ECONOMICS FOR ENGINEERING Final Project PDF

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COST ANALYSIS PROJECT BASED ON IDP SITE....

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FACULTY OF ENGINEERING AND BUILT ENVIRONMENT CIVIL ENGINEERING PROGRAMME SESSION 2020/2021 SEMESTER 1

KKKH4133 ECONOMIC ENGINEERING AND PROJECT EVALUATION

ASSIGNMENT REPORT

NAME: A165451 AZMIR NURHAQIM BIN JEFRIN ROZILEY GROUP 11

LECTURER: DR. NORAINI BINTI HAMZAH

SUBMISSION DATE: 14 FEBRUARY 2021

1.0 INTRODUCTION Engineers involved in construction and evaluation of a project should have a basic understanding of engineering economics. Engineering economics can be defined as the science that deals with techniques of quantitative analysis useful for selecting a preferable alternative from several technically viable ones. For most of the large projects, money is borrowed from investors or banks. A cost benefit analysis, rate of return, pay out period and many more must be performed before venturing into a project. Among several other factors, the project director must be familiar with the cash flow, interest on the borrowed money and timely completion of the project. Familiarity with interest rates, depreciation rates and salvage values of equipment are equally important in understanding the economic viability of a project. All engineering projects use resources, such as raw materials, money, labor and time. Any particular project can be undertaken in a variety of ways, with each one calling for a different mix of resources. The engineer has to become aware of the financial constraints on the problem, particularly if resources are very limited. In addition, an engineering project can meet all other criteria but may cause detrimental environmental effects. Finally, any project can be affected by social and politic constraints. The decision to construct any plant depends on two major issues which are technical feasibility and economic feasibility of the system. Once the technical feasibility of the system is determined, economic feasibility is addressed. Before purchasing or replacing a major piece of equipment, engineers must conduct a detailed cost analysis. The questions that need to be answered include, should one take a loan, what will be the interest rate, how long it will take to pay off for the new equipment, what will be the cash flow during this time period, what should be the rate of depreciation, what should be the salvage value, etc. It is necessary to all engineering is the ability to choose among several technically feasible solutions and to defend that choice credibly. The skills permitting the selection of a good choice are common to all engineers and, for the most part, are independent of which field is involved. Engineering economics is important because it facilitates the establishment of verifiable facts about a decision. The facts are important and necessary for the decision to be made. However, the decision eventually made may be contrary to that suggested by analysis. One could not expect an engineer to predict the future precisely, approximations are very useful. Engineering economics analyses are quantitative in nature and most of the time the quantities used in economic evaluations

are estimates. One way to control this uncertainty is to make sure that the information being used is valid and as accurate as possible. Nothing is as useless or potentially dangerous as a precise calculation made from inaccurate data. However, even accurate data from the past is of only limited value when predicting the future. Even with sure knowledge of past events, the future is still uncertain.

1.1 ECONOMIC EVALUATION Project evaluation is a systematic and objective assessment of an ongoing or completed project. The aim is to determine the relevance and level of achievement of project objectives, development, effectiveness, efficiency, impact and sustainability. Evaluation is a process that critically examines a program. It involves collecting and analyzing information about a program's activities, characteristics, and outcomes. Its purpose is to make judgments about a program, to improve its effectiveness, and/or to inform programming decisions (Patton, 1987). Evaluations also feed lessons learned into the decision-making process of the project stakeholders, including donors and national partners. A project is accountable for achieving outcomes and contributing to development impact. Since the achievement of broad, long-term development changes depends on many factors, it is usually not possible to attribute impact to one project. All outcomes of a project should contribute to the intended impact. Along the chain of results of a project, the relative influence of the project decreases while the relative influence of the project partners increases as they develop capacity and take over ownership of the project. Only when the project is gradually handed over to the local partners can it achieve broader, long term, sustainable impact. Evaluation assesses how well planning and managing for future outputs into outcomes. Impact is being done during the project cycle. Because projects are collaborative efforts, partners have co-responsibility for achieving outcomes and, ultimately, impact (for example, passing and implementing a new legislation frequently takes much longer than the life of a project and is left in the hands of the national partners). For this Integrated Design Project, we use Cost-Benefit Analysis (CBA). The purpose is to ascertain the accuracy of any investment decision and provide a foundation for comparing it with

similar proposals. Estimating economic benefits and costs associated with the proposed project requires establishing the project and without project scenarios and comparing the two. The without project scenario is not necessarily the businesses-usual case, as there may be instances where the current position is untenable and some steps toward mitigation are needed even without the proposed project. Monetary values of project benefits and costs, associated with outputs and inputs, must be identified in the years in which they arise. Any external effects affecting the rest of the economy but not reflected in market transactions by the project itself such as adverse or beneficial environmental impacts where they can be identified, must also be included. The benefits of Cost-Benefit Analysis are: •

To determine the feasibility of the investment opportunity by applying the time value of money.

