W12_SRN_Pipeline System Improvement

Opportunity Recognition:
Current underground flow lines have safety and integrity threats that impact people and production. The flow-lines are operating in a highly corrosive environment, where corrosion inhibitor is required internally and current cathodic protection and coating are ineffective to protect the pipeline externally:

  • High pressure (1350 to 1400 psig), high temperature (275 – 300°F, intermittent peak of 325°F), high velocity gas and CO2 content of around 7%-mole
  • Shallow out-cropped coal seams across the field, combined with water, creates an acidic environment (pH 2 – 4)

Feasible Alternatives:

  • Underground Carbon steel with coolers
  • Aboveground Carbon Steel
  • Aboveground Duplex

Tools and Techniques:

  1. Alternatives reviewed
  2. Preliminary Concept Selection Study
  3. Qualitative Risk review
  4. Discussion by internal integrated team

Selection Criteria:
To deliver an optimum design concept and execution strategy for the entire Pipeline System (New & Existing Wells) to mitigate current risk of system integrity because of highly corrosive environment.

Calculation, Analysis and Comparison:
Following is the approved selection process:

Following is the result of Multi-Attributes Evaluation between alternatives:

Following is preliminary cost evaluation among the alternatives:

Conclusion (Preferred Alternative):

  1. Installing coolers is preferred solution especially on existing lines. Aboveground flowline may be applied for optimization for future flowlines and pipe replacement.
    • Limits time operating with high risk of asset integrity, process safety and occupational safety
    • Opportunities to optimize certain wells
  2. Scope of work for 3rd party FEL-1 engineering is coolers as the preferred solution.

Performance Monitoring and Post-Evaluation:
All options area are within existing plant boundary area and no land acquisition is required. It means that if there is significant discrepancy cost within the options, the evaluation must be redone.

References:

  1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick. (2012). Engineering Economy 15th Edition, Chapter 14 – Decision Making Considering Multiattributes. Singapore: Prentice Hall, Inc.
  2. AACE International Recommended Practice (2003). Recommended Practice No. 16R-90 Conducting Technical and Economic Evaluations – as Applied for the Process and Utility Industries. AACE International
  3. Liu, Henry (2003). Pipeline Engineering. Boca Raton, Fla: Lewis Publisher
  4. Michael Bassard & Diane Riter (2010). The Memory Jogger 2nd Edition. Canada: GOAL/QPC
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W11_SRN_Valuation Using FCFE and FCFF

Opportunity Recognition:
It is to evaluate the stock of PT. Medco Energy International Tbk (MEDC). It will be performed analysis of last 5 years financial statements, some estimates of popular analysis reports, and issues related with the company. It will show whether the valuations are undervalued or overvalued.

Feasible Alternatives:

  • Free Cash Flow To Equity (FCFE): a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment.
  • Free Cash Flow For The Firm (FCFF): a measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments.

Tools and Techniques:

  • FCFE: Calculation using 2-stages, first stage is from 2012 -2017 and next stage is stable growth.
  • FCFF: Calculation using same assumptions with FCFE (except WACC), then calculate fair value of MEDC.
  • Both method use three scenarios of stable growth rate: Optimistic (7%), Moderate (5%), Pessimistic (3%). Assuming market value of company’s long-term debt is equal to its book value.

Selection Criteria:
More conservative of fair value to provide risk-taker perspective analysis.

Calculation, Analysis and Comparison:
FCFE:
Basis of calculation :

Company had an average of last 5-year debt ratio by 49% and pro forma 2011. Cost of equity calculated using CAPM method by first calculating Beta MEDC uses regression methods. The data used is daily data from 1-January-2009 to 30-December-2011. Following is the regression results:

Following is the scenarios of growth rate:

Using FCFE, fair value of MEDC is Rp.10,479 per share.

FCFF:
Basis of calculation :

Following is the scenarios of growth rate:

Using FCFF, fair value of MEDC is Rp.16,805 per share.

Conclusion (Preferred Alternative):
I suggest using FCFE fair value of Rp.10,479 per share, since it use more statistical approach and provide more conservative analysis for risk-taker perspective.

Performance Monitoring and Post-Evaluation:

  • The data should be updated in regular period.
  • Monitoring IHSG is needed to maintain sensitivity of stock to market.

