Q1 capacity of 1.5 ompany QBY owns and operates a chemical plant in Australia. T
ID: 2574656 • Letter: Q
Question
Q1 capacity of 1.5 ompany QBY owns and operates a chemical plant in Australia. The plant was 2000 at a million plant but tons. As part of its expansion plan, the company is considering to build a with a smaller capacity of 0.5 million tons per annum in Brunei Da at a total investment cost of AUD400 million and has an annual ca The following data is available: 2016 108.1 2000 106.2 Australia 1.07 Annual Plant Cost Index Brunei Darussalanm 1.14 Location factor (a) Estimate the cost Company QBY would have to pay in order to build the plant in Brunei Darussalam in 2016 using the Capacity Ratio method, assuming a capacity factor or cost exponent value of 0.7 (12 marks] (b) What would be the level of accuracy of your cost estimate using above method? 3 marks] (c) Briefly describe two types of information that would significantly improve the accuracy of your cost estimate above. 5 marks] (d) What should the level of accuracy of a cost estimate be at the time of awarding major contracts and taking final investment decision (FID) for a project? Give your reason (5 marks]Explanation / Answer
a.) Cost of Building new plant in Brunie Darussalam in 2016 (By Capacity ratio Method)
= Cost of Investment in Australia*(annual capacity of new plant/annual capacity of old plant)*Cost exponent value
= 400 Million*(0.5 million tons/1.5 million tons)*0.7 = AUD 93.33 million
b.) The level of accuracy of the cost estimated by above method is low because it does not consider Annual Plant Cost Index and Location factor for calculation of Cost.
c.) Annual Plant Cost Index and Location factor would significantly improve the estimated cost above which is calculated as follows:-
= 400 million*(0.5/1.5)*(108.1/106.2)*(1.14/1.07) = AUD 144.60 million (rounded off)
d.) The level of accuracy of a cost estimate at the time of taking final investment decision should be higher because:-
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