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Types of Economic Analysis Cash Flow Analysis - Example Sensitivity A l i S iti it Analysis Comparing Alternatives Questions
Economic analysis
Cash Flow Analysis
Typically utilized to determine the financial merits of capital investments
Book Analysis
Conducted for tax purposes, contained in annual report t
Direct Expenses
Power, fuel, catalysts, chemicals, patents, licensing, royalties, machine , overhauls, turnarounds
Escalate cost X percentage per year. 3-4% is a good start
Indirect Expenses
10% of Capital cost, 20-25% of Direct expenses
Account for the project support and operations FTEs admin support loss FTEs, support, control, marketing, R&D, Kleptocratic costs
Product Flowstreams
Methane, NGLs, Sulfur, CO2, Power,
Adjust for reliability turnarounds planned S/Ds reliability, turnarounds,
70 60 50 40 30 20 10 0 1985
USD/bb bl
?
1990 1995 2000 2005 2010
Discount Rate
Rate at which future cash flows are discounted
Also known as MARR: Minimum Allowable Rate of Return
Capital Cost $k 2008 2009 2010 2011 2012 2013 2014 ($2,500) ($2,500)
Direct Expense $k
Depreciation $k
Flowstream bbl/year
Price $/bbl
AS
$k 2008 2009 2010 2011 2012 2013 2014 $6,400 $6,720 $7,056 $7,409 $7,779
ATE
$k ($2,750) ($2,750) ($1,094) ($1,097) ( ($1,099) ) ($1,102) ($1,106)
ACI
$k ($2,750) ($2,750) $5,306 $5,623 $5,957 $6,306 $6,674
AIT
$k ($1,018) ($1,018) $1,963 $2,081 $2,204 $2,333 $2,469
ANCI ACF
$k ($1,733) ($1,733) $3,343 $3,543 $3,753 $3,973 $4,204
1 d (1 i ) n
2008 2009 2010 2011 2012 2013 2014
ANCI ACF
$k ($1,733) ($1,733) $3,343 $3 343 $3,543 $3,753 $3,973 $3 973 $4,204
fd
1.00 0.89 0.80 0 80 0.71 0.64 0.57 0 57 0.51
ADCF
($1,733) ($1,547) $2,665 $2 665 $2,522 $2,385 $2,254 $2 254 $2,130
Where i is the discount rate (12% in this case) and n is the years after project implementation (year2008)
DCF n NPV $8, 677
(A
0
(A
0
DCF n 0
ANCI ACF
$k 2008 2009 2010 2011 2012 2013 2014 ($1,733) ($1,733) $3,343 $3,543 $3,753 $3,973 $4,204
fd
1.00 0.89 0.80 0.71 0.64 0.57 0.51
ADCF
($1,733) ($1,547) $2,665 $2,522 $2,385 $2,254 $2,130
Either set the value of I as a variable or use the IRR function in Excel. In this example, the DCFRR is ~52% Consider what that is based on: My less than expert estimate of oil prices!
Sensitivity Analysis
How robust is the project to changes in the primary variables? Capital Cost
Typical Screening Capital Cost estimates have an uncertainty of + 2040% or more
Project Schedule
The largest cash flows typically take place in the EPC phase. Project schedules can
Product Price
Clearly there are are opportunities for the price to change the economic indicators.
Sensitivity Analysis
Project DCFRR Vs. Capital Cost Vs
80 60 40 Base 20 0 3500
DCFRR (%) (
4000
4500
5000
5500
6000
6500
Sensitivity Analysis
Project DCFRR Vs. Capital Cost Vs
80 60 40 20 0 3500
DCFRR (%) (
Base Lower
4000
4500
5000
5500
6000
6500
Sensitivity Analysis
Project DCFRR Vs. Capital Cost Vs
80 60 40 20 0 3500 Base Lower Upper
DCFRR (%) (
4000
4500
5000
5500
6000
6500
Sensitivity Analysis
Project DCFRR Vs. Capital Cost Vs
80 60 40 20 0 3500 Base Lower Upper
DCFRR (%) (
4000
4500
5000
5500
6000
6500
Comparing Alternatives
Ranking Method
Rank based on economic indicators of the projects
Useful for generating a project priority seriatim
Aggregate Method
Assumes the delta between the current alternative and the next best alternative is invested in a reserve at the minimum allowable rate of return
Useful for comparing very different p j p g y projects with large capital cost g p deltas
Incremental Method
Determine economics based on cash flow deltas between projects
Start with lowest price alternative and develop indicators, compare with next higher capital cost alternatives, keeping the current best choice until all alternatives are exhausted
Questions?