Professional Documents
Culture Documents
Production cost
Means of finance
Profitability projection
Financial analysis seeks to ascertain whether the proposed
project will be financially viable in the sense of being able
to meet
the burden of servicing debt
the return expectations
Classification of project cost
Based on Project Life Cycle
Based on purpose
Investment cost
Production cost
Life cycle costing (LCC)
Life cycle costing is the total cost of ownership of a product,
structure, or system over its useful life.
For products purchased off the shelf, the major factors are the
cost of acquisition, operation, service, and disposal
For a system or product it is necessary to include the costs
associated with conceptual analysis, feasibility studies,
development design, logistics support analysis, manufacturing,
and testing.
LCCContd
The five life cycle phases of a system or product
Conceptual design phase
Advanced development and detail design phase
Production phase
Project termination and system operation and maintenance phase
System disinvestment
The main components of project costs:
I. Pre- investment costs: costs incurred in developing the project
concept and preliminary project design.
II. Bidding and procurement-related costs: design and analysis work to
prepare bids .
III.Project development costs: further development and refinement of
the project scheme during the bid and post concession.
IV.Construction cost: Includes the construction of the entire facility,
including the purchase and installation of equipment.
V. Termination cost
VI.Operating costs
LCCContd
The need for life cycle costing arises because decisions
made during the early stages of a project inevitably have an
impact on future outlay.
The trade off between current objectives and long term
consequences of each decision is therefore a strategic
aspect of a project management that should be integrated
in to the project management system
Project life cycle and its cost
LCCContd
Investment cost
However investment cost identification is the most difficult
and at the same time the most important function of a
project analysis
Like any forecast, cost estimation includes some
uncertainty
There is uncertainty regarding usage and price
Different investment cost estimation mechanisms are used
in a different ways
Investment cost items
Land and site preparation
Technology (lump sum and initial payments)
Equipment
Production
Auxiliary
Costs for environmental protection technology,
waste disposal, internal infrastructural services
Spare parts, wear-and tear-parts, tools
17
Investment cost itemsContd
Civil works
Site preparation and development
Buildings
Outdoor works
Engineering and design costs (unless included in equipment).
Incorporated fixed assets (intangibles)
Project design costs (engineering etc.) (unless included in the
above groups).
Transport, handling costs and charges
Insurance
Duties, taxes
Pre-production expenditures
Cost of previous studies
Preliminary and capital issue
Project and site management
Pre-production marketing costs
Pre-production implementation costs
Personnel recruitment, training, administration and
overheads.
Trial runs, start-up and commissioning
Interests on loan accrued during construction
Investment Cost Estimation
$358,540
Overall Total
Operational cost includes
Employees fee and
Material cost
Development cost includes
International Knowledge transfer or consultant cost
Feasibility study of business incubation
Feasibility study of Science Park
Setup cost includes
Fixed asset requirements for
Enterprise office
Student hatchery
Cost estimation of Tekeze hydropower
project
Lot Title Component Cost Component
MC FC AE
Factory Cost = Prime Cost + Factory Expenses
FC PC FE
Prime Cost = Direct Labor + Direct Material Costs
PC DL DM
Finally total cost is the sum of direct labor, direct material, factory expense,
administrative expense and selling expenses.
TC DL DM FE AE SE
Fixed costs and variable costs
The total cost can also be calculated as the sum of fixed cost and
variable costs
TC FC VC FE AE SE DM DL
Fixed costs: are expenses which are independent of the
volume of output (i.e. constant for any level of production
output).
Examples of the fixed costs include cost of factory building,
insurance, lighting expenses, the cost of production
equipment, property taxes, salaries of administrative staff,
etc.
At break-even sales,
Total Cost = Income
Price Quantity = Fixed Cost + Variable Cost
Let P = Price
Q = break-even quantity
F = fixed costs, and
V= variable costs/unit
PQ = F + VQ
PQ - VQ = F
Q(P -V) = F
F
Q =
P -V
Unit Cost of Production