Capital Investment and Operational Costs

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Capital Investment and Operational Costs
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Introductory Comments

• Cost anything that reduces your business
  objective
• Benefit anything that contributes to it
• Two types of costs investment (capital costs)
  and operational (on-going)

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General Assumptions

• If you wish to assess the future success of your
  project, you must make several assumptions.
• Assumptions will allow calculations to be
  completed and conclusions to be drawn.
• Do you have access to unlimited capital
  (funding)? Will there be taxes to consider.
• Others market prices, dimensions/operational
  parameters, cost/amount of material, construction
  labor, utilities, etc.
• Market prices are the most influential!

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Doc Ks Assumptions

• Ill be building a large flounder fingerling
  production farm. (Flounder Effect)
• I dont have land.
• Semi-intensive technology
• I need bank loan!
• I dont have the company formed yet!

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Investments (Costs)

• Preliminary (meetings, legal, land)
• Construction (excavation, structures, buildings)
• Equipment (vehicles, lab, etc.)

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Preliminary Investments
INVESTMENT COST (US) PLANNING
30,000 LEGAL FEES 16,000 PREFEASIBILITY
30,000 BUSINESS PLAN, FEASIBILITY
50,000 DRAWINGS AND MAPS 20,000 LAND
REGISTRATION 18,000 LAND PURCHASE (420 ha,
170 a) 420,000 TOTAL PRELIMINARY COSTS 584,000
REMEMBER, ALTHOUGH OUR FARM HAS 300 HA, 120 a
OF PONDS, MORE LAND IS NEEDED
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Spreadsheet 1- Preliminary Activities
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Construction Costs

• Earth movement (1.00 - 2.00/cubic m)
• Pumping station (a lot of concrete)
• Water control structures (inflow/harvest gates)
• Ancillary buildings (office, housing, kitchen,
  cafeteria/break room, ice plant, etc.)
• Costs highly reflective of local conditions and
  is usually one of the highest costs

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Earthmoving Costs

• Use of heavy machinery to clear, shape land
• Along with land largest single costs you will
  face (30-50)
• Typically calculated as 15 of total pond area as
  volume
• Thus, 300 ha 3 million sqm, 3 million x .15
  450,000 cubic meters
• _at_ 1.50 per cubic meter 675,000

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Pumps/Pumping Station

• Also a major expense
• Number of pumps, size of the installation is
  determined by stocking density
• 15 daily max exchange for a semi-intensive 300
  ha farm with 1.25 m deep ponds, pumping 16 hours
  per day is 186,000 gpm
• If each pump has a capacity of 40,000 gpm, we
  need at least five (one extra for redundancy, 6 x
  60,000 360,000)
• The pumping station must support this weight and
  therefore is almost solid concrete (200,000)

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Water Control Structures

• Gates/wiers are used to distribute/control water
  flow to farm
• Concrete construction large (sediment pond
  gates), inflow type (filtering) and harvest type
  (effluent, harvesting)
• Most ponds have two inflow gates (1,000 ea) and
  one harvest gate (2,000 ea)
• Our farm will have 30, ten ha ponds 2 sediment
  ponds gates (5,000 ea, total of 10,000), 60
  inflow gates (total of 60,000) and 30 harvest
  gates (total of 60,000)
• Total construction investment for water control
  structures 130,000

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Ancillary Facilities

• Ice plant (20 tons per day, used 70,000)
• Freshwater well (150 gpm, 20,000)
• Feed storage building (15,000)
• Fry acclimation center (30,000)
• Equipment storage (15,000)
• Mechanics shop (10,000)
• Office/Lab (10,000)
• Housing (25,000)
• Kitchen/cafeteria (10,000)
• Guard houses (5,000)

TOTAL 210,000
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Spreadsheet 1 preliminary, construction
investment
NOTE THIS SPREADSHEET IS BEING BUILT AS I GO!
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Equipment Investment
TOTAL 317,000
Plus contingencies 348,700 huh???
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Spreadsheet 1 preliminary, construction,
equipment investment
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Contingency Costs?

• These are increases in line item costs based upon
  the probability that something could (will) go
  wrong!
• Cant predict future! Even in a budget.
• Especially true for developing countries, areas
  where inflationary rates are high or material
  availability is variable (REM Generator story??)
• 10 investment contingency costs
• This increases our total investment costs to over
  2,723,600 (nice, eh?)

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(2) Operational Costs

• Operational costs day to day costs of
  production
• Outlay of funds for inputs, services used in
  production
• for short-run financial analyses, total costs
  include fixed and variable costs
• fixed cost one that does not change during
  production period (how can this differ?)
• examples land taxes, principal and interest on
  loans, insurance premiums, sometimes salaries,
  permitting, etc.
• variable cost one that does change (e.g., feed,
  fry, supplies, etc.)