•

To provide basis for comparing projects.

•

Evaluating the opportunity cost of the foregone alternative.

•

Performing sensitivity analysis for the various real-life scenarios.

In this project evaluation, there is consist of Net Present Value Model, Benefit Cost Ratio, Internal Rate of Return and Return of Investment. The NPV is the sum of the differences between the discounted benefit and cost flows, and can be estimated as:

Where Bt is the gross economic benefit in year t, Ct is the sum of economic costs (including capital costs, operating maintenance costs, and negative terminal values) in year t, r is the required economic discount rate, and n is the project life. The IRR is the discount rate at which the ENPV becomes zero, and it can be estimated from the following:

Where r is the IRR, at which, the sum of the discounted stream of economic benefits equals that of the economic costs of a project.

The BCR is the ratio of the sum of the present value of the project benefits to the sum of the present value of the total project costs, and it can be estimated as:

However, when project costs Ct include only fixed investment cost and exclude operation and maintenance costs, this is called the net BCR. 2.0 OBJECTIVE This report is purposely prepared in conjunction to completing our Integrated Design Project, Sekolah Menengah Vokasional @ SMV Tanjung Piai, and for our team to be able to: •

Explain the role and purpose of performing economic analysis on engineering projects.

•

Determine project economic value through engineering economic analysis.

•

Evaluate the engineering alternatives using different economic criteria and decide the most economic choice of projects.

•

Produce project evaluation proposal based on selected design project.

3.0 SITE LOCATION AND PROJECT DESCRIPTION

With the given contour map showing elevations of the site as seen above, the site chosen by our group is site 3 and it is being compared to nearest site, site 1. Our site 3 is located near to Main Road and Station Trigonometry. The proposed site project is located nearby Malaysia Nuclear Agency and Malaysia Genome Institute at Jalan Bangi, Bangi, Selangor Darul Ehsan. Since the site is located at reserve forest, a thorough planning and decisions making in locating the building and infrastructures are required for an optimum layout and to ensure the project is practicing. In this project, we were assigned to develop an SMV (SEKOLAH MENENGAH VOKASIONAL) @ KOLEJ VOKASIONAL Tanjung Piai at a given site. Among the considerations to include during completion of this project are optimal design layout, costing, environment and sustainability and it needs, public health and safety, society and culture, project management, cost effectiveness and authorities’ requirements. The assigned project to be build include: ➢ Administration and academic block. ➢ Cafeteria ➢ Basketball, football, takraw, netball and badminton courts ➢ Sewerage treatment plant (STP) ➢ Water tank ➢ Guard house ➢ Suction pump house ➢ Multipurpose hall and assembly area ➢ Hostel for male and female students ➢ Walkway (concrete imprint) roofed and unroofed ➢ Detention pond / On-site detention (OSD) ➢ Water pump ➢ Principle residence ➢ Car park ➢ Water reticulation piping ➢ Sewerage lining ➢ Road dan drainage

4.0 SWOT ANALYSIS

5.0 CALCULATION (SITE 3) ITEMS Labour Cost Personnel Cost (welfare) Safety cost Administration cost (accountant, project paperworks, etc.) Cost of facilities, site offices, staffs and parking facilities Earthwork: i) Site clearance ii) Excavation for cut and fill iii) Slope stabilzation Sub-structure Works Structural Works Infrastructure Works i) Roadworks ii) Surface Water Drainage iii) Water Reticulation System iv) Sewerage System v) External Works and Ancillary Buildings Machineries and Equipments Mechanical and Electrical Works Maintenance Other Cost (Electricity ,water,etc)

0

1

YEARS 2 3 COSTS (RM)

TOTAL 4

5

650,000.00 150,000.00 80,000.00

250,000.00

300,000.00 3,500,000.00

800,000.00 4,000,000.00 2,900,000.00

1,200,000 800,000 15,000

15,000

15,000

20,000

20,000

90,000

92,000

92,000

92,000

94,000

TOTAL COST (RM)

