9. INVESTMENT AND OPERATING COSTS


9.1 Investment Decision
9.2 Investment Cost and Size of Fishmeal Plant
9.3 Annual Production Costs


9.1 Investment Decision

Probably the most important decision which any management has to take is the decision to invest, that is to incur an expenditure now in the hope of realizing benefits that are expected to occur over a reasonably long future period of time. In order to know whether an investment in a plant for production of fish meal is a worthwhile proposition or not, it is necessary to make a financial analysis of the plant for the period during which it is expected to be in service. For the calculation of the Internal Financial Return, which is the most common so-called discounted cash flow indicator used by the business community and development banks to measure the profitability of an investment project (Bierman, 1966), the following hypothetical case is shown in Table 7.

The Internal Financial Return by definition is that rate at which the present value of future operational cash flow equals the investment cost. The rate, 18.5% in the example given, indicates the project can bear a cost of capital (in the form of interest on borrowed money) of 18.5% without showing a net loss.

9.2 Investment Cost and Size of Fishmeal Plant

The same financial indicator, Internal Financial Return, used to measure the overall profitability of one investment project is also useful for making comparisons between different scales of a similar type of operation, that is, generally speaking, fishmeal plant A with a production capacity of X tons per day and an Internal Financial Return of 25%, is more profitable than an alternative plant B of Y-ton capacity and a return of 15%. The investment cost per ton of processing capacity for plants of different sizes is another method of determining the economics of scale. To give an idea of how these costs vary depending on the size of plant, Table 8 gives some figures based on 1984 prices. These and all other figures given here should be taken only as indicative of the type of calculations which should be made when construction of a fishmeal plant of any size is being considered. Inflationary trends and differences in geographical locations make it extremely difficult to give precise figures.

In addition to the cost of machinery the investment cost of a fishmeal plant includes costs for possible ocean freight, harbour charges, local transportation, insurance, buildings, sewers, chimney, diesel generator or transformer station, fish unloading and transportation equipment, and tanks for raw fish, fuel and fish oil. Possible public charges, such as import duties and taxes, should also be taken into consideration together with the cost of land, if this is not leased.

As an example of investment cost calculations, the breakdown of the planned costs of a 150-t/24 h plant is shown in Table 9 (estimate based on 1984 prices).

Table 6 Staff per shift

Production lines and capacities

(1)
Works Manager

(2)
For repairs and relief

For attendance of

(3)
Boiler

(4)
Raw fish bin

(5)
Production lines

Bagging & meal store

(6)
Without meal silo

(7)
With meal silo

Packaged plants:
(10-60 t/24 h)

? 0 0 1 1 0-1 -

1 line: 100 t/24 h

1 0 1 1 2 1 2

1 line: 150 t/24 h

1 0 1 1 2 1 2

1 line: 200 t/24 h

1 0 1 1 2 2 3

1 line: 250 t/24 h

1 0 1 1 2 2 3

1 line: 300 t/24 h

1 0 1 1 2 2 3

1 line: 400 t/24 h

1 0 1 1 2 3 4

1 line: 500 t/24 h

1 0 1 1 2 3-4 4-6

2 lines: each 500 t/24 h

1 1 1 1-2 2 4-5 8-12

3 lines: each 500 t/24 h

1 1 1 1-2 3 4-6 10-14

4 lines: each 500 t/24 h

1 2 1 1-2 4 5-8 12-16

5 lines: each 500 t/24 h

1 2 1 1-2 5 6-10 15-20

Note:

  1. This person should have technical qualifications. He could be a dairyman. a laboratory assistant. a mechanical or a chemical engineer -according to the size of the plant. Usually he works day shifts only. You may be able to do without him in small plants.
  2. This person should be a craftsman -a fitter. a mechanic. an electrician or similar. He should be available for production relief. Works day shifts only
  3. The law may demand in certain countries that there should be a trained boiler attendant on each shift
  4. Unskilled labourers
  5. Unskilled labourers; more conscientious. however. than those of (4)
  6. Unskilled labourers; qualified. however. like those of (5)
  7. Same as (6); day shifts only

It is advisable to employ an engineer and steady staff with good qualifications and experience

9.3 Annual Production Costs

In contrast to investment analysis where earnings and costs for the whole service life of the plant are calculated. periodical financial statements are concerned with costs and earnings that accrue in small periods of time -usually of one year's duration. but sometimes even less. While the purpose of the investment analysis is to decide whether to invest or not. the main purpose of periodical statements is to measure the economic performance in the various phases of operations.

