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 1
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
Preliminary Activities
General Planning
Legal Fees
Prefeasibility
Business Plan/Feasibility
Construction Drawings
Land Registration Fee
Land Purchase
30,000
16,000
30,000
50,000
20,000
18,000
420,000
Total, Preliminary Activities
584,000
30,000
16,000
30,000
50,000
20,000
18,000
420,000
+ $10% contingencies = $642,000
Next: Construction Investment, Equipment Investment
584,000
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 1
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
Preliminary Activities
General Planning
Legal Fees
Prefeasibility
Business Plan, Feasibility
Construction Drawings, etc.
Land Registration Fees
Land Purchase
Total, Preliminary Activities
Construction Activities
Earthmoving
Pumps/Pump Station
Water Control Structures
Ancillary Buildings
Total, Construction Activities
30,000
16,000
30,000
50,000
20,000
18,000
420,000
584,000
30,000
16,000
30,000
50,000
20,000
18,000
420,000
584,000
675,000
560,000
130,000
210,000
1,575,000
675,000
560,000
130,000
210,000
1,575,000
+ 10% Contingencies ($157,500) = $1,732,500
Next: Equipment Investment
Note: So far, you are at the $2,000,000 investment level and not finished.
NOTE: THIS SPREADSHEET IS BEING BUILT AS I GO!
Equipment Investment
TYPE
Pond preparation
Fry acclimation
Feeding
Vehicles
Tractors, trailers
Trucks
Boats
Laboratory
Harvesting
Housing, kitchen, cafeteria
COST (US$)
12,000
20,000
20,000
40,000
100,000
20,000
15,000
50,000
20,000
TOTAL = $317,000
Plus contingencies = $348,700 huh???
Spreadsheet 1: preliminary,
construction, equipment investment
SPREADSHEET 1: CAPITAL INVESTMENT (COSTS)
Preliminary Activities
General Planning
Legal Fees
Prefeasibility
Business Plan, Feasibility
Construction Drawings
Land Registration Fees
Land Purchase
Sub-total, Prelim. Activities
Contingencies (10%)
Total, Preliminary Activities
Construction Activities
Earthmoving
Pumps/Pump Station
Water Control Structures
Ancillary Buildings
Sub-total, Construction Act.
Contingencies (10%)
Total, Construction Activities
Equipment Purchases
Pond preparation
Fry/acclimation
Feeding
Vehicles
Laboratory
Harvesting
Housing, etc.
Sub-total, Equipment
Contingencies (10%)
Total, Equipment Purchases
Total Investment Costs
Year 1
Month 1
30000
16000
30000
50000
20000
18000
420000
584000
58400
642400
Month 2
Month3
0
0
0
0
21000
21000
2100
23100
140000
21666
21000
182666
18266.6
200933
168750
21000
189750
18975
208725
Month 4
0
0
Month 5
0
0
Month 6
Month 7
0
0
0
0
21667
21000
42667
4266.7
46934
140000
21667
21000
182667
18266.7
200934
20000
10000
10000
20000
168750
21666
21000
211416
21141.6
232558
Month 8
0
0
Month 9
0
0
Month 10
0
0
Month 11
0
0
168750
140000
21667
21000
182667
18266.7
200934
Month 12
Total
0
0
30000
16000
30000
50000
20000
18000
420000
584000
58400
642400
168750
140000
21667
21000
211417
21141.7
232559
21000
161000
16100
177100
21000
21000
2100
23100
0
0
0
168750
16875
185625
12000
20000
10000
40000
20000
10000
20000
15000
40000
50000
10000
80000
8000
88000
2723600
0
0
0
0
0
0
0
0
0
20000
2000
22000
20000
2000
22000
40000
4000
44000
10000
55000
5500
60500
0
0
0
0
0
0
62000
6200
68200
40000
4000
44000
675000
560000
130000
210000
1575000
157500
1732500
12000
40000
20000
160000
15000
50000
20000
317000
31700
348700
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
10.0
3.0
2.5
5.0
35.0
5.0
7.0
22.5
10.0
feed
fry
salaries+
fuel
consulting
vehicles
electricity
maint.
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 1
Production Costs
Month 1
Fry @ $5.60/thousand
Feed @ $0.30/lb
Salaries
Benefits (25%)
Employee costs (25%)
Fuel ($1.00/gal)
200
Fertilizer/Chemicals
Consulting Expense (air/hotel)
700
Vehicles ($0.30/mile)
900
Electricity ($0.08/kwh)
100
Maintenance (3% of equip)
100
Contingencies (10%)
200
Depreciation (10 yr)
2248
Consulting Fees ($300/day)
2100
Total, Production Costs
6548
Sales Costs
Salaries (sales mgr, staff)
Benefits (25%)
Employee costs (25%)
Commissions (1% of revenue)
Marketing
Contingencies (10%)
Total, Sales Costs
General & Administrative Costs
Salaries
Benefits (25%)
Employee Costs (25%)
Telephone/Communications
Office Supplies, etc.
