W6_Rotimi_Alternative Power Supply

1.    Problem Definition:

Source of Power.. The erratic power supply in Nigeria has increased cost of operations for companies operating in Nigeria, accounting for at least 9% of companies operating cost

2.    Development of Feasible Alternatives

·         Invest in Inverters to Supplement National Grid

·         Purchase 60KVA Generating Set to supplement Public

3.    Development of Outcomes and cash flows for each alternative

Cost Layout for  Inverter

50KVA  Inverter @ $20,000 per inverter                       = $ 20,000

30 Inverter Batteries @ $400per Inverter Battery      = $ 12,000.

Installation and Electrical Works                                 = $   3,000

Annual Maintenance Cost                                          =  $   2,000

Total                                                                                $ 37,000

           

Battery to be replaced every 2 years

Inverter Lifespan is 8 Years

Cost Layout 60KVA Generating Set

60KVA Generating set                                                = $ 10,000

Installation Cost                                                           = $   1,000

Annual Maintenance Cost                                           = $   1,040

Annual Operating Cost                                                = $   8,960

Residual Value                                                            = $   1,700

Generator Life span  is 8 years

4.    Analysis and comparison of alternatives

Two tools will be deployed to compare the 2 alternatives.

The tools to be deployed the NET CASH FLOW TABLE and finding the Equivalence

amounts of both CAPEX and OPEX for the two alternatives

Net Cash Flow Table for Alternatives A & B (Time Value of Money Not Considered)
	Alternative	A	B
Year	Description	50 KVA inverter	60 KVA Generator	Difference	Cumulative Difference
1	Initial Payment	32,000.00	12,000.00	20,000.00	20,000.00
	Installation cost	3,000.00	1,000.00	2,000.00	22,000.00
	Maintenance	200.00	2,400.00	-     2,200.00	19,800.00
	Annual Operating Cost	4,480.00	8,960.00	-     4,480.00	15,320.00
2	Maintenance	200.00	2,400.00	-     2,200.00	13,120.00
	Annual Operating Cost	4,480.00	8,960.00	-     4,480.00	8,640.00
3	Maintenance	200.00	2,400.00	-     2,200.00	6,440.00
	Annual Operating Cost	4,480.00	8,960.00	-     4,480.00	1,960.00
	Battery Replacement	12,000.00		12,000.00	13,960.00
4	Maintenance	200.00	2,400.00	-     2,200.00	11,760.00
	Annual Operating Cost	4,480.00	8,960.00	-     4,480.00	7,280.00
5	Maintenance	200.00	2,400.00	-     2,200.00	5,080.00
	Annual Operating Cost	4,480.00	8,960.00	-     4,480.00	600.00
6	Maintenance	200.00	2,400.00	-     2,200.00	-         1,600.00
	Annual Operating Cost	4,480.00	8,960.00	-     4,480.00	-         6,080.00
	Battery Replacement	12,000.00		12,000.00	5,920.00
7	Maintenance	200.00	2,400.00	-     2,200.00	3,720.00
	Annual Operating Cost	4,480.00	8,960.00	-     4,480.00	-             760.00
8	Maintenance	200.00	2,400.00	-     2,200.00	-         2,960.00
	Annual Operating Cost	4,480.00	7,260.00	-     2,780.00	-         5,740.00

Equivalence Table for Alternatives A & B
Year	Inverter	Generator	Discount factor @ 13.5%	PV Inverter	PV Generator	Difference	Cumulative difference
1	39,680.00	24,360.00	1.0000	39,680.00	24,360.00	15,320.00	15,320.00
2	4,650.00	11,360.00	0.8811	4,096.92	10,008.81	-   5,911.89	9,408.11
3	16,680.00	11,160.00	0.7763	12,948.05	8,663.08	4,284.97	13,693.07
4	4,650.00	11,360.00	0.6839	3,180.28	7,769.46	-   4,589.18	9,103.89
5	4,650.00	11,360.00	0.6026	2,802.01	6,845.34	-   4,043.33	5,060.56
6	16,680.00	11,160.00	0.5309	8,855.57	5,924.95	2,930.62	7,991.19
7	4,650.00	11,360.00	0.4678	2,175.09	5,313.78	-   3,138.68	4,852.50
8	4,650.00	11,360.00	0.4121	1,916.38	4,681.74	-   2,765.36	2,087.14
	Generator Residual Value	-           1,700.00	0.4121		-      700.61	700.61	2,787.76

5.    Selection criteria

a)         Reliability

b)         Initial Capital Investment

c)         Operating Cost

d)         Environmental Pollution

6.    Selection of preferred alternative

The Net Cash Flow Table indicates that it would take 6 years for the extra investments in Alternative A to generate enough savings to justify its higher investment amount and at the end of the life of Alternative A, we would have saved a total of $5,740

The Equivalence table shows that by choosing Alternative A, we would be spending $2,787.76 more today than choosing Alternative B.

These contrasting results raises the problem of the alternative to choose. As the use of the equivalence table takes cognizance of the time vale of money, we will have to choose this table for guidance.

Our decision will now be based on the effect of each alternative on the environment.

As Alternative A is more friendly to the environment ( Less air pollution and noise pollution), compared to Alternative B, Alternative A is selected.

The company will go ahead with the purchase and installation of a 50KVA inverter to complement public supply.

7.    Performance Measurement and Post Evaluation Results

The actual cost savings we are able to make will be compared to historical cost of power expended in the company's books in previous years

References

1.    Sullivan, W., Wicks, E., Koelling, P., Kumar, p., & Kumar, N. (2012). Engineering economy (15^th edition). England: Pearson Education Limited. The Time Value of Money

2.    Head .A. (Octoberl 2010) Acca Student Accountant. Advanced Investment Appraisal  Retrieved from http://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/advancedInvest.pdfstudents/2012/sa_apr08_head.pdf

3.    Investment Appraisal (2012). The Times 100 Business Case Studies

Retrieved from http://businesscasestudies.co.uk/business-theory/finance/investment-appraisal.