Capital Investment and Operational Costs

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)

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!

Doc K’s Assumptions…• I’ll be building a large flounder fingerling

production farm. (Flounder Effect)• I don’t have land.• Semi-intensive technology • I need bank loan!• I don’t have the company formed yet!

Investments (Costs)• Preliminary (meetings, legal, land)

• Construction (excavation, structures, buildings)

• Equipment (vehicles, lab, etc.)

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

Spreadsheet 1- Preliminary Activities

Capital Investment Year 1Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Total

Preliminary Activities

General Planning 30,000 30,000Legal Fees 16,000 16,000Prefeasibility 30,000 30,000Business Plan/Feasibility 50,000 50,000Construction Drawings 20,000 20,000Land Registration Fee 18,000 18,000Land Purchase 420,000 420,000

Total, Preliminary Activities 584,000 + $10% contingencies = $642,000 584,000

Next: Construction Investment, Equipment Investment

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…

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• @ $1.50 per cubic meter = $675,000

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)

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

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

Spreadsheet 1: preliminary, construction investment

Capital Investment Year 1Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Total

Preliminary Activities

General Planning 30,000 30,000 Legal Fees 16,000 16,000 Prefeasibility 30,000 30,000 Business Plan, Feasibility 50,000 50,000 Construction Drawings, etc. 20,000 20,000 Land Registration Fees 18,000 18,000 Land Purchase 420,000 420,000Total, Preliminary Activities 584,000 584,000

Construction Activities Earthmoving 675,000 675,000 Pumps/Pump Station 560,000 560,000 Water Control Structures 130,000 130,000 Ancillary Buildings 210,000 210,000Total, Construction Activities 1,575,000 + 10% Contingencies ($157,500) = $1,732,500 1,575,000

Next: Equipment Investment Note: So far, you are at the $2,000,000 investment level and not finished.

NOTE: THIS SPREADSHEET IS BEING BUILT AS I GO!

Equipment InvestmentTYPE COST (US$)Pond preparation 12,000Fry acclimation 20,000Feeding 20,000Vehicles Tractors, trailers 40,000 Trucks 100,000 Boats 20,000Laboratory 15,000Harvesting 50,000Housing, kitchen, cafeteria 20,000

TOTAL = $317,000Plus contingencies = $348,700 huh???

SPREADSHEET 1: CAPITAL INVESTMENT (COSTS)

Year 1Preliminary Activities Month 1 Month 2 Month3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Total

General Planning 30000 30000 Legal Fees 16000 16000 Prefeasibility 30000 30000 Business Plan, Feasibility 50000 50000 Construction Drawings 20000 20000 Land Registration Fees 18000 18000 Land Purchase 420000 420000 Sub-total, Prelim. Activities 584000 584000 Contingencies (10%) 58400 0 0 0 0 0 0 0 0 0 0 0 58400Total, Preliminary Activities 642400 0 0 0 0 0 0 0 0 0 0 0 642400

Construction Activities Earthmoving 168750 168750 168750 168750 675000 Pumps/Pump Station 140000 140000 140000 140000 560000 Water Control Structures 21666 21666 21667 21667 21667 21667 130000 Ancillary Buildings 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 210000 Sub-total, Construction Act. 189750 21000 182666 211416 182667 42667 182667 211417 161000 21000 0 168750 1575000 Contingencies (10%) 18975 2100 18266.6 21141.6 18266.7 4266.7 18266.7 21141.7 16100 2100 0 16875 157500Total, Construction Activities 208725 23100 200933 232558 200934 46934 200934 232559 177100 23100 0 185625 1732500

Equipment Purchases Pond preparation 12000 12000 Fry/acclimation 20000 10000 10000 40000 Feeding 10000 10000 20000 Vehicles 40000 20000 20000 20000 20000 40000 160000 Laboratory 15000 15000 Harvesting 50000 50000 Housing, etc. 10000 10000 20000 Sub-total, Equipment 80000 0 0 0 20000 20000 40000 55000 0 0 62000 40000 317000 Contingencies (10%) 8000 0 0 0 2000 2000 4000 5500 0 0 6200 4000 31700Total, Equipment Purchases 88000 0 0 0 22000 22000 44000 60500 0 0 68200 44000 348700

Total Investment Costs 2723600

Spreadsheet 1: preliminary, construction, equipment

investment

Contingency Costs?• These are increases in line item costs based upon

the probability that something could (will) go wrong!

• Can’t 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?)

(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.)

