ENG-002 Student Guide

ENGINEERING PROCESS
ENG-002
CALCULATION OF RETURN
Engineering ENG-002 - Calculation of Return 1

Revision 0 01/Jun/2011
REVISION CONTROL
ENGINEERING PROCESS
ENG-002
CALCULATION OF RETURN
Rev. Data Revision description Resp.
Hildo
0 1/Jun/2011 Original Edition
ADMGG

SUMMARY
REVISION CONTROL ................................................................................................. 2

SUMMARY .................................................................................................................. 3
GENERAL INFORMATION ......................................................................................... 4
MODULE DESCRIPTION............................................................................................ 5
LEARNING STAGES .................................................................................................. 6
GENERAL DEFINITIONS............................................................................................ 7
PART 1 - CALCULATION OF RETURN ON INVESTMENT (ROI) .............................. 8
PROCEDURES................................................................................................... 8
PREPARATION AND APPROVAL ................................................................... 10
DEFINITIONS ................................................................................................... 14
EXAMPLES....................................................................................................... 18
PART 2 - PROPOSAL / AUTHORIZATION OF INVESTMENT (PAI / PAI-C) ........... 19
PROCEDURES................................................................................................. 19
PREPARATION AND APPROVAL OF PAI (PRACTICE 4) .............................. 21
DEFINITIONS FOR PREPARATION OF THE PAI AND PAI-C ........................ 23
EXAMPLES....................................................................................................... 25
PART 3 - REQUISITION/ ALTERATION OF INVESTMENT (RAI) ............................ 27
PROCEDURES................................................................................................. 27
DEFINITIONS FOR RAI PREPARATION ......................................................... 31
EXAMPLES....................................................................................................... 34
PART 4 - ACCEPTANCE VALIDITY OF INVESTMENT (AVI) .................................. 35
PROCEDURES................................................................................................. 35
DEFINITIONS FOR AVI PREPARATION ......................................................... 38
EXAMPLES....................................................................................................... 40
PART 5 - AUDIT THE PERFORMANCE OF INVESTMENT (API, APE) ................... 41
PROCEDURES................................................................................................. 41
DEFINITIONS FOR API PREPARATION ......................................................... 45
EXAMPLES....................................................................................................... 46
THEORETICAL SELF-EVALUATION ....................................................................... 48
ANSWERS ................................................................................................................ 51
REFERENCES .......................................................................................................... 52

GENERAL INFORMATION
Target Public
Engineering Managers
Engineering Teams: Project Coordinators, Discipline Coordinators, Industrial
Installation Coordinators, Civil Construction Coordinators, Capex Planning and
Control, and Draftsmen.
Prerequisites
Gerdau Capex Management (GIG)
Duration
It is estimated that this self-training can be adequately carried out in a total of three
hours of study. Two sessions of study are recommended, organized in different
shifts, as follows:
First session - two hours of careful reading;
Second session - half hour review of the main contents, half hour performing
the self-evaluation, followed by a review of theoretical issues where there was
doubt.

MODULE DESCRIPTION
OBJECTIVE
The objective of this module is to present the procedures for elaboration of the:
(i) Calculation of Return on Investment (ROI);
(ii) Proposal / Authorization of Investment (PAI) and Proposal / Authorization of
Investment Consolidated (PAI-C);
(iii) Requisition / Alteration of Investment (RAI);
(iv) Acceptance Validity of Investment (AVI);
(v) Audit the Performance of Investment (API) and Audit the Performance of
Engineering (APE).
LEARNING STAGES
Basic knowledge concerning the Calculation of Return on

1- 8 to 18
Investment (ROI) preparation.
Basic knowledge concerning the Proposal / Authorization of

2- Investment (PAI) and the Proposal / Authorization of Investment 19 to 26
Consolidated (PAI-C) preparation.
Basic knowledge concerning the Requisition / Alteration of

3- 27 to 34
Investment (RAI) preparation.
Basic knowledge concerning the Acceptance Validity of

4- 35 to 40
Investment (AVI) preparation.
Basic knowledge concerning the Audit the Performance of

5- Investment (API) and Audit the Performance of Engineering 41 to 47
(APE) preparation.
EVALUATION PROCESS
After studying the content covered in this module, you will make a Theoretical Self
Evaluation, included in this training material.
After that, you will submit yourself to a Theoretical Evaluation, where you should
answer correctly at least 70% of the questions. If you do not answer correctly at least
70% of the questions, you should review the learning stages where you had more
difficulty.
If necessary, ask for help to the Facilitator.