Table 7 Calculation of internal financial return

Year Investment Cost Earnings Operational costs a/ Net cash flow

Discount factor

Present value

          at 18% at 19% at 18% at 19%
0 -10 000     -10 000 1.00 1.00 -10000 -10000
1   8 000 6 000 +2 000 0.85 0.84 +1700 +1680
2   9 000 6 000 +3 000 0.72 0.71 +2160 +2130
3   11 000 7 000 +4 000 0.61 0.59 +2440 +2360
4   11 000 7 000 +4 000 0.52 0.50 +2080 +2000
5   11 000 7 000 +4 000 0.44 0.42 +1760 +1680

Total net present value
Internal financial return = 18.5%

    +140 -150

a/ Excluding depreciation or interests

Table 8 Investment costs per ton of installed capacity (US$ 1000)

  Nominal daily raw material capacity
Description 60 t 150 t 250 t 500 t 1 000 t
Fishmeal line 390 530 685 1 021 1 792
Fish oil line 77 161 201 292 554
Concentrator 97 152 197 302 510
Deodorizer and seawater pump common to concentrator and deodorizer 22 49 68 94 127
Boiler 43 138 190 342 535
  629 1 030 1 341 2 051 3 518
Panels, electric cables, pipes, valves, cocks, electric and pipe installation,
supervision of erection and erection, insulation 20% of the total value
126 206 268 410 704
Investment per ton of raw material capacity 12 583 8 240 6 436 4 922 4 222

Apart from the requirement to produce financial statements for official purposes (for example, calculation of income taxes) plant management needs financial information to facilitate decisions on, for example (a) changes in production volume, (b) pricing of the final product, and (c) prices to be paid for raw material and other inputs.

For the calculation of production costs for fish meal, it is convenient to separate such costs that vary in proportion to the volume of production from those costs that, over a certain period of time, are fairly independent of changes in volume. The latter costs, usually called fixed costs, include capital costs (depreciation and interest on capital invested), insurance, lease of land, maintenance, management and supervision, and permanent labour costs. The former costs, variable costs, include outlays for raw material, electricity, fuel, daily labour, water and packaging. Table 10, which shows annual production costs (at 1984 prices) for two different levels of production for the 150-t/24-h plant described in Table 9, will serve to illustrate the costing procedure. It is assumed that the plant on the average day of operation will be utilized to two thirds of its nominal production capacity.

Table 9 Investment cost of a complete plant (150 t of raw fish/24 h)

  US$ 1000
Plant machinery 1 030
Mechanical and electric installations 206
Freight, insurance (12%) 124
Plant building, including sewers, chimney, etc.: 300 m2 at US$ 3 000/m2 90
Office building: 100 m2 at US$ 400/m2 40
Tanks: 4 100 m3 at US$ 10000 each 40
Fishmeal store: 600 m2 at US$ 200/m2 120
Unloading and transport equipment for raw fish 25
Miscellaneous equipment, consultants and contingencies 50
Total investment costs, exclusive of import duties, taxes and other public expenses 1 725

Table 10 Annual production costs of fish meal in US dollars (example only)

    Raw material (in tons)
  Cost
(US$)
11300
113 days op
22500
225 days op
Annual fixed plant cost      
Amortization (depreciation and interest in equal annual amounts) 311 500.00/a    
Insurance: 2% investment costs 34 500.00    
Maintenance and repairs: 5% of investment costs 86 250.00    
Management 70 000.00    
Supervision and permanent labour 80 000.00    
Interest on working capital 20 000.00    
Lease of land 10 000.00 611 250 611 250
Variable costs      
Cost of raw material at US$ 50/ton   565 000 1 125 000
Plant costs:      
Fuel: 50 kg/ton of fish US$ 0.23/kg fuel 11.25    
Electricity: 40 kWh US$ 0.12 24 h 100 1.15    
Bags: 4 at US$ 0.30 each 1.20    
Labour 2.00    
Water

0.20

   
Total plant costs/ton of raw material 15.80 178 540 355 500
Total annual production costs   1 354 790 2 091 750
Per ton of meal/oil at 25% yield   480 372

a/ US$ 310 500 = US$ 1 725 000 x 0.18 (0.18 is the annuity factor for amortization in 10 years at 12% interest)