(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)

Typical Operational Costs

35.0

10.022.5

7.0

5.0

5.02.5

3.010.0 feed

frysalaries+fuelconsultingvehicleselectricitymaint.conting.

(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

Spreadsheet 2: Operational Costs, Year 1

SPREADSHEET 2: OPERATIONAL COSTS (PRODUCTION COSTS, SALES, GENERAL & ADMINISTRATIVE)

Year 1Production Costs Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Total Fry @ $5.60/thousand 87500 87500 87500 87500 350000 Feed @ $0.30/lb 25000 50000 100000 150000 325000 Salaries 5000 7500 10000 12500 15000 15000 65000 Benefits (25%) 1250 1875 2500 3125 3750 3750 16250 Employee costs (25%) 1250 1875 2500 3125 3750 3750 16250 Fuel ($1.00/gal) 200 200 200 200 300 400 500 3960 7320 10680 10680 10880 45520 Fertilizer/Chemicals 1500 1500 1500 1500 1500 7500 Consulting Expense (air/hotel) 700 700 700 700 700 1400 1400 1400 2000 2000 2000 2000 15700 Vehicles ($0.30/mile) 900 900 900 900 1350 1800 2250 2700 2700 2700 2700 3600 23400 Electricity ($0.08/kwh) 100 100 100 150 150 150 200 200 200 250 250 250 2100 Maintenance (3% of equip) 100 100 100 100 100 100 525 638 1013 1013 1168 1168 6123 Contingencies (10%) 200 200 200 205 260 385 1238 2165 14223 17439 22830 27940 87284 Depreciation (10 yr) 2248 2423 3945 5707 7396 7951 9804 12024 13365 13540 14057 15797 108257 Consulting Fees ($300/day) 2100 2100 2100 2100 2100 4200 4200 4200 6000 6000 6000 6000 47100Total, Production Costs 6548 6723 8245 10062 12356 16386 27617 40037 175821 211372 271185 329135 1115484 Sales Costs Salaries (sales mgr, staff) 2000 2000 2000 2000 2000 2000 12000 Benefits (25%) 500 500 500 500 500 500 3000 Employee costs (25%) 500 500 500 500 500 500 3000 Commissions (1% of revenue) 8250 8250 Marketing 1500 1500 1500 1500 1500 1500 9000 Contingencies (10%) 450 450 450 450 450 1275 3525Total, Sales Costs 0 0 0 0 0 0 4950 4950 4950 4950 4950 14025 38775

General & Administrative Costs Salaries 3000 3000 3000 3000 4000 4000 5000 6000 7000 8000 9000 10000 65000 Benefits (25%) 750 750 750 750 1000 1000 1250 1500 1750 2000 2250 2500 16250 Employee Costs (25%) 750 750 750 750 1000 1000 1250 1500 1750 2000 2250 2500 16250 Telephone/Communications 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 12000 Office Supplies, etc. 500 500 500 500 500 500 500 500 500 500 500 500 6000 Insurance (1% of total equip) 33 33 33 33 33 33 175 213 338 338 389 389 2041 Directors' Expense 3000 3000 3000 3000 12000 Contingencies (10%) 903 603 603 903 753 753 918 1371 1234 1384 1539 1989 12954Total G&A Costs 9936 6636 6636 9936 8286 8286 10093 15084 13572 15222 16928 21878 142495

Total, Operational Costs 16484 13359 14881 19998 20642 24672 42659 60071 194343 231544 293063 365038 1296754

3) Proforma Statement of Costs• Shows costs over 5 yr financial horizon

1) production costs2) 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

Spreadsheet 3: Proforma

Statement of Costs

SPREADSHEET 3: OPERATIONAL COSTS, 5-YR PROJECTION

Production Costs Year 1 Year 2 Year 3 Year 4 Year 5 Fry @ $5.60/thousand 350000 1050000 1050000 1050000 1050000 Feed @ $0.30/lb 325000 1800000 1800000 1800000 1800000 Salaries 65000 180000 180000 180000 180000 Benefits (25%) 16250 45000 45000 45000 45000 Employee costs (25%) 16250 45000 45000 45000 45000 Fuel ($3.20/gal) 43520 130560 130560 130560 130560 Fertilizer/Chemicals 7500 18000 18000 18000 18000 Consulting Expense (air/hotel) 15700 6700 6700 6700 6700 Vehicles ($0.30/mile) 23400 43200 43200 43200 43200 Electricity ($0.08/kwh) 2100 3000 3000 3000 3000 Maintenance (3% of equip) 6123 14010 14010 14010 14010 Contingencies (10%) 87084 333547 333547 333547 333547 Depreciation (10 yr) 108257 189560 189560 189560 189560 Consulting Fees ($300/day) 47100 20000 20000 20000 20000Total, Production Costs 1113284 3878577 3878577 3878577 3878577 Sales Costs Salaries (sales mgr, staff) 12000 24000 24000 24000 24000 Benefits (25%) 3000 6000 6000 6000 6000 Employee costs (25%) 3000 6000 6000 6000 6000 Commissions (1% of revenue) 8250 99000 99000 99000 99000 Marketing 9000 18000 18000 18000 18000 Contingencies (10%) 3525 15300 15300 15300 15300Total, Sales Costs 38775 168300 168300 168300 168300