LEARNING STAGES
LEARNING STAGES
Activities Resources
1. Study the contents concerning the ENG-002 Module Pages 08 to 18

Calculation of Return on Investment
(ROI) preparation.

Proposal / Authorization of Investment
(PAI) and the Proposal / Authorization of
Investment Consolidated (PAI-C)
preparation.

Requisition / Alteration of Investment
(RAI) preparation.

Acceptance Validity of Investment (AVI)
preparation.

Audit the Performance of the Investment
(API) and Audit the Performance of
Engineering (APE) preparation.
6. Theoretical Self-Evaluation ENG-002 Module Pages 48 to 50

GENERAL DEFINITIONS
FIELD OF APPLICATION
This document applies to all Engineering areas of the Business Divisions of Gerdau.
REFERENCES
GG-PR-169-002 Calculation of Return on Investments (ROI)
GG-PR-169-003 - Engineering Action Plan
GG-PR-169-012 Preliminary Study (PS)
GG-PR-169-502 Proposal/ Authorization of Investment (PAI and PAI-C)
GG-PR-169-508 Capex Implementation
GG-PR-169-511 Requisition/ Alteration of Investment (RAI)
GG-PR-169-513 Acceptance Validity of Investment (AVI)
GG-PR-169-514 Audit the Performance of Investment (API)
Corporate Guideline DC 08 Approval of Fixed Asset Projects
Corporate Guideline DC 06 Accounting Records of Fixed Assets
EPM User Manual
TERMS AND DEFINITIONS

According to the glossary of GG-MG-169-001-Engineering Process Manual.
RESPONSIBILITY
The investment coordinator is responsible for the application of these procedures,

unless another staff member is defined as the person in charge of the procedures in
this document.

PART 1 - RETURN ON INVESTMENT (ROI) CALCULATION
PROCEDURES
DEFINITIONS
The objective of this Part 1 is to present the procedures for calculating the return on
investment (ROI).
The ROI is calculated with the EPM help, according to procedures in the EPM User
Manual.
The values for Payback, Internal Return Rate (IRR) and Net Present Value (NPV) are
calculated according to the definitions presented in next sections. These values are
used to prepare documents for Capex approval and evaluation, as defined by the
Engineering Process Practices (see Figures 1 and 2).
Figure 1 - Engineering Process Practices
Practice 4 Preliminary Study (PS) preparation;

Practice 4 Proposal / Authorization of Investment (PAI) preparation;
Practice 5 Proposal / Authorization of Investment Consolidated (PAI-C) preparation;
Practice 6 Requisition / Alteration of Investment (RAI) preparation;
Practice 6 Acceptance Validity of Investment (AVI) preparation;
Practice 7 Audit the Performance of Investment (API) preparation.
The calculation of Return on Investment (ROI) aims to calculate the

financial indicators of investments that have quantified benefits and
which are classified as Cost Reduction, Increased Quality (price)
and Increased Capacity (sales).

PROCEDURES
Figure 2 - Documents of Capex approval and evaluation that employ the ROI
ATTENTION: This procedure is applicable to Capex which do have

quantifiable benefits, categorized as Results.
If the Capex is categorized as Sustainability and classified as Safety,
Environment, Reliability or Administration/Support, the ROI must not be
calculated even if the Capex has some other quantified benefit.
The return on investment calculation intends to calculate KPIs to help evaluate

"what is the Capex value today." The money value in time concept in financial
mathematics is applied by considering the following basic formula:
PV = FV / (1 + i)n
where;
PV = money value at present date
FV = money value at a future date
i = interest rate for the period considered
n = number of periods between the start date and future
For example, considering an interest rate of 15% per year and a period of five
years, the future value of U.S. $ 1,000 worth U.S. $ 497 at present date, according
to the application of the formula:
PV = 1000 / (1 + 0.15)5 = US$ 497

PREPARATION AND APPROVAL
To prepare and approve the ROI calculation, do the following:

Confirm that the preset parameters, associated with the country where the Capex
was planned to be implemented, are updated as defined by Gerdau Engineering:
Discount Rate (% per year);
Income Tax Rate (%);
Depreciation Rates (months);
Exchange Rate (local currency / US$).
Inform all values of the planned cash flow using US Dollars as currency, always in
nominal values, without any inflation effect;
List all the budget items (including non-recoverable taxes), detailed according to
the planned expenditures. Ensure that the budget items in the standardized Work
Breakdown Structure (WBS elements) are followed, these will be used to allocate
correctly the costs, allowing: taxes, financing and depreciation rates forecasting;

