Project Costing, Budgeting and Financial Appraisal: Installation of a Solar Backup System for McDonalds

This article discusses the project costing, budgeting and financial appraisal for the installation of a solar backup system for McDonalds. It covers the total cost, budgeting approach, managing project budget, cost benefit analysis, break even analysis and payback analysis.

Running head: PROJECT COSTING, BUDGETING AND FINANCIAL APPRAISAL
Project Costing, Budgeting and Financial Appraisal: Installation of a Solar Backup
System for McDonalds
Student Name:
University Name:

1PROJECT COSTING, BUDGETING AND FINANCIAL APPRAISAL
Table of Contents
Project Costing.................................................................................................................................2
Project Budgeting............................................................................................................................3
Approach......................................................................................................................................3
Managing the project budget.......................................................................................................3
Project Financial Appraisal..............................................................................................................4
Input Values.................................................................................................................................4
Cost Benefit Analysis..................................................................................................................5
Break Even Analysis....................................................................................................................6
Payback Analysis.........................................................................................................................7
References........................................................................................................................................9

2PROJECT COSTING, BUDGETING AND FINANCIAL APPRAISAL
Project Costing
The total cost for the project has been estimated to be $123,800.00 for executing the
various activities related to the Solar Backup system installation for McDonalds. The costing of
the project has been prepared with the help of activity based estimates as presented below:
WBS Task Name Duration Start Finish Cost
0 Solar Backup System
Installation 59 days Mon 03-12-18 Thu 21-02-19 $123,080.0
0
1 Project Management 9 days Mon 03-12-18 Thu 13-12-18 $5,800.00
1.1 Contract 5 days Mon 03-12-18 Fri 07-12-18 $4,200.00
1.2 Project plan 4 days Mon 10-12-18 Thu 13-12-18 $1,600.00
2 Pre-Construction 29 days Fri 14-12-18 Wed 23-01-19 $92,780.00
2.1 Site Survey 3 days Fri 14-12-18 Tue 18-12-18 $2,400.00
2.2 Requirements analysis 2 days Wed 19-12-18 Thu 20-12-18 $1,680.00
2.3 Proposal 1 day Fri 21-12-18 Fri 21-12-18 $840.00
2.4 Approval 1 day Mon 24-12-18 Mon 24-12-18 $440.00
2.5 Permits 3 days Tue 25-12-18 Thu 27-12-18 $2,520.00
2.6 Design 7 days Fri 28-12-18 Mon 07-01-19 $2,520.00
2.7 Final Approval 2 days Tue 08-01-19 Wed 09-01-19 $880.00
2.8 Procurement 10 days Thu 10-01-19 Wed 23-01-19 $81,500.00
3 Construction 16 days Thu 24-01-19 Thu 14-02-19 $22,340.00
3.1 Mounting system 3 days Thu 24-01-19 Mon 28-01-19 $14,300.00
3.2 Electrical wiring 2 days Tue 29-01-19 Wed 30-01-19 $560.00
3.3 Mounting panels 2 days Thu 31-01-19 Fri 01-02-19 $1,120.00
3.4 Mounting inverters &
Batteries 3 days Mon 04-02-19 Wed 06-02-19 $1,800.00
3.5 Testing 4 days Thu 07-02-19 Tue 12-02-19 $2,880.00
3.6 Commissioning 2 days Wed 13-02-19 Thu 14-02-19 $1,680.00
4 Post-Construction 3 days Fri 15-02-19 Tue 19-02-19 $1,760.00
4.1 Final testing 2 days Fri 15-02-19 Mon 18-02-19 $1,360.00
4.2 Close project 1 day Tue 19-02-19 Tue 19-02-19 $400.00
5 Maintenance 2 days Wed 20-02-19 Thu 21-02-19 $400.00

