete with the rate of CDOWD, the
capacity of the plant must be scaled up 5 or 10 times its capacity.
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REFERENCES
(n.d.). Retrieved February 11, 2008, from www.investopedia.com
(n.d.). Retrieved February 11, 2008, from www.wikipedia.com
"Depreciation." Microsoft® Student 2007 [DVD]. Redmond, WA: Microsoft Corporation, 2006.
Eskew, Robert K., and Daniel L. Jensen. Financial Accounting. 5th ed. New York: McGraw-Hill, 1995.
Houston, E. F. (2004). Fundamentals of Financial Management. Singapore: Thomas Learning Asia.
Peters, Max S., Klaus D. Timmerhaus, and Roland E. West. Plant Design and Economics for Chemical Engineers: Philippines: McGraw-Hill, 2002
Effective Small Business Management: An Entrepreneurial Approach, Seventh edition. 2003. Norman Scarborough and Thomas Zimmerer. Prentice Hall.
Managerial Accounting: Creating Value in a Dynamic Business Environment, Sixth edition. 2005. Ronald W. Hilton. McGraw-Hill/Irwin.
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APPENDIX A. Facility Cost Estimations
A. CHF Processing Facility
TOTAL CAPITAL INVESTMENT and TOTAL PRODUCT COSTS. No. Description Cost in P Cost in P Cost in P
Direct Costs
1 Purchased Equipment 492,627
2 Purchased Equipment Installation 101,967
3 Instrumentation and Controls 16,257
4 Piping 10,838
5 Electrical Equipment and Materials 81,283
6 Buildings (including services) 216,756
7 Yard Improvements 27,094
8 Service Facilities 81,283
9 Land 27,094
Total Direct Costs (D) 1,055,200
Indirect Costs
10 Engineering and Supervision 81283.455
11 Construction Expenses 83915.2336
12 Legal Expenses 0
13 Contractors Fee 52447.021
14 Contingency 20978.8084
Total Indirect Costs (I) 238624.518
Fixed Capital Investment (FCI), D+I 1,293,825
Working Capital (WC), 15% of TCI 228322.0541
Total Capital Investment (TCI) 1522147.027
S. No. Description Cost in P Cost in P Cost in P
Manufacturing Costs
Direct Production Costs
1 Raw Materials 252000
2 Operating Labor 991200
3 Operating Supervision 180000
4 Power and Utilities 312903
5 Maintenance and Repairs 73894.05
6 Operating Supplies 11084.1075
21
7 Laboratory Charges 157,920
8 Patents and Royalties 267,805.10
Total Direct Production Costs2,246,806.2
6
Fixed Charges
9 Depreciation 97,136.15
10 Taxes 12,938.25
11 Insurance 12,938.25
Total Fixed Charges 123,012.65
Plant Overhead Costs 622547.025
12 Plant Overhead Costs 622547.025
Total Manufacturing Costs (M) 2,992,365.93
General Expenses
13 Administrative Expenses 198240
14Distribution & Marketing Expenses
66470.95692
15 Research and Development33235.4784
6
16 Financing and Interest 33,235.48
Total General Expenses (G)297946.435
4
Total Product Cost, M+G 3,323,548
B. Soft Water Production Facility
TOTAL CAPITAL INVESTMENT and TOTAL PRODUCT COST
S. No. Description Cost in P Cost in P Cost in P
Direct Costs
1 Purchased Equipment 349,868
2 Purchased Equipment Installation 95,707
3 Instrumentation and Controls 11,546
4 Piping 7,697
5 Electrical Equipment and Materials 57,728
6 Buildings (including services) 153,942
7 Yard Improvements 19,243
8 Service Facilities 57,728
9 Land 19,243
Total Direct Costs (D) 772,701
Indirect Costs
10 Engineering and Supervision 57728.17875
11 Construction Expenses 61816.1017
22
12 Legal Expenses 0
13 Contractors Fee 38635.06356
14 Contingency 15454.02543
Total Indirect Costs (I) 173633.369
Fixed Capital Investment (FCI), D+I 946,335
Working Capital (WC), 15% of TCI 167000.231
Total Capital Investment (TCI) 1113334.871
S. No. Description Cost in P Cost in P Cost in P
Manufacturing Costs
Direct Production Costs
1 Raw Materials 19316.14534
2 Operating Labor 352800
3 Operating Supervision 0
4 Power and Utilities 62213.895
5 Maintenance and Repairs 52480.1625
6 Operating Supplies 7872.024375
7 Laboratory Charges 35280
Total Direct Production Costs 529962.227
Fixed Charges
8 Depreciation 47,316.73
9 Taxes 9,463.35
10 Insurance 9,463.35
Total Fixed Charges 66,243.42