Inform the values and respective schedules for the achievement curves planned
of all quantified benefits regarding the Capex.
Inform the recoverable taxes values, the respective disbursement and recovery
dates planned. These dates must be defined along with the Accounting Process;
Inform the working capital flow fluctuations according to their relative schedule;
Inform the Start of Operation deadline in the Capex schedule and the depreciation
period of the main equipment, those dates will be used to define the analysis
period;
Observe that the return on investment calculation will be

automatically executed by EPM. The application will present
results for the following financial indicators:
Payback: Presents the payback value (months) calculated or indicates that

the payback is Non-quantified for investments that do not have quantified
benefits, or when the payback calculation is not within the defined period for
the analysis;
Internal Return Rate (IRR): Presents the internal return rate (% per year)
calculated or states that it is Non-quantified for investments with negative
NPV;
Net Present Value (NPV): Presents the net present value (US$ thousand) of
the investment as long as the NPV calculated is positive.

Compare the Indicators results in order to better evaluate the Capex,

because, in each decision-making process, an indicator may prevail
over others. In general, Keep that in mind:
Payback is an investment risk level indicator. If the payback is long, there is a
higher risk due to market or technology changes that could affect feasibility.
Therefore, the shorter is payback period, the greater is liquidity.
The IRR is a profitability indicator which indicates the safety margin that the
investment offers to the investor in relation to the Discount Rate. The greater
is the difference between the IRR and the discount rate, the greater is the
return on investment and more robust is the investment to possible
fluctuations on the variables used in the calculation of return, before it
becomes unprofitable.
The NPV is a method that provides a good notion of the "value to be obtained"
with the investment. To compare investments, we note that it is important to
relate the NPV to the budget, since the greater is the value of the NPV over
the investment budget, the better is the expected return. For example, an
investment that has a lower NPV compared to another investment may be
more feasible if it also has a lower budget.
Each financial indicator results in different
information that should be used in a complementary
way.
To better evaluate the investment, the recom-
mendation is to calculate the three financial
indicators (IRR, NPV and Payback), since for each
specific decision-making an indicator may take precedence over the others.
For example, there may have investments presenting a good return amount (NPV
highly positive) and are profitable (IRR above the discount rate), but whose return
period (PAYBACK) is long, meaning that the company will have to wait a lengthy
period to recover it.
In addition, financial resources are always limited. The opportunity cost, which is
the cost of choosing an alternative and that means giving up the benefits of other
alternatives, must be considered.
Analyze the results and, if necessary, prepare a sensitivity analysis with other
options.
To analyze the return on investment calculation results it is important to know the
variables of the calculation and the effect they cause over the investment
indicators.

Variables x Return Calculation Key Performance

Indicators affected
Decreasing output flow: means to reduce budget, reduce
Budget deviation (%)
working capital and reduce taxes;
Anticipating inputs: means to generate benefits as soon as
Start of operation deviation
possible, provided the nominal change implemented ("vertical
(%)
start of operation");
Reducing the duration of the Capex implementation: the effect is
Duration deviation (%)
equivalent to anticipate the generation of benefits;
Postponing outputs: can be achieved through supply contracts
with extended payment events and long-term financing;
Increasing inputs: equivalent to raise the income and
Return Evaluation (%)
corresponding benefits;
Increasing the period of analysis: equivalent to increase the
economic life of the Capex, extending the generation of benefits;
Figure 3 graphically represents how the return calculation variables positively

influence the key performance indicators results.
Figure 3: Positive influence in the Capex result
The data must be realistic and reliable, due to the importance that the return
calculation has on the approval decision and the need to develop a performance
evaluation after closure, to compare expected and executed.

DEFINITIONS
The definitions used in this procedure for calculating return on investment are the
same used in other financial mathematic methodologies. The main variables are:
PERIOD OF ANALYSIS
The time period adopted is usually split into two major periods: explicit period and
residual period (perpetuity).
The explicit period of analysis is the time interval between the first and the last
portion considered in cash flow, also known as the Capex recovery period. It
describes a period of time that allows a cash flow forecast with reasonable reliability
and compatible with the Capex life cycle and economic life.
The period of analysis is the time interval (months) which begins at the Capex
approval (n=0) and ends at the Capex main item depreciation, counting from the start
of operation. For instance, if the Start of Operation deadline is 36 months and the
depreciation of the main item is 120 months, the period of analysis will be 156
months.
PERPETUITY
The residual period analysis or perpetuity is a value projection (US$) that represents
the Capex continuous operation and benefits generation, even after the period of
analysis.
This projection period to infinity, generally uses the Gordon model by calculating the
ratio between the net cash flow (NCF) in the period of analysis last month, and the
discount rate (DR), that is:
PERP = NCF / DR
This methodology considers that the calculated value for perpetuity is applied on net
cash flow, in the following month after the period of analysis, in a single income
amount, without flow growth due to reinvestment of operational cash flows.