General & Administrative Costs Salaries 65000 120000 120000 120000 120000 Benefits (25%) 16250 30000 30000 30000 30000 Employee Costs (25%) 16250 30000 30000 30000 30000 Telephone/Communications 12000 12000 12000 12000 12000 Office Supplies, etc. 6000 6000 6000 6000 6000 Insurance (1% of total equip) 2041 4670 4670 4670 4670 Directors' Expense 12000 36000 36000 36000 36000 Contingencies (10%) 12954 23867 23867 23867 23867Total G&A Costs 142495 262537 262537 262537 262537

Total, Operational Costs 1294554 4309414 4309414 4309414 4309414

(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

want’s his money too!)• Tax: income “tax” or “credit”, 12%• You wind up with net income after taxes

Spreadsheet 4: Pro Forma Statement of Operations

Spreadsheet 4: Proforma Statement of Operations (Profit/Loss)

Year 1 Year 2 Year 3 Year 4 Year 5Sales Revenue (@$3.00/lb) 825,000 9,900,000 9,900,000 9,900,000 9,900,000

Cost of Sales 1,115,484 3,880,307 3,880,307 3,880,307 3,880,307 Gross Profit -290,484 6,019,693 6,019,693 6,019,693 6,019,693

Other Costs and Expenses Sales + General & Admin. 181,270 430,837 430,837 430,837 430,837 Interest Expenses (10%) 200,000 150,000 100,000 50,000 0 Income before Income Tax -671,754 5,438,856 5,488,856 5,538,856 5,588,856

Income Tax/Credit (12%) -80,610 652,663 658,663 664,663 670,663Application of Tax Credit 0 -80,610Tax/Credit Carried Forward -80,610 572,052 658,663 664,663 670,663 Net Income/Loss -591,143 4,866,804 4,830,193 4,874,193 4,918,193

(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

(5) Proforma Statement of Cash Flow

• Three “cash flow” categories based on where money comes from: 1) Operations 2) Investments3) Financing

• Cash flow from operations is your net income. REM:previous 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

Spreadsheet 5: ProForma Statement of Cash Flow

Spreadsheet 5: Proforma Statement of Cash Flow

Cash Flows from Operations Year 1 Year 2 Year 3 Year 4 Year 5 Net Income/Loss -591,143 4,866,804 4,830,193 4,874,193 4,918,193 Depreciation 108,257 189,560 189,560 189,560 189,560 Net Cash Provided by Operations -482,886 5,056,364 5,019,753 5,063,753 5,107,753

Cash Flows from Investing Activities Preliminary Activities (including land) -642,400 0 0 0 0 Other Investment Costs -2,081,200 0 0 0 0 Equipment Replacement 0 -34,870 -34,870 -34,870 -34,870 Net Cash from Investing Activities -2,723,600 -34,870 -34,870 -34,870 -34,870

Cash Flows from Financing Activities Proceeds from Shareholder Notes 0 0 0 0 0 Proceeds From/On Short-Term Debt 0 0 0 0 0 Proceeds From/Payments on Long-Term Debt 2,000,000 -500,000 -500,000 -500,000 -500,000 Net Cash from Financing Activities 2,000,000 -500,000 -500,000 -500,000 -500,000

Net Increase (Decrease) in Cash -1,206,486 4,521,494 4,484,883 4,528,883 4,572,883Cash at Beginning of Period 1,000,000 -206,486 4,315,008 8,799,891 13,328,774Cash at End of Period -206,486 4,315,008 8,799,891 13,328,774 17,901,657

IRR 141%NPV $30,709,532Break Even Production 1,293,436 lbsBreak Even Sales $3,880,307Break Even Price $1.18 per lb

Sensitivity Analysis

5-yr Break Break

Income Cash Even Even

Criterion before taxes Flow IRR NPV Prod. Sales

Baseline $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

Financial Indicators

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

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!

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

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

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