1. Problem Definition
This subject is for estimating 5 km2 quotation of the area of the concession area related to our company from a survey contractor is OMR 2,000,000. Is the quotation is appropriate? If it is not, how much is the site survey price?
2. Identify the Feasible alternative
Options for alternatives:
1. Accept the quotation, as price as OMR 2,000,000
2. Using cost approach estimation. Historically, cost/km2 is about OMR 6,000. With length 5 km2, Total estimating budget is OMR 1,600,000
3. Using comparison with another project in another company with cost/km2 is OMR 11,000. Total cost is OMR 2,200,000. With this assumption, the quotation will be accepted. It is need more analysis
3. Development of the Outcome for Alternative
Evaluating all alternative using Benefit – Cost ratio method.
How to validate MARR calculations of 12.8%:
Further to blog 7.2 where MARR has been calculated 8.6% (more details of the calculations) but with ignoring of risk scoring and assumed zero, in this section of this blog, MARR will consider all but the calculations here will focus on the risk scoring to be added. A lot of thanks are forwarded to the colleague of pmioman14 to support of these calculations.
MARR = WACC + Risk Scoring + Country Risk
The range of project risks are including activity type (production or exploration), location, and reservoir type and drilling type (onshore or offshore). Those criterions are summarized to determine the relative ranking for each sub-criterion.
A pair wise comparison matrix for each criterion is the next result to be calculated until priorities obtained for the sub criterion.
To calculate for each of the criterion of the above section, Matrix algebra is used and results are summarized in below table.
Now, the range of project risks is re-written as following:
Activity type: production = 0.1 & exploration = 0.9
Location: north = 0.52, middle = 0.32 & south = 0.16
Reservoir type: conventional = 0.1 & unconventional = 0.9
Drilling type: onshore = 0.1 & offshore = 0.9
Looking at below table, and since no reservoir in Oman that can be described as an offshore and unconventional at the same time, 37.91% is considered as an outlier and 4.21% can be considered as highest most reasonable percentage. Lowest risk is 0.02%
Calculating for MARR by including both maximum and minimum risk scoring, it was found that
– For the most risky project is, MARR= 8.6% + 4.2% = 12.8%
– For the least risky project is, MARR = 8.6% + 0.02% = 8.62%
4. Selection of Criteria
With using discount rate 12.8%
Benefit per/year = OMR 1,000,000
O&M/year = OMR 70,000
Conventional B-C ratio with PW
Modified B-C ratio with PW:
5. Analysis and Comparison of the Alternative.
All the alternatives are shows B-C Ratio’s calculation greater than one. All alternative is economically acceptable
6. Selection of the Preferred Alternative.
Alternative 1 is preferred to be used because it gives the highest value than other even though all alternative is accepted. Also, it is noted clearly that risk scoring has great impact on the calculations if included.
7. Performance Monitoring and the Post Evaluation of Result.
Different alternatives only affect the amount of the B-C ratio, no effect on project tolerability. Extra analysis maybe needed to be done to present input in for a better conclusion.
Here, I would like to thank my colleague to support of adding such validation of above calculations.
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