DEFINITIONS
DEPRECIATION
Fixed assets lose value due to use. This loss is defined by the tax law as
depreciation, which can be deducted from the taxable income.
According to legislation, depreciation is the decrease in the value of tangible or
intangible assets, due to wear, utility loss per use, nature acts or obsolescence.
Fixed assets must be depreciated adopting the annual rates (% per year) as defined
by Corporate Guideline DC-06 Accounting Records of Fixed Assets, except when
local legislation dictates otherwise, resulting in different deadlines from those
established.
Example of depreciation rates:
Rates Life cycle
Assets
(% per year) (years)
Land improvement 10 10
Buildings and Improvements 4 25
Machinery, Equipment and Facilities 10 10
Furniture and fixtures 10 10
Vehicles 20 5
TI equipment 20 5
According to calculations provided by EPM, depreciation is linear and begins at the

first month after the Capex Start of Operation.
DISCOUNT RATE
The discount rate or capital cost is the average price a company pays to its financial
sources. It serves as a reference for the process of making investment decisions.
The discount rate (% per year) is periodically disclosed by Gerdau and must be used
in the present value of cash flow expenditures calculation for Capex Payback and
Net Present Value calculation.

DEFINITIONS
WORKING CAPITAL
Working capital is the amount applied to production for the company complete the
operating cycle. The total working capital is composed by cash and bank values, to
be received or in stock. Working capital variation examples that should be considered
in Capex:
Increase or decrease in consumables items storage (scrap, refractory materials,
fuel, spare parts, etc.)
Increase or decrease in intermediate products storage (material of continuous
casting and wiring, material for finishing areas, etc.)
Increase or decrease in products for sale storage.
NET CASH FLOW
By definition, the net cash flow is made up of accrued income and expenses at the
end of each month, during the period of 40
analysis.
Net Disbursement (US$
20
Also, it is normal that the cash flow 0
thousand)
presents concentrated expenses in the first 0 10 20 30 40 50 60

-20
months and inputs distributed in the period
-40
of analysis remaining months. The more
-60
uniform is the cash flow, more consistent
are the financial indicators IRR and -80
Period of Analysis (months)
Payback.
Expenses (-):
- Capex expenditures (must include non recovarable taxes);
- Working capital fluctuation;
- Recoverable Taxes paid;
- Income Tax paid over taxable results (benefits depreciation).
Income (+):
- Capex Benefits;
- Reimbursement of recoverable taxes;
- Amount that represents the effect of Perpetuity.
FINANCING
For the return on investments calculation, specific financing contributions for the
Capex will be disregarded. The financing effect is considered in the discount rate
calculation.

DEFINITIONS
NET PRESENT VALUE (NPV)

This is the accrued value (US$) of 400
the income and expenses values 300
NPV (US$ thousand)

during the cash flow period of 200
analysis, brought to present value 100

(n=0), using the discount rate (% per 0
year) of the investment. 0 5 10 15 20 25 30 35 40 45 50 55
-100
Example:
-200
- NPV = US$ 85 k Discount rate (% p.y.)
- 60-month period of analysis and
- 15% per year discount rate
APPLIED PAYBACK
This is the period duration (months) 200
Accrued Flow (US$ thousand)
from the investment approval (n=0) 100
until when the present accrued 0

0 10 20 30 40 50 60
income values is equal to the present -100
accrued expenses values, using the -200
Capex discount rate (% per year). -300
Payback is also defined as the -400
recovery period of the invested -500
capital. Applied Payback (m onths)
Example:
- Applied Payback = 51 months
- 15% per year discount rate
INTERNAL RETURN RATE (IRR)

This is the discount rate that zeroes 400
the Net Present Value (NPV) of the 300

NPV (US$ thousand)
cash flows during the Capex period of 200

analysis. 100
Example: 0
- IRR = 24 % per year 0 5 10 15 20 25 30 35 40 45 50 55
-100
- 60-month period of analysis
-200
Discount rate (% p.y.)

EXAMPLES
EXAMPLE ILLUSTRATING THE RETURN ON INVESTMENT CALCULATION

PART 2 - PROPOSAL / AUTHORIZATION OF INVESTMENT (PAI / PAI-C)
PROCEDURES
DEFINITIONS
The Part 2 objective is to present the procedures for preparation of the
documents Proposal / Authorization of Investment (PAI) and Proposal /
Authorization of Investment Consolidated (PAI-C)
As presented in Figure 4, the Proposal / Authorization of Investment (PAI)
should be prepared in Practice 4 - Conception and the Proposal /
Authorization of Investment Consolidated (PAI-C) should be prepared in
Practice 5 - Consolidation, using the EPM, according to the definitions
detailed in item 6.3 and the procedures described in the EPM User
Manual.
The Proposal / Authorization of Investment (PAI)

should be prepared in Practice 4 - Conception, with
the purpose of presenting the technical and
economical information summary necessary to
submit the Capex for approval.

