W7_Rotimi_ Using Benefit-Cost Method to Choose Between Alternative Power Supply

1.    Problem Definition:

Evaluation Alternative Power Project Using Benefit -Cost Ratio Method.

 

Continuing from my W_6 Blog on either, using  a 50KVA Inverter or a 60 KVA Electric Gererator to supplement public supply, I am now applying Benefit - Cost method to confirm my choice of alternative power.

 

2.    Development of Feasible Alternatives.

The Two alternatives under consideration to supplyment power supply in my company are:

·         A 50 KVA Inverter

·         A 60KVA Electric Generator

 

3.    Development of Outcomes and cash flows for each alternative

For this endevour, and ease of convenience, the expected return on investment (ROI) is 15%.

 

Benefit - Cost Ratio: 50KVA Inverter Data

Available Data from W_6

Capex

50KVA  Inverter @ $3,000 per inverter                       = $ 20,000

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

Installation and Electrical Works                                 = $   3,000

                                                                                        $ 35,000

Opex

Annual Maintenance Cost                                          =  $   2,000

           

Benefit Cost Ratio: 60KVA Electric Generating Set Data

Capex

60KVA Generating set                                                = $ 10,000

Installation Cost                                                           = $   1,000

                                                                                                   $ 11,000

Opex

Annual Maintenance Cost                                           = $   1,040

Annual Operating Cost                                                = $   8,960

                                                                                                   $  10,000

Other Cash flows

            Residual Value                                                            = $   1,700

 

Using the Benefit-Cost ratio formula

B-C =   ____ PW (B)_______

            (I - MV) + PW (O&M)

 

Where   B-C = Benefit to Cost Ratio

          PW(B) = Present Worth of all Benefits

                   I = Initial Capital Investment

               MV = Market Value of Equipment After its Useful Life

   PW(O&M) = Present Worth of Operating and Maintaining the Equipment

 

Inverter

PW(B) = Benefit of using  a 50 KVA inverter is a savings of at least 51% in cost of power about ($14,500 * 0.51) $7,395 per annum

        I   = $35,000

    MV  = $ 0.00

O&M   = $2,000

 

                                   7,395 (P/A, 15%, 8)­­­­­­_________________________                                                                        

35,000 + 2,000 (P/A, 15%, 8)+12,000(P/F,15%,3)+12,000(P/F,15%,6)   

 

     ___________________7,395*4.4873__________________

 = 35,000 + (2,000 * 4.4873) + (12,000*0.6575) + (12,000*0.4323)

 

=  33,183 = 0.58 < 1

 57,052

 

60 KVA Electric Generator

PW(B) = Estimated decrease of 35% decrease in cost of power supply per annum as a result of using a new 60 KVA Electric generating set ($14,500 * 0.35) $5,075

        I   = $11,000

    MV  = $   1,700

O&M   = $10,000

 

               5,075 (P/A, 15%, 8)­­­­­­_________  = ____5,075 * 4.4873_____

(11,000 - 1,700) + 10,000 (P/A, 13.5%, 8)     9,300 + 10,000 * 4.4873

                                                                    =  0.42 < 1

 

 

4.    Analysis and comparison of alternatives

 

Both alternatives are giving a Benefit/Cost ratio of less than 1. This means that  both alternatives are not economically acceptable at 15%none of the Two alternatives will be able to generate enough cash flow benefits to off-set both their Capex and Opex during their useful life.

 

5.    Selection criteria

·         Best Return on Investment

6.    Selection of preferred alternative

We will be selecting the installation of the 50 KVA inverter as this option enables us to recover more, but not all of our capital and operating expenditure on this equipment, compared to the purchase and operation of the 60 KVA generator.

We may be forced to look at other equipments with less capacity. This may result in the company deliberately going out to purchase energy saving equipments

 

7.    Performance Measurement and Post Evaluation Results.

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

 

 

 

References

1.    Sullivan, W., Wicks, E., Koelling, P., Kumar, p., & Kumar, N. (2012). Engineering economy (15^th edition). England: Pearson Education Limited. Evaluating Projects with Benefit - Cost Ratio Methods.

2.    Shivey .G & Galopin M (December 2012) An Overview of Benefit - Cost Analysis

Retrieved from http://webcache.googleusercontent.com/search?q=cache:3TG5izpDZNAJ:www.agecon.purdue.edu/staff/shively/COURSES/AGEC406/reviews/bca.htm+benefit+cost+ratio&cd=4&hl=en&ct=clnk&gl=uk

 

3.    Ord .T. (2011) Benefit Cost Ratio, mysmp.com

 Retrieved from http://www.mysmp.com/fundamental-analysis/benefit-cost-ratio.html