References:

  1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick. (2012). Engineering Economy 15th Edition, Chapter 13 – The Budgeting Capital Process. Singapore: Prentice Hall, Inc.
  2. Bodie Z., Kane A. Marcus A.J. (2005). Investments 6th Edition. Singapore: McGraw-Hill Higher Education
  3. Yahoo Finance (2012). Stocks Data. Retrieved from http://finance.yahoo.com/
  4. Bank Indonesia (2012). SBI and BI Rate. Retrieved from http://www.bi.go.id/web/
  5. Indonesia Stock Exchange (2012). Indeks Harga Saham Gabungan (IHSG). Retrieved from http://www.idx.co.id/

W12.0_Ary_Escalation of Labor Cost for Long Term Contract in Mining Sector

Problem Recognition and Definition

Long term contract in mining sector commonly applied for material movement contract, heavy equipment contract or elsewhere applicable to support mining activities. A long term definite contract might not have definite rates applied on certain work activities. In fact, the cost is sensitive to labor cost, fuel price and consumables material that usually driven by market prices.

Escalation is one of aspect in estimate cost development that needs to include in estimating process.

At this time, author would like to study the relationship of labor rate versus consumer price index and develop an escalation formula based on these two parameters to calculate escalation cost.

Alternatives

Polynomial regression analysis will be implemented and there are 5 alternatives to be selected according to defined criteria:

  • Polynomial order #2
  • Polynomial order #3
  • Polynomial order #4
  • Polynomial order #5
  • Polynomial order #6

Analysis and Criteria

According to labor ministry regulation, labor rate is developed based on the following aspects:

  • Minimum living cost
  • Consumer price index
  • Job opportunities
  • Regional labor rates
  • Economic growth

Therefore, in this time author will use one of the above aspects (CPI) to be used to estimate the escalation.

Polynomial regression may provide better relationship between two parameters for nonlinear samples compare to linear regression. Polynomial regression provides 5 alternatives that may be chosen to fit the data sampling model / pattern.

The highest R2 will be recommended to be used for escalation formula of labor cost on long term duration contract with projected line within upper and lower control limit.

Below chart has been created according to statistic bureau of Indonesia (BPS) for period of 2005 to 2010.

Figure-12.1 Metal sector labor rate versus Consumer Price Index of Indonesia

Control chart for labor rate during period of 2005 to 2010 is made with upper limit control at 2,472 and lower limit control at 545.

Figure-12.2 Metal sector labor rate figure with control limit chart

On the last period of labor rate above, there is a significant increase of labor rate adjusted by the government and possibly moving towards the upper control limit.

 

Result / Selected Alternative

Polynomial regression lines have been plotted for labor rate as a function of consumer price index (CPI) and the figure is shown below.

Figure-12.3 Summary of regression analysis

From the above figure, the 5th and 6th polynomial lines are projecting labor rate beyond upper control line and could not be used for escalation formula despite the R2 value > 0.9. The next possible escalation formula could be taken from the 3rd polynomial line with R2 value 0.814.

Therefore recommended escalation formula is expressed below:

Escalation = 0.495x2 – 206.6x – 29097

Post Evaluation

The above formula may be combined with some more parameters such as job data and economic growth forecast to obtain more accurate result.

References:

  1. Humphreys, Gary.C (2011). Project Management Using Earned Value, Second Ed. (chapter 21, page 401-417). Humphreys & Associates. CA 92865.USA
  2. Triyanto, Djoko, et.al. (1997). Proses Penetapan UMR dan Pelaksanaannya, Research Report. Universitas Diponegoro.
  3. BPS. Statistic Table for Labor Cost. Badan Pusat Statistik. Retrieved from: http://www.bps.go.id/aboutus.php?tabel=1&id_subyek=19

W13_RW_Calculate Retirement Plan and Investment

Problem Identification

My friend (35 Year) this year earned $5,000/ month, joint the company retirement program, it is automatic deduction from monthly salary by 14% to be invested in selected mutual fund with earning 10% per year. The average salary merit increase per year is 8%.  He plan early retire to start his own business at the age of 45 (10Year from now) with the minimum capital $200,000.

Problem Statement:

If the accumulated money at age of 45 is not enough, so what age he should plan to early retire with the consequence the business capital will increase in line with the inflation rate 6%?