PROCEDURES
Figure 5 - Relationship of PAI and PAI-C with other procedures and practices
The Capex should be consolidated in Practice 5 Consolidation,

during the beginning of the Capex implementation and management,
before contracting the main suppliers of equipment, materials, civil
constructions and installations.

PAI PREPARATION AND APPROVAL (PRACTICE 4)
The PAI should contain the summary of the information regarding the Technical
Study (TS) according to the Corporate Guideline DC-08. For those Capex that do not
require the TS preparation, the PAI should be directly prepared based on the
Preliminary Study (PS).
The approved PAI is the document that authorizes the Capex implementation.
For PAI preparation and approval, observe the following

procedures:
Prepare the Technical Study / PAI according to the deadlines and resources
planned in the Technical Studies Preparation Plan, which is a part of Engineering
Action Plan using the Preliminary Study (PS) prepared for the Capex as a
reference;
Inform in the time schedule the deadline planned for the Capex consolidation
phase to be implemented in Practice 5 - Consolidation;
Use the updated parameters and exchange rates defined by Gerdau's
Engineering in order to perform the return calculation;
Formalize and register the Capex PAI approval getting the signatures of the
people in charge or the record in the corresponding meeting minutes, up to the
highest level of approval as established in Corporate Guideline DC-08.

PAI-C PREPARATION AND APPROVAL (PRACTICE 5)
The Proposal / Authorization of Investment Consolidated (PAI-C) must be prepared

when there are changes in the approved scope, budget or time schedule according
to the Corporate Guideline DC-08.
The approved PAI-C is the document that authorizes the Capex

for contracts and establishes new reference for the budget,
duration and return KPIs.
For PAI-C preparation and approval, observe the following procedures:

Include in the PAI-C the summary of the information contained in the consolidated
Technical Study (TS);
Prepare the PAI-C according to the time schedule planned in the approved PAI;
Use the updated parameters and exchange rates defined by Gerdau's
Engineering in order to revise the calculation of return;
Formalize and register the Capex PAI-C approval by obtaining signatures of the
people in charge or registering in the corresponding meeting minutes, up to the
highest level of approval as established in Corporate Guideline DC-08,
considering the highest budget between the PAI and PAI-C;
Revise the budget values and the deadlines for closure and start of operation
according to the approved PAI-C. The Capex approval date should not be
changed.

DEFINITIONS FOR PREPARATION OF THE PAI AND PAI-C
In the PAI and PAI-C preparation the following items, detailed in the procedure GG-
PR-169-501 - Technical Study, should be informed:
Objective:
Keep the same objective defined in the Technical Study.
Classification of Objectives, Type of Directive and Criticality:

Inform the Capex categorization data according to the Technical Study.
Scope:
Describe the summary of the work to be carried out, mentioning the main
equipment, facilities and changes proposed based on the information included
in the Technical Study.
Budget:
Inform the Capex main budget items details, according to the Project Structure
Plan (PEP Elements), defined in the EPM User Manual;
Inform the expenditures forecast for the budget items;
Include in the budget, the Technical Study (TS) preparation costs of the
Transitional Investment (IT);
Inform the tax percentage which is included in the budget item and which is
not planned to be recovered. In order to define which percentages apply for
each item contact the Accounting area.

DEFINITIONS FOR PREPARATION OF THE PAI AND PAI-C
Time Schedule:
Inform the deadline for each one of the activities in the PAI / PAI-C standard
time schedule. The time schedule will be presented in months, two-months,
quarters or six-months according to the Capex total duration;
Inform the Start of Operation" and Closure milestones to define the Capex
implementation durations referred to the start of operation and closure,
respectively.
Quantifiable Benefits:
Describe only the benefits with financial gain for the Capex implementation,
classified as cost reduction, increased capacity and quality improvement;
Inform the planned time schedule for the estimated quantifiable benefits.
Return on investment calculation:

The return on investment calculation is automatically performed by the EPM.
Be aware that this value must be the same presented in the Technical Study.
Comments:
Describe the benefits, classified as safety, reliability, environmental and
administration/support, detailed in the TS;
Include information regarding the technology employed, safety aspects and
environmental, general observations and attachments.
Key Performance Indicators:

Inform the key performance indicators of the Capex benefits defined in the
Technical Study.
Attention: key performance indicators of budget and deadlines should not be
informed in this document.

