SFB5012 Project Paper May 16-G03178 Idzuari Azli

2016

Kamilan, Idzuari Azli

MSc Asset Management & Maintenance

1/5/2016

Economic Analysis for Boiler Acquisition in MLNG 1

Debottlenecking Project

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Economic Analysis for Boiler Acquisition in MLNG 1 Debottlenecking Project 2016

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Table of Contents Abstract ................................................................................................................................................... 2

1.0 Introduction ....................................................................................................................................... 3

1.1 Problem Statement ....................................................................................................................... 4

1.2 Objective........................................................................................................................................ 4

1.3 Scope ............................................................................................................................................. 4

2.0 Literature Review .............................................................................................................................. 5

2.1 Performing an Engineering Economy Study .................................................................................. 6

2.2 Definitions ..................................................................................................................................... 7

2.2.1 Cash Flows .............................................................................................................................. 7

2.2.2 Minimum Attractive Rate of Return (MARR) ......................................................................... 7

2.2.3 Present Worth (PW) ............................................................................................................... 7

2.2.4 Future Worth (FW) ................................................................................................................. 7

2.2.5 Annual Worth (AW) ................................................................................................................ 8

3.0 Methodology ..................................................................................................................................... 9

4.0 Data Presentation ............................................................................................................................ 10

5.0 Results and Discussion .................................................................................................................... 11

5.1 Analyzing Investment Alternatives by Using Equivalent Worth .................................................. 11

6.0 Conclusion ....................................................................................................................................... 13

7.0 References ....................................................................................................................................... 14


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Abstract

Malaysia Liquified Natural Gas Satu Sdn Bhd (MLNG 1) is producing super cooled natural gas at -160

degC by converting natural gas in gas form into liquid form (LNG). MLNG is owned and part of

Petronas group of business. This LNG is stored in LNG storage tank before transport into LNG cargo

for import to Japan, Korea, China, etc. Once the cargo reach imported country LNG receiving terminal,

the LNG will be transported to LNG Storage Tank before converting it back to Natural Gas in Gas form

for power generation usage.

Recently, MLNG 1 management instructed for MLNG 1 debottlenecking study to be carried out. The

objective of the study is to identify equipments/units in MLNG 1 process and utilities area which

debottleneck the whole LNG process from producing LNG as per its design 8.4 million tonnes of LNG

per annum (mpta). MLNG debottlencking study was successfully done with assistance from Petronas

GTS 2 months ago. 15 equipments/units was identified in the MLNG Satu debottlenecking report.

However, it is worth to note that insufficient steam from Boiler for steam generator contribute 50%

from total debottleneck. Based on this finding, MLNG 1 management decided that all 15

equipments/units shall be done with additional 2 Boilers was identified as top priority.

The aim of this project is to apply principles in engineering economics to assess the options in the

acquisition the 2 Boilers and give recommendation to MLNG 1 management for decision making in

choosing most economicall feasbile Boilers in MLNG 1 Debottlenecking project.


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1.0 Introduction

A boiler is water containing vessel which transfers heat from a fuel source (oil, gas, coal) into steam

which is piped to a point where it can be used to run production equipment, to sterilize, provide heat,

to steam-clean, etc.

The energy given up by the steam is sufficient to convert it back into the form of water. When 100%

of the steam produced is returned to be reused, the system is called a closed system. Examples of

closed systems are closed steam heating, hot water heating, and "one-pipe" systems.

Since some processes can contaminate the steam, so it is not always desirable to feed the

condensate back into the boiler. A system that does not return the condensate is called an open

system.

The two main types of boilers are:

Firetube - the fire or hot gases are directed through the inside of tubes within the boiler shell,

which are surrounded by water. The tubes are arranged in banks so that the gases can be

passed through the boiler up to 4 times before passing out the stack. This system exposes

the maximum heat transfer surface to the water. Firetube boilers are also known as shell

boilers and can produce up to approximately 750 hp or 25,000 lbs of steam per hour. 80% of

boilers in use are of this configuration.

Watertube - the fire or hot gases are directed to and around the outside of tubes containing

water, arranged in a vertical position. Watertube boilers are usually rectangular in shape and

have two or more drums. The separation of steam and water takes place in the top drum,

while the bottom drum serves as a collection point for sludge. This system is usually used

when more than 750 hp or several hundred thousand lbs of steam per hour, are needed.

Malaysia Liquified Natural Gas Satu Sdn Bhd (MLNG 1) is producing super cooled natural gas at -160

degC by converting natural gas in gas form into liquid form (LNG). MLNG is owned and part of

Petronas group of business. This LNG is stored in LNG storage tank before transport into LNG cargo

for import to Japan, Korea, China, etc. Once the cargo reach imported country LNG receiving terminal,

the LNG will be transported to LNG Storage Tank before converting it back to Natural Gas in Gas form

for power generation usage.

