- Problem Definition.
An LPG bottling plant is planned to be built near a gas plant constructed in a remote area. In order to benefit the local community from similar sort of projects, it is decided to source the bottling plant to a local SME.
The SME should be a balance of not losing money but also should not be a large profit generator. The main issue, however, is that how to maximize and diversify beneficiaries of this project and at the same time making sure whoever SME gets this project, they are being able to execute it safely.
- Identify the Feasible Alternative.
Two options have been identified to approach this SME.
Option 1 is that the projects remain in the ownership of the company, i.e Build Own Operate (BOO).
Option 2 project design and build would be by Company and owned and operated by possible SME.
- Development of the Outcome for Alternative
The cash flow of each option has been calculated and plotted in Figure1 below. It is clear from Figure1 below that Option1 has a higher NPV (6,300,000 USD) that Option2 (5,100,000 USD).
Figure1: Options Cash Flaws
- Selection of the Acceptable Criteria.
Highest NPV value would be the selection criteria.
- Analysis and Comparison of the Alternative
A main reason why Option 1has higher cash flows is that the LPG is subsidised only once, from the government to the company that built will build own operate the bottling plant. However, LPG price has to be further subsidised to the SME if option2 is considered
- Selection of the Preferred Alternative.
Option 1, BOO is the preferred option as it has a higher NPV
- Performance Monitoring and the Post Evaluation of Result.
After this initial result, a more detailed cost estimate to be performed, like IRR and ERR, in order to make sure it is the better option.
- Investopedia , Understanding The Time Value Of Money, Retrieved on 17.09.2014 from http://www.investopedia.com/articles/03/082703.asp
- ehow, How to Calculate NPV and IRR , Retrieved on 17.09.2014 from http://www.ehow.com/how_6746269_calculate-npv-irr.html
- Businessdictionary, net present value (NPV), Retrieved on 17.09.2014 from http://www.businessdictionary.com/definition/expected-monetary-value.html