EXAMPLES
EXAMPLE OF PAI DOCUMENT

EXAMPLES
EXAMPLE OF PAI-C DOCUMENT

PART 3 - REQUISITION/ ALTERATION OF INVESTMENT (RAI)
PROCEDURES
DEFINITIONS
The objective of this Part 3 is to present the procedures for preparing the document
Requisition/ Alteration of Investment (RAI).
The Requisition/ Alteration of Investment (RAI) must be prepared during Practice 6 -
Implementation, as presented in Figure 6.
The RAI objectives are as follows:

To formalize the requests for alterations in duration, budget and/or scope that
proved to be necessary during Capex implementation to submit it for approval, as
detailed in the Corporate Guideline DC-08.
To register learning from the analysis of Capex change facts and causes, as
lessons learned for process improvement.
The RAI must be prepared in a preventive approach, to submit alterations that will
happen. Corrective RAIs, submitted to formalize alterations that have already
occurred, should be avoided. Figure 7 locates RAI in the Engineering Process
practices.

PROCEDURES
Figure 7: Relationship between RAI and the other procedures and practices
More than one RAI can be issued for each Capex. The alterations must be presented
referring to the latest approval document (PAI or PAI-C) or in reference to the
previous approved RAI.
The RAI objectives must be informed, associated with

the alteration cause as defined by DC-08:
Alteration of conclusion deadline;
Budget alteration;
Alteration of scope: Capex closure without the
approved scope full implementation or scope
change that causes duration and budget alteration
beyond approved limits or even reduces the
approved benefits;
Alteration of budget item: Budget item change, according to defined limits;
Cancellation of investment: Capex is cancelled and the paid values are
transferred to the cost center, as long as no equipment acquisitions or civil
construction have been carried out. In such case, the amount spent by the Capex
with projects, travels and consulting up to the cancellation must be reported in the
"Comment on Root Cause" field. This amount value will be sent to cost to inform
the budget historic.

PROCEDURES
The approved RAI is the document that authorizes the Capex to implement the
alterations, establishing new objectives of budget, duration and scope. To calculate
the key performance indicators for budget, duration and return, the baseline values
approved by the PAI or PAI-C will be used.
Attention:
The budget and the time changed by an approved RAI cannot be
exceeded. A new RAI must be issued as soon as any future change in
budget or duration is identified.

For RAI preparation and approval, do the following:
Prepare the RAI with EPM software help, according to the definitions detailed in
the next sections and the procedures described in the EPM User Manual.
List the future Capex alterations, presenting the fact that caused each
one of the alterations and also its impact, in months and/or dollars;
Calculate the Capex return parameters (IRR, payback and NPV), considering
alterations in the time schedule; using the parameters and exchange rates
defined by Engineering;
Formalize and register the RAI approval by obtaining the people in charge
signatures or registering in the corresponding meeting minutes, up to the highest
approval level as established in Corporate Guideline DC-08. Observe that the
previous approval level must necessarily be involved, whether it refers to the PAI,
PAI-C or RAI;
Revise the budget and the deadlines values for closure and start of operation in
the control system, according to the approved RAI.

DEFINITIONS FOR RAI PREPARATION
The previous approval data (PAI, PAI-C or RAI) are automatically retrieved
by EPM and cannot be changed. These items are defined according to the
GG-FM-169-501 Technical Study (TS) form.
Additional data, exclusive for the RAI, are presented below together with the
procedures to be observed:
RAI Objective:
Select the RAI objectives (there can be more than one objective for each RAI):
Duration alteration;
Budget alteration;
Scope alteration;
Budget item alteration;
Cancellation of investment;
Approved Values x Deviations:

Inform the deviation values for the proposed alteration. The values for the PAI or
PAI-C are automatically presented as initial approval, as well as the previously
approved RAIs.
Total Budget: Inform the total budget planned for the Capex. The RAI budget
is calculated as a deviation from the previous approval;
Dates: Show the planned time schedule for the Capex. New start of operation
and closure dates are calculated by EPM, considering the new durations and
the initial approval date, which cannot be changed. The approval date for the
RAI being submitted will only be informed after approval.