Engineering economy involves the systematic evaluation of the economic merits of proposed

solutions to engineering problems. To be economically acceptable that is affordable, solutions to

engineering problems must demonstrate a positive balance of long-term benefits over long-term

costs, and they must also;

promote the well-being and survival of an organization,

embody creative and innovative technology and ideas,

permit identification and scrutiny of their estimated outcomes, and

translate profitability to the “bottom line” through a valid and acceptable measure of merit.


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1.1 Problem Statement

MLNG 1 management acknowledge that MLNG 1 is not producing at 100% plant design capacity.

Recently, MLNG 1 management instructed for MLNG 1 debottlenecking study to be carried out. The

objective of the study is to identify equipments/units in MLNG 1 process and utilities area which

debottleneck the whole LNG process from producing LNG as per its design 8.4 million tonnes of LNG

per annum (mpta).

MLNG debottlencking study was successfully done with assistance from Petronas GTS 2 months ago.

15 equipments/units was identified in the MLNG Satu debottlenecking report. However, it is worth to

note that insufficient steam from Boiler for steam generator contribute 50% from total debottleneck.

Based on this finding, MLNG 1 management decided that all 15 equipments/units shall be done with

Boilers as top priority. Additional 2 boilers are required to be installed in 2 years time from MLNG 1

Debottlenecking report.

MLNG Debottlenecking Project Management team (PMT) was formed to undertake this

debottlenecking project. An engineering team study many Boiler alternatives available in the market

that the PMT can choose from. PMT should aware of each alternative machine has to offer

economically before acquire any of the alternatives.

1.2 Objective

The objective of this project paper is to apply principles in engineering economics to assess the

options in the acquisition the 2 Boilers and give recommendation to MLNG 1 management for

decision making in choosing most economically feasbile Boilers in MLNG 1 Debottlenecking project.

1.3 Scope

Since the objective of this project is to run an economic analysis, it is important to specify the scope

of the analysis. The scope will be comparing 3 alternatives with methods as follow;

Analyzing investment alternatives by using equivalent worth method

Analyzing cost-only alternatives by using equivalent worth method

Rate-of-return method: Incremental analysis for investment alternatives

Three of basic methods for analyzing cash flows will be used in this project paper;

Present worth (PW)

Annual worth (AW)

Future worth (FW)


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2.0 Literature Review

Engineering economy involves formulating, estimating, and evaluating the expected economic

outcomes of alternatives designed to accomplish a defined purpose. Mathematical techniques

simplify the economic evaluation of alternatives.

The need for engineering economy is primarily motivated by the work that engineers do in

performing analyses, synthesizing, and coming to a conclusion as they work on projects of all sizes. In

other words, engineering economy is at the heart of making decisions. These decisions involve the

fundamental elements of cash flows of money, time, and interest rates.

Decisions are made routinely to choose one alternative over another by individuals in everyday life;

by engineers on the job; by managers who supervise the activities of others; by corporate presidents

who operate a business; and by government officials who work for the public good. Most decisions

involve money, called capital or capital funds, which is usually limited in amount. The decision of

where and how to invest this limited capital is motivated by a primary goal of adding value as future,

anticipated results of the selected alternative are realized. Engineers play a vital role in capital

investment decisions based upon their ability and experience to design, analyze, and synthesize.


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2.1 Performing an Engineering Economy Study


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2.2 Definitions

The equations and procedures of engineering economy utilize many terms and notations.

2.2.1 Cash Flows

Engineering economy bases its computations on the timing, size, and direction of cash flows. Cash

inflows are the receipts, revenues, incomes, and savings generated by project and business activity. A

plus sign indicates a cash inflow. Cash outflows are costs, disbursements, expenses, and taxes caused

by projects and business activity. A negative or minus sign indicates a cash outflow. When a project

involves only costs, the minus sign may be omitted for some techniques, such as benefit/cost analysis.

A cash flow diagram is a very important tool in an economic analysis, especially when the cash flow

series is complex. It is a graphical representation of cash flows drawn on the y axis with a time scale

on the x axis. The diagram includes what is known, what is estimated, and what is needed.

2.2.2 Minimum Attractive Rate of Return (MARR)

The Minimum Attractive Rate of Return (MARR) is a reasonable rate of return established for the

evaluation and selection of alternatives. A project is not economically viable unless it is expected to

return at least the MARR. MARR is also referred to as the hurdle rate, cutoff rate, benchmark rate,

and minimum acceptable rate of return.

2.2.3 Present Worth (PW)

The PW method is based on the concept of equivalent worth of all cash flows relative to some base

or beginning point in time called the present. All cash inflows and outflows are discounted to the

present point in time at an interest rate that is generally the MARR. A positive PW for an investment

project is an amount of profit over the inimum amount required by investors.

