Dubai government has signed an agreement for construction of a 228,000 sq. ft. e

Question

Dubai government has signed an agreement for construction of a 228,000 sq. ft. electronics and specialised waste recycling plant at Dubai Industrial Park by December 2018. The construction will cost 3m AED and ongoing operating costs are estimated to be 500k AED annually. The facility will serve as the region's largest centre of expertise for electronic waste management. The plant will recycle the entire range of end-of-life electrical and electronic equipment ranging from consumer and industrial to commercial and military appliances, such as air conditioners, batteries, IT equipment, household appliances, military avionics and mobile phones. Phase 1 of the plant will comprise state-of-the-art equipment to process 50,000 tonnes of electronic waste annually. Phase 2, which will go live at the end of the second year of operation and cost another 1m AED for construction, will increase capacity to 75,000 tonnes annually. Each tonne generates 50 AED of revenue through resale or reuse. The cost of capital is 10%.

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4.3. Use financial tools and financial benfit on decision making

Explanation / Answer

Let's look at the numbers for phase 1 first:

Construction Cost (in AED) = 3M

Operating Cost (in AED) = 0.5M

Annual Volume (in tonnes) = 50000

Revenue per tonne (AED) = 50

Total Annual revenue in Phase 1 = Total Volume * Revenue per tonne = 50000 * 50 = 2.5M AED.

On similar lines, we can calculate the Net Profit / Loss year on year and compare them against the total cost to derive the return on investment.

So Phase 1 of this project will turn profitable in the second year itself, hence it is advisable to proceed with the same based on the above analysis.

Now let's look at the same analysis for Phase 2. Please note the following important points about this phase:

As we can see here, Phase 2 will not be profitable even after 5 years of operation. Hence, the government should implement Phase 1 immediately, and should invest in Phase 2 only if it plans to have a long term horizon (>5years) for returns on its investment.

PHASE 1 Year 1 Year 2 Year 3 Year4 Year 5 Construction Cost & Cost of Capital (in million AED) 3 0.3 0.3 0.3 0.3 Operating Cost (in million AED) 0.5 0.5 0.5 0.5 0.5 Annual Volume (in million tonnes) 0.05 0.05 0.05 0.05 0.05 Annual Revenue (@50AED per ton, in million AED) 2.5 2.5 2.5 2.5 2.5 Cumulative Profit / Loss (in million AED) -1 +0.7 +2.4 +4.1 +5.8

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