Return: Inform the new expenditures forecast and new benefits, along with
their respective time schedules. The return calculation will be executed by
EPM according to procedure GG-PR-169-002 Calculation of Return on
Investments (ROI).
Attention: The return calculation is not executed for investments that do not
have financial benefits.
Total deviations (%): The calculation of Capex budget deviations values,
start of operation and closure duration deviation and return is performed by
EPM and are informed in the RAI.
Fact, Root Cause and Impact:

Inform all Facts and Root Causes (there can be several for each RAI) that
explain/ justify the proposed alterations and their respective impact on the Capex
closure duration and budget.
Fact: Detail what is being proposed as alteration regarding what

had been previously approved. For example, if a Capex scope is
the installation of a new gas injection system in the electric
furnace and some cooled panels cannot be adapted to the new
nozzles, the fact will be "acquisition of new cooled panels"
Root Cause: The system features two fields for the root cause:
Cause: The cause must be selected among the many
standardized ones, and it will be used for statistic analyses of
causes for deviations. For example, for the previous Fact, the
cause could be Change in the Quality/Performance/
Specifications Plan.
Comment on Cause: Comment on the Cause through a free text which will be
on the RAI document. For example, still using the previous example, the
comment could be the analysis of existing panels concluded that it is not
viable to adapt them to operate with the new nozzle modules".

Impact: for each main cause listed, the impacts on the budget and/or Capex
closure deadline must be presented in dollars and/or months.
Attention: Make sure the result of the entered impacts sum

reflects the differences between the new budget and the new
duration and the previously approved ones.
For instance, when the budget alteration is caused by the dollar exchange rate
fluctuation, the following data must be entered:
Fact: Exchange rate variation
Cause: Fluctuation of exchange rate
Comment on Cause: Mean variation of the dollar from U$ XX to U$ YY.
Learning:
For process improvement, inform the lessons learned from the facts and causes
of alterations. For instance, in the mentioned case, it could be Include
representatives of Operation and Maintenance during the evaluation of existing
equipment during the Technical Study preparation.
NOTE: as you are leading with facts and causes this is an excellent
moment for registering the lessons learned in the Capex
implementation.process.
Key Performance Indicators:

The key performance indicators should be updated, although they are not
presented in the RAI document.
RAI Attachments:
Include the documents that complement the alterations proposed in the RAI.

EXAMPLES
EXAMPLE OF RAI DOCUMENT

PART 4 - ACCEPTANCE VALIDITY OF INVESTMENT (AVI)
PROCEDURES
DEFINITIONS
The objective of this Part 4 is to present the procedures for the preparation of the
Acceptance Validity of Investment (AVI).
The Acceptance Validity of Investment (AVI) is part of Practice 6 in the Engineering
Process, as presented in Figure 8, and must be prepared for all investments.
The main purposes of the AVI are as follows:

To formalize the Capex technical closure. For Capex closure, consider the
following requirements:
Deliveries planned in the scope have been performed;
Start of operation (INOP), defined by the main equipment start of operation
and the beginning of the Capex benefits generation;
All orders for acquisitions planned in the scope have been issued;
To evaluate the Capex implementation with all areas involved;
To register the lessons learned throughout the Capex implementation, aiming
process improvement.

PROCEDURES
The AVI must be prepared with the EPM, according to definitions detailed below and
procedures described in the EPM User Manual. Figure 9 locates the AVI together
with other Engineering Process practices.
Figure 9 - Relationship of AVI with other procedures and practices

For AVI preparation and approval, do the following:

Conduct a closure meeting with participation of the Capex
Team and representatives of the involved areas (Operation,
Engineering, Maintenance, Safety, Environment,
Procurement, etc.);
Undersign that the Capex can be closed. The group must agree that the
deliveries planned in the Capex Implementation Plan have been completed. If
new pending items are listed, that require additional resources, these must be
completed and another closure meeting must be scheduled. Pending items
related to the monitoring of previously contracted activities can be accepted;
Discuss the implementation evaluation until there is consensus about the result.
The result of evaluated items must not be calculated as an average of
participants' evaluations;
Formalize and register the AVI approval obtaining the participants signatures;
Formalize, in the AVI, the Capex closure acceptance by the representative of the
Capex benefits area;

DEFINITIONS FOR AVI PREPARATION
The previous approval data (PAI, PAI-C or RAI) are automatically

retrieved by EPM and cannot be changed. These items are defined
according to the form GG-FM-169-501 Technical Study
Preparation.
Additional data, exclusive for the RAI, are presented below, together with the
procedure to be carried out:
Date:
Inform the start of operation date (INOP). Make sure that the closure takes place
after the INOP. The initial approval date (PAI or PAI-C) is retrieved by EPM.
Duration:
Inform the time schedule executed for the Capex. The duration until conclusion is
calculated by EPM, considering the initial approval date.
Budget:
Inform the budget executed for the Capex. The approved budget is retrieved by
EPM to calculate the deviation of the executed budget compared to the approved
one.
Evaluation Items:
The AVI evaluates the main activities and deliveries from the Capex concept,
consolidation and implementation stages (Practices 4, 5 and 6). Evaluate all items
using the following definitions:
Excellent: fully met the objectives, exceeding expectations (score 9 to 10);
Good: fully met the objectives (score 7 to 9)
Average: met objectives (score 5 to 7)
Unsatisfactory: partially met objectives (score 3 to 5)
Poor: did not meet objectives (score 0 to 3)
Not Applicable: the item does not apply to the Capex, and will not be included
in the evaluation.

