delay and project profitability
DESCRIPTION
Delay and project profitability. Sigurður Guðni Sigurðsson September 2007. Delay and project profitability . Presumptions. Total time = Production time + Time of utilization Total time is constant Period of production 1 year, duration of operations 5 years Affect on producer/developer - PowerPoint PPT PresentationTRANSCRIPT
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Delay and project profitability.
Sigurður Guðni Sigurðsson
September 2007
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Delay and project profitability. Presumptions
Total time = Production time + Time of utilization
Total time is constant• Period of production 1 year, duration of operations 5
years– Affect on producer/developer – Affect on buyer
• Period of production 3 years, duration of operations 10 years– Affect on producer/developer– Affect on buyer
• Lump sum payment vs. distributed payment
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Reason of delay. Contract variation.
• The owners (buyer) determination that makes delay and extra cost on his accountability.
• Force Majeure. Neither seller or buyer have any control of the cause. The seller can delay the project of such reasons.
• Delay based on sellers action. The seller is responsible and pays for it with penalty.
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Short project . Sellers presumptions
Fixed contract price– Payment on delivery.• Cost estimate Kr. 1.000.000• Contribution margin 30%• Contract price Kr. 1.428.571• Duration of production 12 months• Penalty 5 % per month• Maximum penalty 15%• Fixed cost per year 7,5%• Cost of capital 8%• Inflation 4%
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Sellers cost distribution Short production time
Cost NPV
0
200.000
400.000
600.000
800.000
1.000.000
1.200.000
1.400.000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Months
kr.
0 1 2 3 4 5 6 7 8 9 10 11 12Delay months
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Affection of delay on profit Short production time
Profit and cost
-500.000
-400.000
-300.000
-200.000
-100.000
0
100.000
200.000
300.000
0 1 2 3 4 5 6 7 8 9 10 11 12
Delay months
-500.000
-400.000
-300.000
-200.000
-100.000
0
100.000
200.000
300.000
Fixed costr Financial cost Penaltyr decreased value of payment Profit - no delay Profit NPVr
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Relative effect of delay on profit Short production time
Relative affect on profit
-100%
-80%
-60%
-40%
-20%
0%
0 1 2 3 4 5 6 7 8 9 10 11 12
Fixed cost Financial cost penaltyr Decreased value of paymentDelay months
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Sensitivity analyzes
No delay
15%
17%
19%
21%
23%
25%
27%
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Fixed cost Financial cost Inflation
12 month delay
-17%
-15%
-13%
-11%
-9%
-7%
-5%
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Fixed cost Financial cost inflation
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Short project Buyers presumptions
• Investment – no delay Kr. 1.428.571• Operation cost per year Kr. 1.000.000• Markup 70%• Lifetime 5 years• Financial cost 6 % • Fixed cost per year Kr. 75.000• Inflation 4%• Return on capital 20%
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Distribution of income Fixed total income
Distribution of income
0%
50%
100%
150%
200%
250%
1 2 3 4 5
Year
0 1 2 3 4 5 6 7 8 9Case
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NPV calculated from income distribution and delay.
NPV
-2.000.000
-1.000.000
0
1.000.000
2.000.000
3.000.000
4.000.000
0 1 2 3 4 5 6 7 8 9 10 11 12
Delay months
kr.
0 1 2 3 4 5 6 7 8 9Case
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Internal Rate of Return based on income distribution and delay.
IRR
0%
50%
100%
150%
200%
250%
300%
0 1 2 3 4 5 6 7 8 9 10 11 12
Delay in months
0 1 2 3 4 5 6 7 8 9Case
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Long project period. Sellers presumptions
Fixed contract price – Payment on delivery.• Cost estimate Kr. 1.000.000• Contribution margin 34,1%• Contract price Kr. 1.517.451• Duration of production 3 years• Penalty 2,5 % per month• Maximum penalty 15%• Fixed cost (36 months) Kr. 75.000• Financial cost 8%• Inflation 4%
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Affection of delay on profit Long production time
Profit and cost
-600.000
-500.000
-400.000
-300.000
-200.000
-100.000
0
100.000
200.000
300.000
0 1 2 3 4 5 6 7 8 9 10 11 12
Delay in months
Fixed cost Financial cost Penalty Decrease of payment value Profit - no delay Profit - NPV
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Sensitivity analyzes
No delay
8%
10%
12%
14%
16%
18%
20%
22%
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Fixed cost Financial cost Inflation
12 month delay
-20%
-18%
-16%
-14%
-12%
-10%
-8%
-6%
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Fastur kostnaður Fjármagnskostnaður Verðbólga
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Affect on sellers presumptions
Fixed costFinancial cost Inflation
Estimated time 1 yearNo delay 8,8% 4,0% 4,9%12 m. delay 11,8% 7,4% 7,0%Estimated time 3 yearsNo delay 6,5% 11,1% 13,3%12 m. delay 6,5% 12,0% 13,5%
Sensitivity analysisChange in profit
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Long project. Buyers presumptions
• Investment – no delay Kr. 1.517.451• Operation cost per year Kr. 1.000.000• Markup 50%• Lifetime 10 years• Financial cost 8 % • Fixed cost per year Kr. 75.000• Inflation 4%• Return on capital 20%
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Distribution of income Fixed total income
Distribution of income
-50%
0%
50%
100%
150%
200%
250%
1 2 3 4 5 6 7 8 9 10
Year
0 1 2 3 4 5 6 7 8 9Case
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NPV and IRR
NPV
-2.000.000
-1.000.000
0
1.000.000
2.000.000
3.000.000
4.000.000
5.000.000
0 1 2 3 4 5 6 7 8 9 10 11 12
Delay months
kr.
0 1 2 3 4 5 6 7 8 9Case
IRR
0%
20%
40%
60%
80%
100%
120%
140%
0 1 2 3 4 5 6 7 8 9 10 11 12
Delay in months
0 1 2 3 4 5 6 7 8 9Case
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Distributed payment . Long project
Two payment series• Four payments:
Payment order Month. Percentage
Dawn payment 0 10,0%
Payment # 2 12 25,0%
Payment # 3 24 25,0%
Final payment 36 40,0%
• Four payments - 85% of earned value at each time
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Sellers profit, Lump sum and distributed payments
- 20%
- 10%
0%
10%
20%
30%
40%
0 1 2 3 4 5 6 7 8 9 10 11 12
Delay months
Lump sum Fixed distribution Progress payment
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NPV and distributed payments.The buyers side
NPV Case 0 evenly distributed income
- 100.000
0
100.000
200.000
300.000
400.000
500.000
600.000
700.000
800.000
0 1 2 3 4 5 6 7 8 9 10 11 12
Töf í mán.
Lump sum Distributed payments
NPV Case 8 Decreasing income
0
500.000
1.000.000
1.500.000
2.000.000
2.500.000
3.000.000
3.500.000
0 1 2 3 4 5 6 7 8 9 10 11 12
Töf í mán.
Lump sum distributed payments
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Conclusions I
• Time and cost in projects have strong connection.• Delay harm both seller and buyer.• The buyers protection by using penalties protect him
only if income is low in the delay period or the delay is short.
• It is of common interest that the production period is successful.
• The length of the production period and lifetime of the product does not influence the results strongly.
• Sensitivity for changes in presumptions increase with longer delay.
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Conclusions II
• The distribution of the income affects the delay impact. More impact as the delivery is later in the product life-cycle.
• It is of great interest to study further interaction between distributed payment and profitability of projects.
• The impact of distributed payments are often higher than penalty.
• Distributed payment is of high value for the seller. • Distributed payment cost the buyer more as the delay
increase.
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Thank you