14,630,000

105,000

107,000

107,000

112,000

114,000

Government Allocation Student Fees Corporate Social Responsibility (CSR)

14,650,000

30,000 200,000

BENEFITS (RM) 30,000 200,000

35,000 200,000

35,000 200,000

35,000 230,000

63,000

63,000

65,000

65,000

65,000

70,000

14,713,000

293,000

295,000

300,000

300,000

335,000

1.00 14,630,000.00 14,713,000.00 1.000 14,630,000.00 14,713,000.00

0.94 99,056.60 276,415.09 0.893 93,750.00 261,607.14

0.89 95,229.62 262,548.95 0.797 85,299.74 235,172.19

TOTAL B ENEFIT (RM) RATE ( 6%) NPV COST (RM ) NPV BENEFIT (RM) RATE ( 12%) NPV COST (RM ) NPV BENEFIT (RM) Benefits Cost Ratio 6% Benefits Cost Ratio 12% ROI

0.84 89839.26 251885.78 0.712 76,160.49 213,534.07

0.79 88714.49 237628.10 0.636 71,178.02 190,655.42

0.75 85,187.43 250,331.49 0.567 64,686.66 190,088.00

15,175,000

16,236,000

15,088,027.4 15,991,809.4 15,021,074.9 15,804,056.8 1.059900608 1.052125558 7.252%

(SITE 1) ITEMS Labour Cost Personnel Cost (welfare) Safety cost Administration cost (accountant, project paperworks, etc.) Cost of facilities, site offices, staffs and parking facilities Earthwork: i) Site clearance ii) Excavation for cut and fill iii) Slope stabilzation Sub-structure Works Structural Works Infrastructure Works i) Roadworks ii) Surface Water Drainage iii) Water Reticulation System iv) Sewerage System v) External Works and Ancillary Buildings Machineries and Equipments Mechanical and Electrical Works Maintenance Other Cost (Electricity ,water,etc)

0

1

YEARS 2 COSTS (RM)

TOTAL 3

4

5

650,000.00 150,000.00 80,000.00

210,000.00

300,000.00 3,705,000.00

800,000.00 3,850,000.00 2,950,000.00

1,200,000 800,000 15,000

15,000

15,000

20,000

20,000

90,000

92,000

92,000

92,000

94,000

107,000

107,000

112,000

114,000

35,000 200,000

35,000 200,000

35,000 230,000

TOTAL COST (RM)

14,695,000

105,000

Government Allocation Student Fees Corporate Social Responsibility (CSR)

14,650,000

30,000 200,000

63,000

63,000

65,000

65,000

65,000

70,000

14,713,000

293,000

295,000

300,000

300,000

335,000

1.00 14,695,000.00 14,713,000.00 1.000 14,695,000.00 14,713,000.00

0.94 99,056.60 276,415.09 0.893 93,750.00 261,607.14

0.89 95,229.62 262,548.95 0.797 85,299.74 235,172.19

0.84 89839.26 251885.78 0.712 76,160.49 213,534.07

0.79 88714.49 237628.10 0.636 71,178.02 190,655.42

0.75 85,187.43 250,331.49 0.567 64,686.66 190,088.00

TOTAL BENEFIT (RM) RATE ( 6%) NPV COST (RM) NPV BENEFIT (RM) RATE ( 12%) NPV COST (RM) NPV BENEFIT (RM) Benefits Cost Ratio 6% Benefits Cost Ratio 12% ROI

BENEFITS (RM) 30,000 200,000

15,240,000

16,236,000

15,153,027.41 15,991,809.42 15,086,074.92 15,804,056.83 1.055354088 1.04759236 6.778%

Based on Cost Benefit Analysis @ CBA from this both sites which are site 3 and site 1, the comparison can be seen in the table below:

Total Costs (RM) Total Benefits (RM) NPV Cost (6%) NPV Benefits (6%) NPV Cost (12%) NPV Benefits (12%) BCR 6% BCR 12% ROI

SITE 3 15,175,000.00 16,236,000.00 15,088,027.41 15,991,809.42 15,021,074.92 15,804,056.83 1.0599 1.0521 7.25%

SITE 1 15,240,000.00 16,236,000.00 15,153,027.41 15,991,809.42 15,086,074.92 15,804,056.83 1.0554 1.0476 6.78%

As we can see, site 3 has more benefits to choose as the total cost is less than site 1. Furthermore, the cost benefits ratio for both 6% and 12% for site 3 is higher than site 1. Last but not least, the return of investment for site 3 is higher than site 1. So, with all the advantages has been said before, we choose site 3 as the best site.

