Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

4.5.4.1 Investment costsThe total investment costs of the project amount to €64.5 Million (€62 Million of fixed assets, €1 Millionof pre-production expenses, and €1.5 Million of variation in working capital). More specifically:- The land to be bought costs €50 per m 2 and the company needs 60,000 m 2 , for a total cost of €3Million.- The project includes the construction of two new plants, the first of 2,000 m 2 and the second of 5,000m 2 , for a total cost of €17 Million.- The acquisition of tools, machinery, software and hardware from the best suppliers is expected to cost€42 Million.- Licences and Patents expenses are estimated at €1 Million.All the costs are considered net of Value Added Tax.4.5.4.2 Operating costsOperations will require different inputs. Assumptions are made about their dynamics depending on theexpected market growth (prices and demand).Table 4.53 Main costs as a percentage of salesCOST ITEMS Value as% of sales Average annual increase/decrease (%)Raw materials 51 0.00Electricity 4 0.10Fuel 5 0.30Maintenance 3 0.00General industrial costs 3 -0.15Administrative variable costs 3 -0.10Sales expenditures A 3 0.00Sales expenditures B 4 0.00Sales expenditures C 2 0.00With regard to the cost of labour, the required number of workers and the cost per worker in future years,the assumptions are shown in Table 4.54. To simplify the calculation it was assumed that labour costsincluded some other minor fixed costs (e.g. administrative costs).Table 4.54 Cost of labour / Main consumptionType of worker Number needed Baseline salary (000/€) Increase in base salary (%)Unskilled workers 50 13 1.00Skilled workers 25 15 1.20White collars 20 18 1.504.5.4.3 Operating revenuesThe company will produce three outputs, in particular two for specific customers and one for the market.Detailed forecasts were made for the output and the price of each of them (not reported here).The three financial performance indicators were calculated:- the project’s return on investment (FNPV(C) and FRR(C))- the project’s return on national capital (FNPV(K) and FRR(K))- the project’s return on private equity (FNPV(K p ) and FRR(K p ))The financial performance of the investment is modest (FRR(C) is 3.3%), while the returns on nationalcapital and private equity are high (respectively 9.3% and 11.8%). In fact the investment itself wouldprobably not have been implemented because of the fairly low expected financial return and the relatively188