Given a meal/oil yield of 25%, the annual costs for the plant, shown in Table 10, can be broken down in the following costs per ton of meal or oil:

Output per year 2825 t 5625 t
Fixed costs 216 - 45% 108 - 29%
Raw material costs 200 - 42% 200 - 54%
Other variable costs 64 - 13% 64 - 17%
Total production costs 480 - 100% 372 - 100%

When planning a new fishmeal enterprise a careful survey of the items influencing the costs and the ex-factory sales prices must be accomplished. Some of these items could be listed as follows:

Raw material. The cost of raw material constitutes in many cases more than 50% of the total production costs of the products. A low price of raw fish is therefore an essential advantage, which could counterbalance possible disadvantages such as high transportation costs to the main international markets. To illustrate variations in raw fish prices it could be mentioned that Danish fishmeal factories may pay up to US$ 70 to 80 per ton of raw fish, whereas in Chile the price could be as low as US$ 25 per ton.

Composition of the raw material. The content of oil-free dry matter and of oil varies considerably in the different fish species caught and with the season of the year. A North Atlantic blue whiting may, in the spring, contain only 14% oil-free dry matter and 3% oil, whereas a Chilean horse mackerel may at best contain 18% to 20% oil-free dry matter and 16% to 20% oil.

It is therefore imperative to perform a careful survey of available raw material with respect to variations in species and composition when planning a new fishmeal enterprise.

Number of working days per year. The influence of the number of working days is illustrated in Table 10, which shows the lowering of the percentage by which the fixed costs contribute to the total production costs when the number of working days is doubled.

Another advantage of a regular supply of raw material is that the number of stops and starts of the plant operation is low with subsequent savings in fuel and labour.

Location of the plant relative to its main markets. A large part of the world production of fish meal is sold on the USA and European markets and the ruling prices are normally indicated CIF main import harbours, for instance CIF Rotterdam. The manufacturer will have to bear the freight costs of his products and normally also a broker's commission, when calculating his ex-factory price. For Chilean meal these costs could amount to US$ 60 to 80 per ton, when selling to Western Europe, whereas freight costs from Denmark to the same market would constitute only a fraction of this.

Many developing countries are building up a poultry industry needing fish meal, and a local factory covering these needs would have an immediate advantage in freight costs.

Financing costs. The financing costs, specially interest charges, may constitute a rather heavy burden for a newly established enterprise. A company in a developing country should therefore seek maximum benefit from the low interest arrangements made available by international development, banks and from the special export credit terms given by many countries.

In countries where fish meal is produced on a large industrial scale (in plants with over 500 t/24 h processing capacity), the fixed plant costs are usually much lower than those for smaller plants. As a result, the value of such plants is often largely written down as the serviceable lifetime of the machinery will normally exceed the budgeted depreciation period.

Fuel costs. The price of fuel oil internationally shows rather small variations, but some countries subsidize the fuel costs to their industries.

New developments in fuel saving equipment may have a positive effect on fuel costs, but the effect of increased investment costs must be carefully balanced against the savings. Alternative fuels, such as coal or natural gas, may under certain circumstances offer considerable savings, specially if the plant is operating with steam heating from central boilers.

Labour, electricity and water. Fishmeal production is not very sensitive to variations in the above factors. Low labour salaries are often balanced by low efficiency. Authority demands for environmental protection. Fishmeal plants placed in populated areas will practically always be met with demands for elimination of nuisance from odour and liquid effluents, which could incur rather heavy investment and operation costs. In the case of quite a few factories, originally established in rather remote areas, dense populations have in time grown up around them with consequent intensification of the demands for environmental protection.

Prices. The influence of freight costs and commissions has already been mentioned.

The basic price of fish meal is large determined by the prices of competing protein feeds, specially of soya. As the price is calculated on the basis of protein content, and as fish meal normally contains 68% to 72% protein as against 40% to 42% for soya, the nominal price should be correspondingly higher for fish meal than for soya. To this should be added a premium because fish meal contains certain growth promoting factors which are appreciated by farmers.

High quality fish meal has found wide application in aquaculture and in mink farming and obtains for these purposes a price premium over conventional meal, but to benefit from this the control of raw fish quality and of processing conditions must be very strict. Special types of fish meal have proved beneficial for feeding ruminants and as a whole, there is little doubt that in future a wider differentiation in the products of the fishmeal industry will take place, subsequently diminishing the influence of competition from soya.