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(2) Operational Costs

• Major cost components for our flounder facility
  include
• fry (local or imported)
• salaries, benefits (fringe), employee costs
• fuel (pumps, vehicles, generators)
• fertilizer, pesticides, lime (other treatments)
• consulting expenses (around 300/day)
• vehicle expenses (maintenance)
• electricity (if generated, then consider fuel)
• maintenance (3 of total, spread-out monthly)
• contingencies (10, same as investments)
• depreciation (variable, straight-line)
• consulting fees (set as a contract)

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Typical Operational Costs
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(2) Operational Costs, Year 1

• Production, sales and administrative costs
  encountered at start-up
• Shown in detail to help understand timing of
  funds released by bank
• Shows transitions that typically occur in
  start-up
• Some loan institutions also want to see Year 2 in
  detail

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Spreadsheet 2 Operational Costs, Year 1
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3) Proforma Statement of Costs

• Shows costs over 5 yr financial horizon
• 1) production costs
• 2) cost associated with selling product)
• 3) general and administrative costs not
  associated with production)
• All have employee benefits and costs
• benefits social security, health, 13th month
  wage
• costs lunch?, transportation, parties, awards

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Spreadsheet 3 Proforma Statement of Costs
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(4) Proforma Statement of Operations

• Goal determines your net income
• Includes 1) sales revenue 2) cost of sales 3)
  gross profit 4) other costs/expenses and 5) tax
  liability
• gross profit taxes not included
• net income before taxes (net present value, NPV)
  is what many bankers look at
• Also must consider interest payments on credit!
  (Tony wants his money too!)
• Tax income tax or credit, 12
• You wind up with net income after taxes

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Spreadsheet 4 Pro Forma Statement of Operations
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(5) Proforma Statement of Cash Flow

• A statement of the cash available to the company
  at various points in time
• Used as a planning tool, different from profit
• Important when considering expansion or
  diversification into new markets (ie., can you
  meet payroll and expand)
• Helps to determine if you might need a loan, or
  you can pay for the expansion with internal funds

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(5) Proforma Statement of Cash Flow

• Three cash flow categories based on where money
  comes from
• 1) Operations 2) Investments 3) Financing
• Cash flow from operations is your net income.
  REMprevious spread
• Depreciation is here considered a gain (like a
  tax write-off)
• From net gain from operations, you subtract other
  cash flows (investments, payments on loans)
• You add, as positive to Year 1, your loan
  principle
• 1 million cash at beginning of period is what
  I brought to the table

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Spreadsheet 5 ProForma Statement of Cash Flow
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Sensitivity Analysis
5-yr Break Break Income Cash Even Even
Criterion before taxes Flow IRR NPV Prod. Sales Ba
seline 21.4 M 18 M 141 31 M 1.3 M 3.9 M 1
Price Drop 8.2 M 6.4 M 74 11 M 1.9 M ?
same 10 ? Surv. 13.5 M 11 M 105 19 M 1.3
M same Feed ? 10c/lb 19 M 16 M 131 27 M 1.5
M 4.5 M Price ? Feed ? 5.8 M 4.3 M 54 7.2
M 2.2 M same
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Financial Indicators

• Start-up Indicators (IRR, NPV, break- even)
• On-going Indicators (cash flow, income, balance
  sheets)

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IRR

• IRR internal rate of return (or financial rate
  of return)
• How much is the money you have invested in the
  project earning?
• Projects that are accepted always have an equal
  to- or greater return than the opportunity cost
  of capital
• If you can earn more by depositing your money in
  the bank, do it!

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IRR (continued)

• When developed from a series of cash flows, at
  least one value must be negative
• Although IRR values vary from project to project,
  they are hard to use as a ranking tool
• A project with a 25 rate of return is likely to
  be a better investment than one with 15, but you
  are really estimating

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NPV (NPW)

• NPV net present value (often, net present
  worth)
• not a percentage, but a number
• the present worth of benefits of a project less
  the present worth of costs
• calculates the present value of an investment by
  using a discount rate and a series of future
  payments and income
• discount rate can be the rate of inflation or the
  interest rate of a competing investment
• in other words you are comparing the value of
  your project over a given time period to
  investment in another venture (opportunity)
• IRR is the rate for which NPV equals zero

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Start-up Break-even Analysis

• Break-even analysis is used to compare two
  different cost patterns and determine the point
  at which they are equivalent
• usually compares points at which sales revenues
  equal production costs
• this is then related to a production level (e.g.,
  farm production in lbs/yr) or a sales price
  (/lb)
• any value above break-even normally represents
  increased profit