3PROJECT COSTING, BUDGETING AND FINANCIAL APPRAISAL
Project Budgeting
Approach
Different budget estimating methods are there and among those for this specific project
the budgeting approach that has been chosen is Bottom up budget estimation approach. This is
one of the most effective as well as time consuming budget estimation methods. With the help of
this method the cost for each item and activity of labor, schedule and labour can be identified.
Managing the project budget
In order to manage the overall project budget the approaches followed in this project
include management of cash flow, contingency reserve, management reserve and proper budget
evaluation during the project progress phase. Through proper budget evaluation the project
progress will be accordingly measured and reported.
It has been analyzed that each process associated to any project are interwoven into the
budget of any project. Based on the outline of project the budget of a project should be
structured by the finance heads. It is obligatory for the project heads to design the budget
considering all needful resources (Nicholas and Steyn 2017). In order to prepare the “solar
backup system installation” project the factors that are to be analyzed respectively include time,
quality and budget. This is crucial to come up with detail project cost estimation. In order to
estimate project budget the different tools and techniques that are to be utilized are as follows:
Resource cost rates determination: All the project associates need to work on specific
project activities. All the materials used in this project will be charged. This calculation will
measure the labors and materials rate.

4PROJECT COSTING, BUDGETING AND FINANCIAL APPRAISAL
Vendor bid analysis: If the project owner needs to work with external contractors then
vendor bid analysis is required (Kerzner and Kerzner 2017). This specific tool or technique will
evaluate the bids and choose the one that will be accepted.
Reserve analysis: Certain amount of money for cost overruns needs to set aside. If it is
found that, any risk may generate that expense the project better budgeting structure needs to be
designed.
Cost of quality: Based on the project quality the budget should have to be prepared by the
associates to ensure that the complete budget is not overrunning (Pheng 2018). Cost of quality is
a way that tracks the cost of all the project activities.
Project Financial Appraisal
Input Values
Hardware $ 50,000.00
Software $ 15,000.00
Installation team salaries $ 12,500.00
Training $ 5,750.00
Total Development Cost $ 83,250.00
Hardware $ 12,000.00
Software $ 1,500.00
Operational Labor $ 15,000.00
Total Operational Cost $ 28,500.00
Approximate salary savings $ 85,000.00
Reduced operating cost $ 35,000.00
Total Benefit $ 120,000.00
Discount Rate Used 5.00%
The above table presents the investment costs, operational costs and savings that will be
achieved approximately from the project. It has been identified that the total one-time

5PROJECT COSTING, BUDGETING AND FINANCIAL APPRAISAL
development cost for the project will be $ 83,250.00 and the operational cost which is required
every year is $ 28,500.00. The savings that will be achieved from the project is $
120,000.00.
Cost Benefit Analysis
Discount Rate Used 5.00%
Annual Benefits $ 120,000.00
Annual Operational Costs $ 28,500.00
One-Time Development Cost $ 83,250.00
Year of Project
0 1 2 3 4 5 TOTAL
Economic
Benefit $0.00
$
120,000
.00
$
120,000
.00
$
120,000.
00
$
120,000.
00
$
120,000.
00
Discount Rate 1.0000 0.9524 0.9070 0.8638 0.8227 0.7835
PV of Benefits $0.00
$114,28
5.71
$108,84
3.54
$103,660
.51
$98,724.
30
$94,023.
14
NPV of all
BENEFITS $0.00
$
114,285
.71
$
223,129
.25
$
326,789.
76
$
425,514.
06
$
519,537.
20
$
519,537.2
0
One-Time
COSTS
$(83,25
0.00)
Recurring
Costs $0.00
$
(28,500.
00)
$
(28,500.
00)
$
(28,500.0
0)
$
(28,500.
00)
$
(28,500.0
0)
Discount Rate 1.0000 0.9524 0.9070 0.8638 0.8227 0.7835
PV of
Recurring
Costs $0.00
$
(27,142.
86)
$
(25,850.
34)
$
(24,619.3
7)
$
(23,447.
02)
$
(22,330.5
0)
NPV of all
COSTS
$(83,25
0.00)
$(110,3
92.86)
$(136,2
43.20)
$
(160,862.
57)
$
(184,309
.59)
$
(206,640.
09)
$
(206,640.
09)
Overall NPV $
312,897.1

