feasibility report (financial assessment)

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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.

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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)

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Page 1: Feasibility Report (Financial Assessment)

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

Page 2: Feasibility Report (Financial Assessment)

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

Page 9: Feasibility Report (Financial Assessment)

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

Page 10: Feasibility Report (Financial Assessment)

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).

Page 12: Feasibility Report (Financial Assessment)

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

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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

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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

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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

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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

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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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