Question 4: ACCELERATION PROJECT

Project saving calculation 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Depreciation = depreciation rate * savings =
𝑠ố 𝑛ă𝑚
Output gained = Accel Production - Normal production
Taxable savings = Savings – depreciation
Net cash receipts for oil production are $7.00 per barrel
Tax paid = taxable savings * tax rate
 Cashflow gained = output gained * 7 * 1000
After tax cashflow = pre-tax cashflow – tax paid
Net cash gained = cashflow gained – extra costs
NPV = - Capital + NPV(rate, after tax cashflow)
Cash flow calculations
NPV = - Capital + An,I (After tax cash flow)
Saving = net cash gained
𝑁𝑃𝑉
PWPI =
Pre-tax cash flow = savings – capital 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Project Savings Calculations

Year Normal Accel Output gained Cashflow gained Extra costs Net cash gained

1 1800 2400 600 4200000 4200000

2 1800 2300 500 3500000 3500000
10 500 200 -300 -2100000 -2100000
TOTAL
14500 15000 500 3500000 1500000 2000000
Cash Flow Calculations
Year Capital Savings Pre-tax Cashflow Depreciation Taxable savings Tax Paid After Tax cashflow

0 4000000 -4000000 0 0 -4000000

1 0 4200000 4200000 400000 3800000 1520000 2680000
10 0 -2100000 -2100000 400000 -2500000 -1000000 -1100000
TOTAL
4000000 2000000 -2000000 4000000 -2000000 -800000 -1200000

1−(1+𝑖)−𝑛
𝑨𝒏,𝒊 = 𝑖

For non uniform cash flow: NPV = After tax cash flow + Am, I (After tax cash savings) 1m + Am, I (After tax cash savings) mn / (1+i)m
b) There are two zero NPVs at the rate of 6% and 36.4%
c) The investment decision for NPV discount rates of 10% and 20% will be accepted because the NPVs > 0. NPV at discount rates of 20% is higher than
NPV at 10% discount rate  it would be a better investment decision at discount rate 20%.

Net Present Value calculations 800000

Rate NPV NPV 600000

0 ($1,200,000) -1200000 400000
5% ($132,448) -132447.956 200000
10% $355,954 355954.3098
0
15% $521,400 521399.8792 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55%
-200000
20% $507,787 507787.4265

NPV
25% $397,172 397172.0806 -400000
30% $236,809 236808.5742 -600000
35% $54,010 54009.78488 -800000
40% ($135,509) -135508.972
-1000000
45% ($322,853) -322853.142
-1200000
50% ($503,169) -503168.555
-1400000
Discount rate
NPV is zero at 6.0%
and 36.4%
 Question 2: Fix and Repair
Steam and Power Balance Calculations
Replace Abandon
Steam demand t/d (The average process LP steam demand) 1520 1520
Electric power kW (The average power requirement) 10000 10000
STA Capacity kW (steam turbine driven turbo-alternator) 7500 0
kWH ex STA per t/d HPS (net AC power per tonne of HP steam) 125 125
1
Desuperheater HPS/LPS t/t 𝑑𝑒𝑠𝑢𝑝𝑒𝑟ℎ𝑒𝑎𝑡𝑒𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑠 1.25 𝑡𝑜𝑛𝑛𝑒𝑠 𝑜𝑓
𝐿𝑃 𝑠𝑡𝑒𝑎𝑚 𝑓𝑟𝑜𝑚 𝑜𝑛𝑒 𝑡𝑜𝑛𝑛𝑒 𝑜𝑓 𝐻𝑃 𝑠𝑡𝑒𝑎𝑚 0.8 0.8
𝑆𝑡𝑒𝑎𝑚 𝑡𝑜 𝑑𝑒𝑎𝑟𝑎𝑡𝑜𝑟
Dearator LPS/Condensate t/t 0.0526 0.0526
𝑆𝑡𝑒𝑎𝑚 𝑡𝑜 𝑝𝑟𝑜𝑐𝑒𝑠𝑠

Steam to process t/d (Steam demand) 1520 1520

Steam to Dearator t/d (dựa trên hình) 80 80
Total LP Steam t/d (tổng steam to process và steam to dearator) 1600 1600
𝑆𝑇𝐴 𝑝𝑜𝑤𝑒𝑟 ×24
Steam to STA t/d 1440 0
𝑘𝑊𝐻 𝑒𝑥 𝑆𝑇𝐴 𝑝𝑒𝑟 𝑡/𝑑 𝐻𝑃𝑆
LP Steam ex desuperheater t/d (dựa trên hình) 160 1600
HP Steam to desuperheater t/d (dựa trên hình) 128 1280
Total HP Steam t/d 1568 1280
STA power kW (STA Capacity) 7500 0
Purchased power kW (Electric power – STA power) 2500 10000