Plant Overhead Costs 202640.0813
11 Plant Overhead Costs 202640.081
Total Manufacturing Costs (M) 798,845.73
General Expenses
12 Administrative Expenses 70560
13 Distribution & Marketing Expenses 17925.89141
14 Research and Development 8962.945704
Total General Expenses (G) 97448.8371
Total Product Cost, M+G 896,295
23
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Appendix B. Incremental Cash Flow
A. CHF MANUFACTURING FACILITY
Year 0 1 2 3 4 5
Escalation factor at 5%
A. Total Revenue 0 3816000 4006800 4207140 4417497 4638371.85
B. Less: Total Product Cost 0 3,323,548.00 3390018.96 3457819.339 3526975.726 3597515.241
C. Less: Depreciation 304429.406 304429.406 304429.406 304429.406 304429.406
D. Taxable Income (A-B-C) 188,022.59 312,351.63 444,891.25 586,091.87 736,427.20
E. Less: Income tax at 35% (D * 0.35) 0.35 65807.9079 109323.0719 155711.9392 205132.1538 257749.5212
F. Net Income after tax (D-E) 122,215 203,029 289,179 380,960 478,678
G. Plus: Depreciation 304429.406 304429.406 304429.406 304429.406 304429.406
H. Less: Capital Cost 1,522,147.03 -' -' -' -' -'
I: Plus: Salvage value 0 0 0 0 0
J. After-tax cash flow (F+G+H+I) 1,522,147 426,644 507,458 593,609 685,389 783,107
K. Discount factor at 15% 0.869565217 0.756143667 0.657516232 0.571753246 0.497176735
L. Discounted after-tax cash outflow at 15% (J*K) 1,522,147 370994.8627 383711.129 390307.3702 391873.454 389342.6255
N. Cumulative discounted after-tax cash flow -1,522,147 -1,151,152 -767,441 -377,134 14,740 404,082
B. SOFTWATER PRODUCTION FACILITY
Year 0 1 2 3 4 5
Escalation factor at 5%
A. Total Revenue 0.00 1324822.20 1391063.31 1460616.48 1533647.30 1610329.66
B. Less: Total Product Cost 896295.00 914220.90 932505.32 951155.42 970178.53
C. Less: Depreciation 222666.97 222666.97 222666.97 222666.97 222666.97
D. Taxable Income (A-B-C) 205860.23 254175.44 305444.18 359824.90 417484.16
E. Less: Income tax at 35% (D * 0.35) 0.35 72051.08 88961.40 106905.46 125938.72 146119.46
F. Net Income after tax (D-E) 133809.15 165214.03 198538.72 233886.19 271364.70
G. Plus: Depreciation 222666.97 222666.97 222666.97 222666.97 222666.97
H. Less: Capital Cost 1113334.87
I: Plus: Salvage value 0.00 0.00 0.00 0.00 0.00
J. After-tax cash flow (F+G+H+I) 1113334.87 356476.12 387881.01 421205.69 456553.16 494031.68
K. Discount factor at 15% 0.00 0.87 0.76 0.66 0.57 0.50
L. Discounted after-tax cash outflow at 15% (J*K) 1113334.87 309979.24 293293.77 276949.58 261035.75 245621.06
N. Cumulative discounted after-tax cash flow -1113334.87 -803355.63 -510061.87 -233112.29 27923.46 273544.52
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Appendix C. Sample Calculation for the Softwater Production Plant
A. Payback Period
Year 0 1 2 3 4 5
Cash Flows -1113334.87 356476.12 387881.01 421205.69 456553.16 494031.68
Cumulative -1113334.87 -756,858.75 -368,977.74 52,227.95 508,781.11 1,002,812.79
PP 0.87600369 + 2 2.87600369
PP = Year before full recovery + Unrecovered cost at start of year/Cash flow during year = 2 + (368,977.74/421205.69) = 2.89
B. NPV
DCF = 15%Year 0 1 2 3 4 5 Total DCF
DCF -1113334.87 309979.24 293293.77 276949.58 261035.75 245621.06 1386879.39
Cumulative -803355.63 -510061.87 -233112.29 27923.46 273544.52
NPV 273544.52
NPV = Total Discounted Cash Flow – Capital Cost= 1,386,879.39- 1,113,334.87= 273,544.52
C. B/C Ratio
= Total Discounted Cash Flow/Capital Cost= 1,386,879.39 /1113334.87= 1.25
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D. IRR (Using Microsoft® Excel’s Coal Seek)
For the soft water production plant, here is the time line set-up:
Year 0 1 2 3 4 5
Cash Flows -1113334.87 356476.12 387881.01 421205.69 456553.16 494031.68
The equation to be inputted in the spreadsheet:
-1113334.87 + (356476.12/ (1+IRR) ^-1) + (387881.01/ (1+IRR) ^-2) + (421205.69 *(1+IRR) ^-3 + (456553.16 *(1+IRR) ^-4) + (494031.68*(1+IRR) ^-5) = 0
Thus, we have an equation with an unknown, IRR, and we need to solve for IRR using Goal Seek.