2.2.4 Future Worth (FW)

The FW is based on the equivalent worth of all cash inflows and outflows at the end of the study

period at an interest rate that is generally MARR. The economic information provided by the FW

method is very useful in capital investment decision situations.


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2.2.5 Annual Worth (AW)

The AW of a project is an equal annual series of money amounts, for a stated study period, that is

equivalent to the cash inflows and outflows at an interest rate that is generally MARR.

AW = PW(A/P, i%, N) = FW(A/F, i%, N)


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3.0 Methodology

DTSB has given these information for the purpose of this study;

MARR = 5% annually

Study period = 20 years

Therefore, the above reference values shall be used throughout the analysis. Assessing the

investment feasibility and profitability and recommending to management on making the best

decision, methods below will be carried out in this project paper;

1. Summary of information regarding each alternatives will be presented based on collected

data. Information such as capital investment, annual operating cost, annual labor cost and

annual power maintenance cost for each alternatives are important and will be presented in

a simple table.

2. Analyzing investment alternatives by using equivalent worth method will be conducted.

The respective values of PW, AW, FW will be computed.


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4.0 Data Presentation

MLNG 1 Debottlenecking Project Team has gathered necessary data and made the following table for

the expected inflow and outflow on each water jet cutting equipment system.

The data were collected from many sources such as consultants, contractors, and original equipment

manufacturers.

MLNG 1 Debottlenecking Project Team provided the values of expected annual revenue for the study

period of 20 years for each alternative. All values are in Ringgit Malaysia (RM).


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5.0 Results and Discussion

The most straightforward technique for comparing mutually exclusive alternatives when all useful

lives are equal to the study period is to determine the equivalent worth of each alternative based on

total investment at i = MARR. Then, for the investment alternatives, the one with the greatest

positive equivalent worth is selected. And, in the case of cost alternatives, the one with the least

negative equivalent worth is selected.

5.1 Analyzing Investment Alternatives by Using

Equivalent Worth

Present worth (PW) for each alternatives;

PW(5%)A = – 987,440 + (300,450 – 185,000)(P/A, 5%, 20)

= – 987,440 + 115,450(P/A, 5%, 20)

= – 987,440 + 115,450(12.4622)

= + RM 451,321.00

PW(5%)B = – 1,468,393+ (512,940– 290,000)(P/A, 5%, 20)

= – 1,468,393+ 222,940(P/A, 5%, 20)

= – 1,468,393+ 222,940(12.4622)

= + RM 1,309,930.00

PW(5%)C = – 2,109,039+ (647,380– 430,000) (P/A, 5%, 20)

= – 2,109,039+ 217,380 (P/A, 5%, 20)

= – 2,109,039+ 217,380 (12.4622)

= + RM 599,994.00

From the PW method, we can see that all of the alternatives are positive with B has the largest value

(+ RM 1,309,930.00)

Present worth (FW) for each alternatives;

FW(5%)A = PW(5%)A x (F/P, 5%, 20)

= RM 451,321.00 x 2.6533

= + RM 1,197,490.00

FW(5%)B = PW(5%)B x (F/P, 5%, 20)


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= RM 1,309,930.00 x 2.6533

= + RM 3,475,637.27

FW(5%)C = FW(5%)C x (F/P, 5%, 20)

= RM 599,994.00 x 2.6533

= + RM 1,591,964.08

Based on the FW method, the choice is B because it has the largest value.

Annual worth (AW) for each alternatives;

FW(5%)A = PW(5%)A x (A/P, 5%, 20)

= RM 451,321.00 x 0.0802

= + RM 36,195.94

FW(5%)B = PW(5%)B x (A/P, 5%, 20)

= RM 1,309,930.00 x 0.0802

= + RM 105,056.39

FW(5%)C = FW(5%)C x (A/P, 5%, 20)

= RM 599,994.00 x 0.0802

= + RM 48,115.50

Alternative B again is chosen as it has the largest AW value compared to others.

PW, FW and FW for all Boiler A, B and C is summarised as above.


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6.0 Conclusion

From the analysis, Boiler B is the most preferred alternative to be acquired by the company.

This recommendation is based on its PW, FW and AW.

Therefore, it is recommended that MLNG 1 management to choose Boiler B to be acquired for MLNG

1 Debottlenecking project.


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7.0 References

Sullivan, Wicks, and Koelling. Engineering Economics, Fifteen Ed. Essex,

England: Pearson Education Limited, 2012

Blank, and Tarquin. Engineering Economy, Seventh Ed. 1221 Avenue of the

Americas, New York: McGraw-Hill, 2012

Documents

SFB5012 Project Paper May 16-G03178 Idzuari Azli