Environmental Engineering Reference
In-Depth Information
Table 2. The financial appraisal profile (FAP) of the case study
Project
(i)
(ii)
Basic data
Capital cost of t
he project
$292,000
$1,673,000
Cost of capital
8%
8%
Estimated Life
of Project
7 years
14 years
Financial:
NPV Profile
NPV
$724,000
$1,938,000
DPB
2.94 years
6.21 years
DPBI
3.5
2.2
MGR
19.5%
5.65%
AVs - Classification
Medium
low
Project specific risk:
Project Risk Profile
Risk Area Index
RAI -3.6 Dept. B
RAI -3.1 Dept. A
Extreme 'risk impact' area and value:
Department A: 11.2
(D. of V. 8.4%) Risk
element 2.
Department B: 12.3
(D. of V. 10.1%) Risk
element 1.
Highest Degree of Variance
Probability: Risk el-
ement 6. Dept. E.
14.2%
Impact: Risk element 5.
Dept. E. 13.7%
Strategic benefits: Strategic Index
6.3
5.8
Environmental Factors: ES Index (maximum possible score 63)
48.8 (77%)
39.3 (62%)
compiled, which highlights the financial, risk,
strategic, and environmental characteristics of a
proposed project. It is then left to the investment
appraisal team to make their recommendations
to corporate management. A case study based on
two mutually exclusive projects, with important
environmental implications, is now given. The
projects under consideration are aimed at increas-
ing production capacity in an industry that is known
for its potentially high level of environmental
pollution. While all known costs and benefits are
included in the DCF calculations, the company
wishes to 'quantify' the environmental impact of
the two projects. The final analysis from this case
study summarises the overall results of the FAP
process and is shown in Table 2.
The net present value profiles of the two proj-
ects show (see Table 3.):
Project (i)
has a capital cost of $292,000 with an
estimated life of seven years. It has a net
present value of $724,000, with a short
payback period marginally less than three
years. The project repays its original cost
three and a half times, has a very high mar-
ginal growth rate of 19.5%, and a
medium
classification for the abandonment value.
Table 3. NPV Profile of the two projects
Project (i)
Project (ii)
Capital cost of project
$292,000
$1,673,000
Illustrative Case Study Summary
Project estimated life
7 years
14 years
NPV
$724,000
$1,938,000
So what does this profile tell us? It gives us
a profile of four main investment criteria, (1)
financial, (2) project specific risk, (3) strategic,
and (4) environmental.
DPB
2.94 years
6.21 years
DPBI
3.5
2.2
MGR
19.5%
5.65%
