Cost Analysis and Technical Feasibility Study for Project Optimization

Posted on Aug 31, 2024 in Economy

Costs in Project Coaching

Relevant Cost Elements

Within the relevant cost elements, the most significant are:

• Variation in standards of raw materials
• Rate of pay and staffing requirements for the direct operation
• Supervision and inspection requirements
• Fuel and energy
• Production volume and selling price
• Waste and scrap
• Acquisition value
• Residual value of equipment in each year of remaining life
• Taxes and insurance
• Maintenance and repairs

Objectives and Overview of the Technical Study

The objectives of technical analysis – operating a project are:

• To verify the technical feasibility of manufacturing the intended product.
• Analyze and determine the optimum size, the optimal location, equipment, facilities and organization required for production.

The aim with this study is to resolve the questions concerning where, how, when, with what, and how much to produce what is desired, so that the technical aspect – operating a project includes everything that has connection with the operation and functioning of the own project.

Parts that comprise the technical study

• Analysis and determination of the optimal location of the project
• Analysis and determination of the optimal size of the project
• Analysis of the availability and cost of supplies and inputs
• Identification and description of the process
• Determination of human organization and legal entity required for proper operation of the project

Estimate of Costs

The purpose of this chapter, among others, is to present the fundamentals of the theory of costs and its applications to the field of study of investment projects aimed at facilitating in subsequent chapters, the analysis of other aspects, such as investment, construction flow or profitability analysis of the project.

Cost Differentials

The difference in the costs of each alternative to provide a return or similar benefit determine which of them should be selected. These costs, called differentials, expressed the increase or decrease in the total costs that would entail the implementation of each of the alternatives.

Consequently, they are incremental costs that ultimately must be used to make a decision involving any increase or decrease in expected economic performance each course of action being studied.

The cost differential will be given only by the variable cost of production of these units. Further, since it can be assumed that fixed costs remain constant.

Must first identify the differential cost items. Raw materials, hand direct labor and variable manufacturing overhead costs are incremental costs, since producing an additional unit requires respective incur those costs.

Instead of fixed manufacturing costs are incurred costs to be independent, that is accept an additional order. Therefore they are not incremental costs.

Expenses for selling and administrative are fixed and independent of production levels within the limits of the maximum installed capacity. Consequently, both are irrelevant to the decision.

Variable costs are not the same as the differential, but may overlap. Costs variables are those that vary directly with production volume, costs Spreads refer to the specific alternatives analysis, which may or may not coincide with the variables. For example, the change in the level of activities involves varying the number of supervisors, equipment, insurance and others.

Future Costs

Any decision taken in this affect future results. The clearest case of irrelevant historical cost is the purchase of an asset. At the time it was acquired stopped be avoided, and whatever the alternative is chosen, the investment will not be extinct relevant.

The historical cost themselves are irrelevant in decision making, as not having occurred can recover. It should take care not to confuse the historical cost with the asset or property product of that cost, it may be relevant. This would be the situation of an asset purchased in the past, on which a decision can be made to generate future income if they intended to optional uses such as sale, lease or operation. In these cases, the relevant factor will always be what to do in future. No assessment is incorporated as the standard unit of measurement the investments already made.

Relevant Costs of Replacement Facilities

The economic calculations of investment for the replacement facility is one of the more complex analysis of relevant cost considerations, not because the procedures employees and the availability of adequate information.

The substitution analysis can take into account both increases the maintenance of productive capacity. Replacement Cases that do not increase the capacity may be due to replace facilities that have reached their point of exhaustion, or that even if can continue to function, an alternative appears more likely to conveniences. In this second hypothesis are two possibilities to alter the calculation procedure:

1. New facilities have a useful life equal to the remaining life of the facility by replacement.
2. New facilities have a maturity greater than the remaining useful life of those who are into use.

A real situation of many companies expect a major technological change in the future nearby, in circumstances where there is already a machine whose technology is better than the machine in use, but not yet perfected to the point expected for the end of those years.

According to the above, the reasoning is to determine the economic benefits differential against the old team again, or whether the savings in overhead and variables caused by the replacement operation is sufficient to cover the additional investment and to remunerate the capital invested at a reasonable interest rate to cover the cost of opportunity, depending on the risk involved in the decision.

Assuming that fixed costs and operating income to remain constant, they excluded from the calculation of ROI. To determine the savings generated by the new investment are working with constant costs of production factors, since changes in raw material prices or the remuneration of the direct labor will affect equally to both alternatives, unless for purposes of the new investment-recourse to cheaper raw materials or workers of different skills. Whatever the case, be determined strictly incremental costs.

If the old team had a residual value at the end of the evaluation period, it must discounted to their present value of estimated revenue from their sale at the time of replacement. Del new equipment should be estimated residual value at the end of the evaluation period.

Replacement Costs for Increased Capacity

Most investments are aimed at increasing the productive capacity of an enterprise to cope with market expansion or a decision of introduction to new markets.

The investment, in these cases is dependent on the estimation of future quantities of sale and their effect on net income.

The substitution analysis of production capacity expansion should ask, depending on merado an estimate of potential, with specific reference to the price and volume variables sales, in a projection of expected revenues from the operation.

Increased capacity may influence the unit variable costs. This will depend on effect of increased operation on technical performance and cost factors production. If the substitution improves performance, direct costs will be lower. The replacement can increase production without increasing proportionately the performance. In that case the unit variable costs remain constant. In either of these cases, the increase volume can affect the cost of production factors. For example, one could acquire a larger quantity of raw materials, obtaining a better volume discount, or be a change in the hourly rate work.

If increased capacity is significant, possibly the physical and administrative infrastructure grow, increasing fixed costs. In this situation if they are relevant for the decision.

Valuation of Investments

1 Balance of Physical Works

The management of information on investments in physical work is done in tabular form in called “balance of physical works” and which contains the information. The residual value column will indicate the value each of the items considered in the balance sheet at the end of life useful for each item, but at the end of the evaluation period.

The balance of physical works should contain all items that determine an investment in the project. No detail is needed most, as it seeks most of all grouped according items of cost.

At this point we must identify the layout and distribution of technical and physical infrastructure company to ride.

It must estimate the cost of investing in physical infrastructure of the plant.

It must estimate the balance works in the year 0.

In the balance of works is intended to estimate what is encompassed by the construction or remodeling physics of the company, by way of example is a table of works (the costs are estimated at UF):

2 Balance of Machinery and Equipment

It must estimate the Balance of machinery for the year 0.

At this point we must consider the machines to be used in its implementation, optimal production in the table shown below is an example of it (the Costs are estimated at UF):