Baseline percentage: 15% since the project’s IRR should be greater than 15%.
Using Goal Seek, when rate is 24.36% the PV of investment Softwater Production Plant is zero, which indicates that its internal rate of return is 24.36
%. The IRR for the CHF Manufacturing Project is approximately to 24.57%.
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Appendix D. Break Even Sales
A. CHF Manufacturing Facility
Year 1 2 3 4 5
Total Fixed Cost, TFC 745,555.68 745,555.68 745,555.68 745,555.68 745,555.68
Total Variable Cost, TVC2,246,806.
22,291,742.
32,337,577.
2 2,384,328.7 2,432,015.3
Total Product Cost, TPC3,323,548.
03,390,018.
93,457,819.
3 3,526,975.7 3,597,515.2
Total Production, TP (kg) 144000.
Revenue 3816000 4006800 4207140 4417497 4638371.85
Unit Selling Price 26.50 26.50 26.50 26.50 26.50
Unit Variable Cost, TVC/TP 15.60 15.91 16.23 16.56 16.89
Break-even Outputs, BEO 68417.32 70434.30 72617.94 74989.30 77573.1273
Break-even Sales, BES1813058.7
61741802.9
81677749.0
2 1619880.69 1567364.32
Break-even Price, BEP 23.08 23.54 24.01 24.49 24.98
Profit 823638.06 969501.941124007.0
9 1287612.54 1460800.82
X 3816000 4006800 4207140 4417497 4638371.85
TVC = include expenses directly associated with the manufacturing operation or simply the Total Direct Production Costs of the Plant.
= the increase in inflation rates causes the materials and other production inputs to increase, thus, the total variable costs is also assumed to increase by 2% annually.
TFC = Fixed Charges + Overhead Costs
A. SOFTWATER PRODUCTION FACILITY
Year 1 2 3 4 5
Total Fixed Cost, TFC 268,883.50 268,883.50 268,883.50 268,883.50 268,883.50
Total Variable Cost, TVC 529962.23 540561.47 551372.70 562400.16 573648.16
Total Product Cost, TPC 896295.00 914220.90 932505.32 951155.42 970178.53
Total Production, TP (m3) 21,368
Revenue/Sales 1324822.20 1391063.31 1460616.48 1533647.30 1610329.66
Unit Selling Price 62.00 62.00 62.00 62.00 62.00
Unit Variable Cost, TVC/TP 24.80 25.30 25.80 26.32 26.85
Break-even Outputs, BEO 7228.35 7326.04 7428.45 7535.89 7648.73
Break-even Sales, BES 448157.97 439780.32 431936.61 424580.35 417670.30
Break-even Price, BEP 41.94 42.78 43.64 44.51 45.40
Profit, P 525976.47 581618.33 640360.27 702363.64 767798.00
X 1324822.20 1391063.31 1460616.48 1533647.30 1610329.66
Sample Computations for the Softwater Production Plant: (first year of operation)
a. Break-even Output, BEO
BEO = TFC / (USP – UVC) = 268,883.50 / (62-24.80)
= 7,228.35
Where: TFC = Total Fixed Cost = 268,883.50USP = Unit Selling Price = 62.00UVC = Unit Variable Cost = TVC/TP
Where: TVC = Total Variable Cost = 529,962.23TP = Total Production, m3 = 21,368.10
b. Break-even Sales
BES = TFC / (1 – (TVC/S) = 268,883.50 / (1 – (529,962.23/1,324,822.20)= 448,157.97
c. Break-even Price
BEP = TC/TP= 896,295.00/21,368.10= 41.945
d. Sales
X = TFC + P / (1 – (TVC/S) where P = estimated profit = (268,883.50 + 889233.5545) / (1 – (529,962.23/1,324,822.20)
= 525, 976.47
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