Cost data
Purchased power $/kWH 0.07
Purchased HP steam $/t (Incremental HP steam cost) 20
Replacement cost (purchased and installed) 6,000,000
Maintenance % of capital 5%
Other operating expenses 250000
Investment Data
Depreciation Rate 10%
Tax Rate 30%
Discount Rate #1 12.50%
Discount Rate #2 20%
 Calculation of Savings
Purchased steam and Power Quantities
HP steam (Total HP steam Replace - Abandon) 288 (t/d) (288 × 365 days) 105120 (t/a)
Electric power 7500 (kW) (7500 × 365days × 24h) 65700000 (kWh pa)
Savings for replacement STA
Purchased power (Electric power × Purchased power $/kWH ) 4599000
Less
Additional purchased HP steam (105120 × Purchased HP steam $/t ) 2102400
Maintenance costs (Maintenance % of capital × Replacement cost) 300000
Other operating costs (= Other operating expenses) 250000
Total savings (Purchased power - ∑(Additional + Maintenance + Other)) 1946600

Cash flow calculations

Pre-tax Taxable After tax Cumulative
Year Capital Savings Deprec'n Tax paid
Cashflow savings Cashflow cash costs
0 =Replacement cost -6,000,000 0 0 0 -6,000,000 -6000000
1 1946600 1,946,600 600000 1,346,600 403,980 1,542,620 -4,457,380
2 1946600 1,946,600 600000 1,346,600 403,980 1,542,620 -2,914,760
10 1946600 1,946,600 600000 1,346,600 403,980 1,542,620 9,426,200
Total 6,000,000 19466000 13466000 6000000 13466000 4039800 9426200

Saving = net cash gained Tax paid = taxable savings * tax rate
Pre-tax cash flow = savings – capital After tax cashflow = pre-tax cashflow – tax paid
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 NPV = - Capital + NPV(rate, after tax cashflow)
Depreciation = depreciation rate * savings =
𝑠ố 𝑛ă𝑚
𝑁𝑃𝑉
Taxable savings = Savings – depreciation PWPI =
𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Cumulative cash costs = - Capital + After tax cash flow

Net Present value calculations

Discount Rate #1 12.50% An,i 5.53643 NPV 2,540,608.9
Discount Rate #2 20% An,i 4.19247 NPV 467,391.3
IRR (by interpolation) 21.69%
After Tax Payback 3.89 years Pre tax payback 3.08 years PWPI Index 0.42343
 1−(1+𝑖)−𝑛 𝑖2 −𝑖1 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝑨𝒏,𝒊 = IRR (by interpolated) = i1 + NPV1 x Pre tax pay back = (years)
𝑖 𝑁𝑃𝑉1 −𝑁𝑃𝑉2 𝑆𝑎𝑣𝑖𝑛𝑔𝑠

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
After tax pay back = = (years)
𝑆𝑎𝑣𝑖𝑛𝑔𝑠−𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 (𝑠𝑎𝑣𝑖𝑛𝑔𝑠−𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛) 𝑆𝑎𝑣𝑖𝑛𝑔𝑠−𝑡𝑎𝑥 𝑝𝑎𝑖𝑑 ×𝑡𝑎𝑥 𝑟𝑎𝑡𝑒

Other data
NPV Steam cost An,I × Additional purchased HP steam × (1-Tax rate) -8147855 -320.70% of project NPV
NPV Power cost An,I × Purchased power × (1-Tax rate) 17823432 701.54% of project NPV
NPV Capex Capital + (An,I × Tax rate × Depreciation) -5003442 -196.94% of project NPV
NPV Other An,I × -(Maintenance + Other operating) × (1-Tax rate) -2131526 -83.90% of project NPV

For the case where total capital cost increase A%

Saving for replacement STA
Purchased power 4599000
Less
Additional purchased power HP steam (Purchased HP steam $/t × HP Steam) 2102400
Maintenance costs (Replacement × Maintenance % of capital) 360000
Other operating costs 250000
Total savings 1886600

Cash flow calculations

Pre-tax After tax Cumulative cash
Year Capital Savings Deprec'n Taxable savings Tax paid
Cashflow Cashflow costs
0 7200000 -7200000 0 0 -7200000 -7200000
1 1886600 1886600 720000 1166600 349980 1536620 -5663380
Total 7200000 18866000 11666000 7200000 11666000 3499800 8166200