Insurance (1% of total equip)
Directors' Expense
Contingencies (10%)
Total G&A Costs
Total, Operational Costs
Month 2
Month 3
Month 4
Month 5
Month 6
Month 7
Month 8
Month 9 Month 10 Month 11 Month 12
87500
87500
87500
87500
25000
50000
100000
150000
10000
12500
15000
15000
2500
3125
3750
3750
2500
3125
3750
3750
7320
10680
10680
10880
1500
1500
1500
1500
2000
2000
2000
2000
2700
2700
2700
3600
200
250
250
250
1013
1013
1168
1168
14223
17439
22830
27940
13365
13540
14057
15797
6000
6000
6000
6000
175821
211372
271185
329135
200
200
200
300
400
5000
1250
1250
500
700
900
100
100
200
2423
2100
6723
700
900
100
100
200
3945
2100
8245
700
900
150
100
205
5707
2100
10062
700
1350
150
100
260
7396
2100
12356
1400
1800
150
100
385
7951
4200
16386
1400
2250
200
525
1238
9804
4200
27617
7500
1875
1875
3960
1500
1400
2700
200
638
2165
12024
4200
40037
2000
500
500
2000
500
500
2000
500
500
2000
500
500
2000
500
500
1500
450
4950
1500
450
4950
1500
450
4950
1500
450
4950
7000
1750
1750
1000
500
338
8000
2000
2000
1000
500
338
9000
2250
2250
1000
500
389
1234
13572
1384
15222
194343
231544
0
0
0
0
0
0
1500
450
4950
3000
750
750
1000
500
33
3000
903
9936
3000
750
750
1000
500
33
3000
750
750
1000
500
33
4000
1000
1000
1000
500
33
4000
1000
1000
1000
500
33
5000
1250
1250
1000
500
175
603
6636
603
6636
3000
750
750
1000
500
33
3000
903
9936
753
8286
753
8286
918
10093
6000
1500
1500
1000
500
213
3000
1371
15084
16484
13359
14881
19998
20642
24672
42659
60071
Total
350000
325000
65000
16250
16250
45520
7500
15700
23400
2100
6123
87284
108257
47100
1115484
2000
500
500
8250
1500
1275
14025
12000
3000
3000
8250
9000
3525
38775
1539
16928
10000
2500
2500
1000
500
389
3000
1989
21878
65000
16250
16250
12000
6000
2041
12000
12954
142495
293063
365038
1296754
3) Proforma Statement of Costs
• Shows costs over 5 yr financial horizon
1) production costs
2) 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: OPERATIONAL COSTS, 5-YR PROJECTION
Spreadsheet 3:
Proforma
Statement of
Costs
Production Costs
Fry @ $5.60/thousand
Feed @ $0.30/lb
Salaries
Benefits (25%)
Employee costs (25%)
Fuel ($3.20/gal)
Fertilizer/Chemicals
Consulting Expense (air/hotel)
Vehicles ($0.30/mile)
Electricity ($0.08/kwh)
Maintenance (3% of equip)
Contingencies (10%)
Depreciation (10 yr)
Consulting Fees ($300/day)
Total, Production Costs
Year 1
Year 2
Year 3
Year 4
Year 5
350000 1050000 1050000 1050000 1050000
325000 1800000 1800000 1800000 1800000
65000
180000
180000
180000
180000
16250
45000
45000
45000
45000
16250
45000
45000
45000
45000
43520
130560
130560
130560
130560
7500
18000
18000
18000
18000
15700
6700
6700
6700
6700
23400
43200
43200
43200
43200
2100
3000
3000
3000
3000
6123
14010
14010
14010
14010
87084
333547
333547
333547
333547
108257
189560
189560
189560
189560
47100
20000
20000
20000
20000
1113284 3878577 3878577 3878577 3878577
Sales Costs
Salaries (sales mgr, staff)
Benefits (25%)
Employee costs (25%)
Commissions (1% of revenue)
Marketing
Contingencies (10%)
Total, Sales Costs
12000
3000
3000
8250
9000
3525
38775
24000
6000
6000
99000
18000
15300
168300
24000
6000
6000
99000
18000
15300
168300
24000
6000
6000
99000
18000
15300
168300
24000
6000
6000
99000
18000
15300
168300
General & Administrative Costs
Salaries
Benefits (25%)
Employee Costs (25%)
Telephone/Communications
Office Supplies, etc.
