W4.0_Musallam Al Awaid_Economic Evaluation of Alternatives

Economic Evaluation of Alternatives

1.  Problem Definition

The methanol facility is using Diesel generators for power supply during the plant upsets. Those generators require a lot of maintenance through the whole year. However, government power is available around and can be purchased but with little modification to the connection grid. What is the better option stop using diesel generators and buying power from government or maintain things as they are?

2.  Identify the Feasible Alternatives

The alternatives are:

  1. Do nothing and maintain things as they are.
  2. Stop using diesel generators and buy power from government.

3.  Development of the Outcomes for Alternatives

  • Calculate the max annul power requirement from diesel generator.
  • Calculate the annual cost of diesel generators maintenance and the diesel cost
  • Calculate the annual cost of purchased power along with additional cost for modification.

4.  Selection of Criteria

The alternative with higher net present value is selected.

5.  Analysis and Comparison of the Alternatives.

In the worst scenario, the plant trips/shuts down 5 day per month which is 60 day/annum.

Then, the total power required per annum is 4320 MWh as the total diesel generators capacity is around 3 MW.

The two alternatives are compared as in the following table at 7% rate for 5 year. [ Negative (-) means cost]

Comparison Parameter Diesel Generators Government Power
Annual Operating cost -450000 $ 15000$
Capital Cost Not applicable -1000000$
Total NPV -1845089 $ -1061500$


6.  Selection of the Preferred Alternative.

As using government power has higher NPV, it is selected as the preferred alternative.

7.  Performance Monitoring and the Post Evaluation of Result.

It is better to keep the diesel generators in good conditions in case we need them in future or something happened in near future which restricts the government power supply.  [3]


  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P.(2012). Engineering economy 15th Edition.Chapter 8 Price Change and Exchange Rates, pp.406-409.
  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. Allinson, Guy., (2007). Petroleum Economic, Risk and Fiscal Analysis Course (2012, 16-20 July). Indonesia, Bandung : Guy Allinson
  4. Andhylaksono (8th April 2014). Kristal AACE 2014, Life Cycle Cost Analysis Retrieved on 25th June 2014 from http://kristalaace2014.wordpress.com/2014/04/08/w7_al_-life-cycle-cost-analysis/


One thought on “W4.0_Musallam Al Awaid_Economic Evaluation of Alternatives

  1. Musallam, you picked a REALLY great case study and you analyzed it well with one small but FATAL error…….

    Where or how did you come up with a MARR of 7%? Until or unless you can validate or justify your MARR, then it means your entire financial analysis is in danger of being wrong…. (GIGO- Garbage In/Garbage Out)

    My best suggestion would be to go HERE http://www.timeanddate.com/worldclock/meetingtime.html?iso=20140628&p1=108&p2=197&p3=51 then following the process explained by Ms. Liana, FIRST create a blog showing what is the appropriate MARR for use in Oman.

    Then once your have an MARR, only then can you do any of the IRR, ERR, NPV or other financial calculations correctly. Explained another way, if you use the wrong or inappropriate MARR, then your entire set of calculations is flawed, which probably will result in your analysis being wrong as well?

    Take your time and do it RIGHT and you will thank me come exam time……. 😉 And your company will thank YOU if you prevent them from making financially unsound decisions!!!

    Dr. PDG, back home in Jakarta

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