6PROJECT COSTING, BUDGETING AND FINANCIAL APPRAISAL
2
Overall ROI
1.5142
Break-even
Analysis
Yearly NPV
Cash FLOW
$(83,25
0.00)
$
87,142.
86
$
82,993.
20
$
79,041.1
4
$
75,277.2
8
$
71,692.6
4
Overall NPV
Cash FLOW
$(83,25
0.00)
$
3,892.8
6
$
86,886.
05
$
165,927.
19
$
241,204.
47
$
312,897.
12
From the above analysis, it can be said that the project is financially feasible and the
overall net present value of the project is estimated to be $ 312,897.12. The overall ROI (Return
on Investment) is calculated to be 1.5142 which means that the investment could be recovered in
that time period.
Break Even Analysis
B-E Analysis Over
5 Years: 0 1 2 3 4 5
NPV of all
BENEFITS $0.00
$
114,285.
71
$
223,129.
25
$
326,789.
76
$
425,514.06
$
519,537.20
NPV of all COSTS
$
83,250.
00
$
110,392.
86
$
136,243.
20
$
160,862.
57
$
184,309.59
$
206,640.09

7PROJECT COSTING, BUDGETING AND FINANCIAL APPRAISAL
0 1 2 3 4 5 0
$0.00
$100,000.00
$200,000.00
$300,000.00
$400,000.00
$500,000.00
$600,000.00
Break-Even Analysis: Solar Backup System Installation
NPV of all BENEFITS NPV of all COSTS
Year
D
o
l
l
a
r
s
Figure 1: Break Even Analysis for the Solar Backup System
(Source: Created by Author)
The above chart reflects the comparison of NPV (Net Present Value) of all benefits
against all costs. The NPV of all benefits after 5 years is estimated to be $ 519,537.20 whereas
the costs associated with this project will be $ 206,640.09.
Payback Analysis
Benefits of option Year 1 Year 2 Year 3 Year 4 Year 5
Approximate salary savings
$
85,000
$
85,000
$
85,000
$
85,000
$
85,000
Reduced operating cost
$
35,000
$
35,000
$
35,000
$
35,000
$
35,000
Total Benefits
$
1,20,000
$
1,20,000
$
1,20,000
$
1,20,000
$
1,20,000
$6,00,00
0
Costs of option Year 1 Year 2 Year 3 Year 4 Year 5
Development costs $ $ - $ - $ - $ -

8PROJECT COSTING, BUDGETING AND FINANCIAL APPRAISAL
83,250
Additional hardware
$
12,000 $ - $ - $ - $ -
Operation costs
$
28,500
$
28,500
$
28,500
$
28,500
$
28,500
Total Costs
$
1,23,750
$
28,500
$
28,500
$
28,500
$
28,500
$2,37,75
0
Net benefits/costs
$
(3,750)
$
91,500
$
91,500
$
91,500
$
91,500
Cumulative benefits/costs
$
(3,750)
$
87,750
$
1,79,250
$
2,70,750
$
3,62,250
Payback Period 3.04
1 2 3 4 5
$(50,000)
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
Payback Analysis
Net benefits/costs
Cumulative
benefits/costs
Year
Figure 2: Payback Analysis for the Solar Backup System
(Source: Created by Author)
From the above figure, it can be said that the payback period for investment in the Solar
Backup System installation project for McDonalds is 3.04 years. The investment required for
the project could be retrieved by the company within next 3.04 years.

9PROJECT COSTING, BUDGETING AND FINANCIAL APPRAISAL
References
Abednego, G., Githae, W. and Masu, S.M., 2014. The Contingencies Allowances In Project
Budgeting. International Journal of Soft Computing and Engineering, 3(6), pp.17-23.
De Marco, A., 2018. Planning and Scheduling. In Project Management for Facility
Constructions (pp. 93-122). Springer, Cham.
Fleming, Q.W. and Koppelman, J.M., 2016, December. Earned value project management.
Project Management Institute.
Harrison, F. and Lock, D., 2017. Advanced project management: a structured approach.
Routledge.
Kerzner, H. and Kerzner, H.R., 2017. Project management: a systems approach to planning,
scheduling, and controlling. John Wiley & Sons.
Nicholas, J.M. and Steyn, H., 2017. Project management for engineering, business and
technology. Routledge.
Pheng, L.S., 2018. Project cost management. In Project Management for the Built
Environment (pp. 97-112). Springer, Singapore.
Tate, K., 2017. Project Scheduling and Management. Managing Supply Chain Operations,
p.191.