Insurance (1% of total equip)
Directors' Expense
Contingencies (10%)
Total G&A Costs
65000
16250
16250
12000
6000
2041
12000
12954
142495
120000
30000
30000
12000
6000
4670
36000
23867
262537
120000
30000
30000
12000
6000
4670
36000
23867
262537
120000
30000
30000
12000
6000
4670
36000
23867
262537
120000
30000
30000
12000
6000
4670
36000
23867
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 2
9,900,000
Year 3
9,900,000
Year 4
9,900,000
Year 5
9,900,000
Cost of Sales
Gross Profit
1,115,484 3,880,307
-290,484 6,019,693
3,880,307
6,019,693
3,880,307
6,019,693
3,880,307
6,019,693
Other Costs and Expenses
Sales + General & Admin.
Interest Expenses (10%)
Income before Income Tax
181,270
200,000
-671,754
430,837
150,000
5,438,856
430,837
100,000
5,488,856
430,837
50,000
5,538,856
430,837
0
5,588,856
Income Tax/Credit (12%)
Application of Tax Credit
Tax/Credit Carried Forward
Net Income/Loss
-80,610
0
-80,610
-591,143
652,663
-80,610
572,052
4,866,804
658,663
664,663
670,663
658,663
4,830,193
664,663
4,874,193
670,663
4,918,193
Sales Revenue (@$3.00/lb)
Year 1
825,000
(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) Investments
3) 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
Net Income/Loss
Depreciation
Net Cash Provided by Operations
Year 1
-591,143
108,257
-482,886
Year 2
4,866,804
189,560
5,056,364
Year 3
4,830,193
189,560
5,019,753
Year 4
4,874,193
189,560
5,063,753
Year 5
4,918,193
189,560
5,107,753
Cash Flows from Investing Activities
Preliminary Activities (including land)
Other Investment Costs
Equipment Replacement
Net Cash from Investing Activities
-642,400
-2,081,200
0
-2,723,600
0
0
-34,870
-34,870
0
0
-34,870
-34,870
0
0
-34,870
-34,870
0
0
-34,870
-34,870
Cash Flows from Financing Activities
Proceeds from Shareholder Notes
Proceeds From/On Short-Term Debt
Proceeds From/Payments on Long-Term Debt
Net Cash from Financing Activities
0
0
2,000,000
2,000,000
0
0
-500,000
-500,000
0
0
-500,000
-500,000
0
0
-500,000
-500,000
0
0
-500,000
-500,000
Net Increase (Decrease) in Cash
Cash at Beginning of Period
Cash at End of Period
-1,206,486
1,000,000
-206,486
4,521,494
-206,486
4,315,008
4,484,883
4,315,008
8,799,891
4,528,883
8,799,891
13,328,774
4,572,883
13,328,774
17,901,657
IRR
NPV
Break Even Production
Break Even Sales
Break Even Price
141%
$30,709,532
1,293,436 lbs
$3,880,307
$1.18 per lb
Sensitivity Analysis
5-yr
Break
Break
Income
Cash
Even
Even
Criterion
before taxes
Flow
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
$4.3 M 54%
$7.2 M 2.2 M
same
Price  Feed  $5.8 M
IRR
NPV
Financial Indicators
Start-up Indicators (IRR, NPV, breakeven)
On-going Indicators (cash flow,
income, balance sheets)
IRR
• IRR = internal rate of return (or financial
rate of return)
• How much is the money you have invested
in the project earning?
• Projects that are accepted always have an
equal to- or greater return than the
opportunity cost of capital
• If you can earn more by depositing your
money in the bank, do it!
IRR (continued)
• When developed from a series of cash
flows, at least one value must be negative
• Although IRR values vary from project to
project, they are hard to use as a ranking
tool
• A project with a 25% rate of return is likely
to be a better investment than one with
15%, but you are really estimating
NPV (NPW)
• NPV = net present value (often, net present worth)
• not a percentage, but a number
• the present worth of benefits of a project less the present
worth of costs
• calculates the present value of an investment by using a
discount rate and a series of future payments and income
• discount rate can be the rate of inflation or the interest rate
of a competing investment
• in other words you are comparing the value of your project
over a given time period to investment in another venture
(opportunity)
• IRR is the rate for which NPV equals zero
Start-up: Break-even Analysis
• Break-even analysis is used to compare two
different cost patterns and determine the point at
which they are equivalent
• usually compares points at which sales revenues
equal production costs
• this is then related to a production level (e.g., farm
production in lbs/yr) or a sales price ($/lb)
• any value above break-even normally represents
increased profit