Net Present value calculations

Using discount factor tables
Discount Rate #1 0.125 An,i 5.53643 NPV 1307390.3
Discount Rate #2 0.2 An,i 4.19247 NPV -757763.5
IRR (by interpolation) 17.25%
After Tax Payback 4.69 years Pre tax payback 3.82 years PWPI Index 0.18158
  At the discount rate of 12.5% pa, NPV > 0. Therefore, the replacement will be approved.
 This is a mutually exclusive project decision because the turbo-alternator will not be replaced and kept at the same time.
 Two examples of sunk costs in the data presented are the purchased power cost and incremental HP steam cost.
For the case where increasing the capital cost by 20%, the NPV at the discount rate of 12.5% pa will decrease to about 51.5% (1,307,390.3 / 2,540,608.9). Thus,
the project is very sensitive to the capital cost.
A change in the cost of steam and purchased power would have a much greater effect on the project because those costs are incurred repeatedly while the
capital cost is only incurred once.
This is confirmed in the sensitivity analysis which shows that purchased power savings contribute significantly to the NPV.
If the costs of steam or power vary significantly the NPV might change to a negative value so the project might not go ahead.
 Question 3: Fleet replacement
Cash flow calculations for proposal "C"
Operating Taxable After Tax
Year Capital Other costs Pre-tax costs Deprec'n Taxable costs
costs savings cash flow
Deprec’n at the
∑(Capital + Pre-tax costs
Annual End of life final year = Capital Pre-tax + Taxable costs
Operating + – Taxable
operating cost Trade in value – ∑ Deprec’n in Depreciation × Tax rate
Other) saving
previous year
0 60000 60000 0 0 60000
1 0 12000 12000 18000 30000 9000 3000
2 0 14000 14000 13000 27000 8100 5900
3 0 18000 18000 9000 27000 8100 9900
4 0 24000 -10000 14000 20000 34000 10200 3800
Total 60000 68000 -10000 118000 60000 118000 35400 82600
Tax
rate 0.3
Net Present Cost Calculations for Proposal "C"
Net Cash <Rate = 7.5%> <Rate = 15%> Cumulative cash
Year
Cost PV Factor PV At PV Factor PV At costs
= After tax 1 Net Cash cost × 1 Net Cash cost × PV
cash flow (1+𝑖)𝑦𝑒𝑎𝑟 PV Factor (1 + 𝑖)𝑦𝑒𝑎𝑟 Factor
0 60000 1 60000 1.00000 60000 60000
1 3000 0.93023 2790.7 0.86957 2608.7 63000
2 5900 0.86533 5105.5 0.75614 4461.2 68900
3 9900 0.80496 7969.1 0.65752 6509.4 78800
4 3800 0.74880 2845.4 0.57175 2172.7 82600
Total 82600 ∑PV At = 78710.7 75752.0 Check value
An,i 3.34933 2.85498
Equivalent Annual cost 23500.5 26533.3

𝑇𝑜𝑡𝑎𝑙 𝑃𝑉 𝐴𝑡
Equivalent Annual cost =
𝐴𝑛,𝑖

𝐴𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤 𝐴𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤 𝐴𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤

Check value = NPC = Capital + + + +….
1+𝑖 (1+𝑖)2 (1+𝑖)3
 Summary of Equivalent Annual Costs
Interest Case "A" (2 years) Case "B" (3 years) Case "C" (4 years)
7.5% 23500.0 22548.9 23500.5
15.0% 27441.9 26063.4 26533.3
Trade in 30000 22000 10000

i% Case "A" (2 years) Case "B" (3 years) Case "C" (4 years)

1−𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 1−𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 1−𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
Other cost × Other cost × Other cost ×
(1+𝑖)𝑦𝑒𝑎𝑟 (1+𝑖)𝑦𝑒𝑎𝑟 (1+𝑖)𝑦𝑒𝑎𝑟
7.5% -18172.0 -12396.4 -5241.6
15.0% -15879.0 -10125.7 -4002.3

NPC of trade in / ∑ (PV At) vd: -12396.4 / ∑ (PV At)

7.5% -43.07% -21.14% -6.66%
15.0% -35.59% -17.02% -5.28%

The field vehicles should be replaced every 3 years to minimise the total cost of owning and operating them. The optimum replacement time is not a
clear-cut decision.
My decision is based on the lowest (Equivalent Annual Cost) EAC and the same whether the discount rate is 7.5% or 15%. The optimum replacement
time is not a clear cut decision because the trade-in has a sigifficant impact for 2 & 3 year cases. The EAC calculations are close together so the decision
is not very clear. From the sensitive analysis, it is clear that the trade in has a large contribute to the EAC.
Sensitive analysis would be used as a type of analysis for the optimum replacement time. Investigate using sensitive analysis - look at trade in value
and operating cost. Other aspects, including the maintenace costs, the evironmental impact of the vehicle and the energy requirements, would be
investigated.