Feasible Alternative:

  1. If at age of 45 the accumulated money is enough then he will resign and start his own business.
  2. If at age of 45 the accumulated money then he should extent to work until certain age to start his own business.

Tools and Technique:

I’m using the formula stated in Sullivan, Engineering Economy pp.144-149. To calculate Geometric Sequence of Cash Flow.

  • Current Salary per month = $5,000 – OR- $60,000 per year
  • Investment: $60,000 x 14% = $8,400 per year.
  • P=(A[1-(P/F,i%,N)(F/P,f%,N) )/ i-f
  • P=($60,000[1-(P/F,10%,10)(F/P,8%,10) ]) /10%-8%
  • P=($60,000[1-(0.3855)(2.1589)])/2%
  • P=$70,452.5
  • F=P(F/P,10%,10)
  • F=$70,452.5 (2.5937)
  • F=$182,732.65 à the accumulated money at 10th years.

Because of the accumulated money is not enough to start his own business, then he should extent the work.

With the same step above now we have to find the P for F=$200,000

  • F=P(F/P,10%,10)
  • $200,000=$70,452.5(F/P,10%,N)
  • (F/P,10%,N) = $200,000/$70,452.5
  • (F/P,10%,N) = 2.8388
  • Now see the interest table provided in Sullivan, Engineering Economy 5th Edition, Appendix C.
  • For N = 11 Year à2.8531 and for N=13 Year à3.1384
  • So the N would be 11 Year.
  • Now test the whole calculation with N=11
  • P=(A[1-(P/F,i%,N)(F/P,f%,N) )/ i-f
  • P=($60,000[1-(P/F,10%,11)(F/P,8%,11) ]) /10%-8%
  • P=($60,000[1-(0.3505)(2.8531)])/2%
  • P=$76,765.16
  • F=P(F/P,10%,11)
  • F=$76,765.16 (2.8531)
  • F=$219,018.69 à the accumulated money at 11th years

IF the capital investment is postponed for 1 year with 6% inflation it became:

  • F=$200,000(F/P,6%,1)
  • F=$200,000(1.0600)
  • F=$212,000

So the accumulated money at 11th Years = $219,018.69 > 11th year Capital Investment=#212,000

It is recommended he retire at age 46.

 

Post Evaluation of Result

Based on the calculation above my friend is recommended to take early retirement at age of 46 to start his own business.

Reference:

Sullivan, W.G., Wicks, E. M., & Koelling, C. P. (2011). Engineering Economy 5th Edition, Chapter 5 P.144-200

The Smartest Way to Invest for Retirement (http://www.fool.com/investing/mutual-funds/2007/04/26/the-smartest-way-to-invest-for-retirement.aspx)

W12_RW_EDN_Calculate IRR for Laundry Business

Problem Identification.

My wife and I are thinking to open laundry business in Dago Street in Bandung, since Dago Street is one of areas where most colleges’ students lived. I made calculation and showed Eli the summary of accompanying table of projected costs and annual receipts for laundry business.

Table 1. Projected Costs and Annual Receipts.

Our MARR is 10%

How much is the IRR of laundry business and present it with the graph of PW versus IRR?

The feasible Alternatives:

  1. If the IRR is less than 10% it means the business is not profitable and find another alternatives.
  2. If the IRR is >10 %, it meas the business is profitable, and I will treat Ely to for Batagor Kingsley lifetime coupon for two every time she go to Bandung

Tools and Technique:

Using the formula stated in Sullivan, Engineering Economy pp.194-200, if IRR>= MARR, then the project is justified.

We start to calculate PW using the i=10% (MARR) and do trial for another i=x% to result the negative PW.

Table 2. PW Calculation

Now we know that:

PW(10%)=$68,993

PW(25%)=($7,206)

By using the interpolation we will find the i (x%) that result the PW=0

X%=23.58%

And draw into graph

Reference:

Sullivan, W.G., Wicks, E. M., & Koelling, C. P. (2011). Engineering Economy 5th Edition, Chapter 5 P.194-200

Calculating Internal Rate Of Return, retrieved from 😦http://www.business-analysis-made-easy.com/Calculating-Internal-Rate-Of-Return.html)

Engineering Toolbox. Internal Rate of Return – IRR. Retrieved from: http://www.engineeringtoolbox.com/internal-rate-of-return-irr-d_1235.html