ENGINEERING ECONOMICS

 FINAL COURSE PRESENTATION



 PRESENTED BY:


 Pramod Thapa 064bme625

 Susheel Regmi 064bme646
 Umanga Bhattarai 064bme647
 Utsav S. Rajbhandari 064bme648



 R & D Solar Solutions
PROJECT FEASIBILITY ANALYSIS

U U PS prepared by:-
ENGINEERING SOUTIONS
 Problem statement

R&D solar solutions that manufactures solar heating equipment, namely improved


solar water heater. The initial investment is Rs.70 lakhs. The production target is 250
units per year till the service life of 10 years. During these years, it would invest in
R&D. At the end of year 6, additional Rs.5lakhs,in bulk is, invested for R&D. After
its current service life, the continuation would be based in the progress by the R&D.
The land is on rent while other fixed assets are the capital investment. With the
assumption of escalation rate of 5%, the depreciation for building and machinery to
be 15% and 25% respectively. The annual insurance cost is 2.5% . The revenue per
unit production for the first year is Rs50,000 and it will increase by 5% each year
thereafter. The MARR of the company is assumed to be 15%
 OBJECTIVES
 To make the engineering economic analysis using Project Evaluation Technique

 To Develop a Discounted Cash Flow (DCF) model for the project and find out whether

the project is feasible or not.

 To check out whether the project can be carried out further along with R&D.

 To find out the IRR for the project.

 To find the payback period of the project

 The non-commercial objective of this project is to replace diesel and kerosene burning

water boilers in various industries and household purposes in Nepal with high
efficiency solar water heaters to reduce imported fossil fuel use and related GHG
emissions

METHODOLOGY
 Methodology (continued)

 Analysis Tools used:

Discounted Payback Period
Net Present Value
Annual Equivalent Value
Internal Rate Of Return

 Discounted Payback period

Payback period is the time needed to recover the

initial investment by the net cash flows produced by
the investment.
But it doesn’t show the profit.

 NPV
Present worth (PW) is an equivalent cash flow at present, generally at
t =0, to all the cash flows associated with a project.

 NPV =∑Ai (P/F, i, n) NPV =∑Ai (P/F, i, n)



 If NPV > 0, accept the investment

 If NPV = 0, remain indifferent
 If NPV< 0, reject the investment.

 AEV

It is measurement of investment on equal payment

annual basis.
AE(i)=PW(i)(A/P,I,N)


 If AE>0, accept the project

 If AE =0, remain indifferent
 If AE <0, reject the project

 IRR

Internal rate of return (IRR) of a project is the interest

rate, i, which makes PW(i) = 0.


Methods of project Evaluation by IRR

 If IRR>MARR, accept the project
 If IRR = MARR, remain indifferent
 If IRR < MARR, reject the project


 CASHFLOW *in Rs, 000
Particulars
no. of products 0 1
250 2
250 3
250 4
250 5
250 6
250 7
250 8
250 9
250 10
250
Revenue/piece 50 53 55 58 61 64 67 70 74 78
Revenue 12,500 13,125 13,781 14,470 15,194 15,954 16,751 17,589 18,468 19,392
capital costs
Building (5,000)
Machinery (2,000) (500)
Total (7,000) - - - - - (500) - - - -
working capitals
Manufacturing overhead expenses:
material(28 per unit) (7,000) (7,350) (7,718) (8,103) (8,509) (8,934) (9,381) (9,850) (10,342) (10,859)
labor(4 per unit) (1,000) (1,050) (1,103) (1,158) (1,216) (1,276) (1,340) (1,407) (1,477) (1,551)
land rent (48) (50) (53) (56) (58) (61) (64) (68) (71) (74)
Power (125) (125) (125) (125) (125) (125) (125) (125) (125) (125)
repair and (75) (79) (83) (87) (91) (96) (101) (106) (111) (116)
maintenance
Depreciation
building (15%) (750) (638) (542) (461) (392) (333) (283) (103) 0 0
machinery (25%) (500) (375) (281) (211) (158) (119) (89) (67) 0 0
project insurance (175) (175) (175) (175) (175) (175) (175) (175) (175) (175)
(2.5%)
non manufacturing overheads
admin & marketing (200) (210) (221) (232) (243) (255) (268) (281) (295) (310)
expenses
salary (600) (630) (662) (695) (729) (766) (804) (844) (886) (931)
R&D (100) (100) (100) (100) (100) (100) (100) (100) (100) (100)
Operating profit 1,927 2,343 2,721 3,069 3,398 3,714 4,022 4,463 4,885 5,149
Tax 482 586 680 767 850 928 1005 1116 1221 1287
Net Profit (7,000) 1,445 1,758 2,040 2,302 2,549 2,785 3,016 3,348 3,664 3,862
net cash flow (7,000) 1,445 1,758 2,040 2,302 2,549 2,285 3,016 3,348 3,664 3,862
Capital Costs
Annual Expenditures
Revenue
Project Cash Flow
 Project evaluation techniques

 We have used following method for project evaluation:



 Payback period:
 Between 5th and 6th year
 Net Present Value (NPV):
 PW(15%)=Rs. 5143000
 Annual equivalent value:
 AE(15%)=Rs. 1025000
 Internal rate of return:
 IRR=28%
 Payback Period

Discounted payback period

year Cash flow % cash cumulative

0 -7000 0 -7000
1 1445 -1050 -6605
2 1758 -991 -5838
3 2040 -876 -4673
4 2302 -701 -3072
5 2549 -461 -984
6 2285 -148 1153
7 3016 173 4342
8 3348 651 8341
9 3664 1251 13256
10 3862 1988 19107

Payback period is between 5th

and 6th year
Very attractive for a company
which is planning further
expansion in future.
 NPV and AEV
 NPV:
 Assume, MARR=15%=i
 For our project,
 NPV(15%)= ∑Ai (P/F, i, n) =Rs. 5143000
 As, NPV is +ve, so we accept project

 AEV:
 AE(15%)=Rs. 1025000
 Attractive Annual income
 IRR
NPV Profile
year Cash Flow Discount rate NPV
0 -7000 0%
19,268
1 1445 5%
12,471
2 1758 10%
7,896
3 2040 15%
4,723
4 2302 20%
2,459
5 2549 25%
803
6 2285 30%
(437)
7 3016 35%
(1,386)
8 3348 40%
(2,127)
9 3664 45%
(2,715)
10 3862 50%
(3,190)

IRR = 28%
Very attractive for investors
 CONCLUSION

vThe project is feasible and is profitable.

vInvestment on R&D is also feasible.
vThe project can be even carried out further after the
projected life based on the progress report from R&D.
vThe payback period is very good.
vThe IRR is attractive enough to attract any investor, if
required.

 

THANK


YOU ! ! !