CETS 1

midterms

The new venture must be measured in units that will produce income, such as square feet of buildings, tons of units of products, existing units to compete with, future expansion, etc.

Size of the proposed venture

Buildings are most often located where the market is, but production plants may be located far from the consumers and thus require pipelines, railroads, highways, power lines, to mention but a few, all of which will add to the final cost

Cost of distribution

Some areas offer attractive tax advantages in order to encourage construction and manufacturing. Others find in taxation a convenient source of income to the point where they will kill the goose that laid the golden egg.

Impact of taxation

Some new products or raw materials may require the construction of small pilot plants.

Cost of research and development

Capital will be influenced by the schedule, amount, inflation, projected income or return on investment, scarcity and competition with other promising ventures, production or operating costs, and many other factors.

Evaluation of the required capital

In a competitive market, the investors must consider the final cost that consumers will be willing to pay.

Expected market price

A considerable portion of new construction in the past few years goes to comply with the new environmental regulations. Cost of new construction is greatly increased for the same reason. Many proposed ventures will never leave the drawing boards because of environmental restrictions.

Environmental requirements

Obtaining permits and fighting court battles add a new dimension to the engineering and construction industries. Permits may be required from municipalities, counties, states, federal authorities, and a thousand and one commissions, and anybody can appeal a permit in court. A proposed pipeline construction required about 700 permits. After $50 million had been spent in the process, the project was abandoned.

Permitting requirements

Economic evaluations must assume a certain cost for building the proposed facilities. If construction overruns can be passed on to the consumer, there is no problem. If, however, the overruns must be absorbed, the venture will not have the same profitability as first assumed.

Reduced income due to overruns

International projects are greatly influenced by fluctuations in the exchange rates of foreign currencies against the dollar.

Foreign currency exchange rates

is the responsibility of the marketing, sales, industrial-engineering, accounting, value-engineering, and cost-engineering departments. This requires a study of all the activities and cost centers involved in the production cycle of the product or products under consideration.

Product Optimization

Many projects, especially in the process industry, produce some marketable by-products. Their potential, additional costs, and income may improve the overall profitability of the project and must be considered during the feasibility studies. On the negative side, by-products that have no market value will have to be disposed of, sometimes at great cost.

Probable by-products

During the feasibility studies or when reviewing the economics of a new venture, it may be advantageous to consider expanding some of the existing facilities. Expansion may offer the advantages of using many of the existing facilities. As a matter of fact, it may be advantageous to consider future expansion, whenever possible.

Expansion of Existing Facilities

Feasibility studies for a new project must consider the cost over the entire life of the project, better known as

Life Cycle Cost

Simply means the “TOTALITY” of the technical requirements defining the characteristics required of:

a service to be performed,

a materials or product to be supplied; or

works to be constructed

Technical Specifications

Borrowing money costs money. It has a great influence over the decision to build or wait. This additional amount must be included in the economic evaluation of the

new venture.

Construction Interest

It may not be a significant factor for many projects, but it may be significant for some plants with a high risk to people and the environment.

Insurance

This will depend on a multitude of factors. Those factors must be evaluated as part of the economics of the project. The location must be carefully considered because with few exceptions the plant cannot be moved.

Plant Location

Many private, corporate, or government projects never see the light of day for lack of funding. Except for projects that were realized with slave labor, all projects require money and money is invested only if there is a positive outcome.

Funding and Cash Flow