6.0 CASH FLOW DIAGRAM (SITE 3) Cash Beginning Labour Cost Personnel Cost (welfare) Safety cost Administration cost (accountant, project paperworks, etc.) Cost of facilities, site offices, staffs and parking facilities Earthwork: Sub-structure Works Structural Works Infrastructure Works Machineries and Equipments Mechanical and Electrical Works Net Benefits

14,713,000.00 (650,000.00) (150,000.00) (80,000.00)

(250,000.00)

(300,000.00) (3,500,000.00) (800,000.00) (4,000,000.00) (2,900,000.00) (1,200,000.00) (800,000.00) 83,000.00

(SITE 1) Cash Beginning Labour Cost Personnel Cost (welfare) Safety cost Administration cost (accountant, project paperworks, etc.) Cost of facilities, site offices, staffs and parking facilities Earthwork: Sub-structure Works Structural Works Infrastructure Works Machineries and Equipments Mechanical and Electrical Works Net Benefits

14,713,000 (650,000.00) (150,000.00) (80,000.00)

(210,000.00)

(300,000.00) (3,705,000.00) (800,000.00) (3,850,000.00) (2,950,000.00) (1,200,000.00) (800,000.00) 18,000.00

7.0 NET CASH FLOW DIAGRAM (SITE3) Years 0 1 2 3 4 5 Total

Net Cash Flow 83,000.00 188,000.00 188,000.00 193,000.00 188,000.00 221,000.00 1,061,000.00

(SITE 1) Years 0 1 2 3 4 5 Total

Net Cash Flow 18,000.00 188,000.00 188,000.00 193,000.00 188,000.00 221,000.00 996,000.00

8.0 DISCUSSION The cost benefit analysis was done to ascertain the accuracy of any investment decision and provide a foundation for comparing it with similar proposal. The result allows us to predict what will happened in the future after the investment. The estimation values are based on the data and facts received from many reliable resources. Maybe sometime the past data may not relevant anymore but an approximation is an approximation and we could not predict what will be the actual outcome in the future. Based on the cost benefit analysis done previously, the result shown from Cost Benefit Ratio (CBR), Net Present Value (NPV), and Internal Rate of Return (IRR) is good which means it is worth to invest in although the IRR value is just a little bit above 0. There are a few limitations in Cost-Benefits Analysis such as: ▪

Inaccuracies in quantifying costs and benefits o Cost-Benefits analysis requires that all costs and benefits be identified and appropriately quantified. o Error in CBA are: ▪

Accidentally admitting certain costs and benefits due to inability to make a forecast

▪ ▪

Giving an inaccurate model.

Element of subjectivity o All cost and benefits cannot be quantified easily. o The monetary value of benefits such as employee satisfaction, client satisfaction or costs such as reduction of trust is difficult to be ascertained.

▪

CBA is might be mistaken for a project budget. o Involve estimation and deemed quantification. There is some level that the CBA model may be mistaken for a project budget. o Forecasting budget is more precise function and CBA can only be a precursor to it.

▪

Ascertaining the discount rate o Major concerns in the usage of discounting is the value pertains to the discount rate chosen o The standard method of discounting to present value based on the timing of costs and benefits, assumes all costs and benefits at the end of the year.

o Certain scenario, timing of cost and benefits need to be considering more thoroughly and in a distinguished manner. o If incurred halfway through the years. The timing cost and benefits need to be adjusted depends on the life span of project. There are other methods to evaluate the project such as: ▪

Urgency: a measure of the degree of urgency associated with the project can be made

▪

Net Cash Flow (NCF): A basic calculation that should be made for every investment proposal.

▪

Cost Effectiveness Analysis (CEA)

▪

Feasibility Study

▪

Net Terminal Value (NTV)

9.0 CONCLUSION In conclusion, this report allows us to re-evaluate our project in terms of monetary and decide which parameters could cut its cost to fit the investment thus allow us to get higher return. From the approximations, this project could give high return from the investment although many other possibilities could happen in the future that causes an increase of cost. Therefore, ba...