DEFINITIONS FOR AVI PREPARATION
For items that receive the score Poor, Unsatisfactory or Average,

register lessons learned through the score justification, in the
Comments field.
It is recommended to also register the lessons learned for items that
scored Excellent. Frequently this record clarifies what have been done
to achieve the "Excellent" and might be a reference for new Capex.
Execution Evaluation:
The Execution Evaluation is calculated by the average score of the evaluated
items that are applicable to the Capex. The grade obtained in evaluation is
associated to the score, according to previous definitions.
Approve the Capex Closure Authorization from the representative of the Capex
benefited area, characterizing the Capex Implementation Acceptance.

EXAMPLES
EXAMPLE OF AVI DOCUMENT

PART 5 - AUDIT THE PERFORMANCE OF INVESTMENT (API, APE)
PROCEDURES
DEFINITIONS
The objective of this Part 5 is to present the procedures for the Audit the
Performance of the Investment (API) preparation and the Audit the Performance of
Engineering (APE).
The Audit the Performance of Investment (API) is part of Practice 7 Evaluation, as
presented in Figure 10.
The main purposes of the API are:

To evaluate and disclose to stakeholders the Capex and Engineering
performance.
To register the lessons learned throughout the Capex implementation, for
process improvement.
Figure 11 presents the position of the API among the Engineering practices.

PROCEDURES
Figure 11 - Relationship of the API with other procedures and practices
The API must be prepared for all Capex, at the Business Operation and Gerdau
levels of approval, within 6 months of the Capex technical conclusion, as established
by Corporate Guideline DC-08. For Capex at the Unit approval level, the respective
Business Operations must establish the APIs preparation criteria.
Capex that have a benefits generation curve longer than 6 months, must be
evaluated through complementary APIs, prepared at a later time.
The API is also used to calculate the indicator Return Evaluation for investments that
have quantifiable benefits.
The Audit the Performance of Engineering (APE) must be determined maintaining
the values proposed in the Technical Study for indicators that are external to the
Capex management, such as deliveries, sales price, inputs price, exchange rate and
postponings by company decision.

For API preparation and approval, proceed as described

below:
Prepare the API using the EPM, according to
definitions detailed in this section and procedures
described in the EPM User Manual;
Observe that the EPM automatically retrieves all
previously entered data:
Proposed objectives approved in the PAI or PAI-C for budget, duration,
benefits and key performance indicators;
Amounts paid, entered during the preparation of the AVI, for budget, duration,
benefits and key performance indicators and time schedules for budget
expenditures and benefits achievement.
Update values and time schedule of the benefits, as well as KPIs real values at
the API preparation date;
Use the approved Technical Study to retrieve the memory of Capex

benefit calculation;
Attention: Inform all achieved benefits, even those that had not been
proposed in the plan.
The key performance indicators, comparing the proposed and executed items,
both for the API and for the APE, are calculated by the EPM;

The Engineering evaluation in the Capex implementation is calculated by the APE

Audit the Performance of Engineering, in the same way as the API is prepared.
Enter the data required for calculation of the APE Audit the Performance of
Engineering, according to the EPM User Manual,
Review Capex benefits, expenditures and time schedule, as well as budget
expenditures and benefits achievement;
In the APE calculation consider the values external to the Engineering Process
management the same as approved ones, as follow:
Benefits:
Increase in selling quantities;
Development of new products or change in mix of products sold;
Increase in selling prices;
Increase in supply prices;
Cost changes for sales and freight.
Budget:
Values of exchange rates
Schedule:
Do not consider the postponing of deadlines due to company's decision;
Attach to the API the documentation of proven benefit calculation and

updated key performance indicators as evidence and learning;
Formalize and register the API approval obtaining the people in

charge signatures or registering it in the corresponding meeting minutes, up to the
highest level of approval as established in Corporate Guideline DC-08.
Attention: necessarily the previous level of approval must be involved and

communicated, whether it refers to the PAI, PAI-C or RAI;

DEFINITIONS FOR API PREPARATION
The previous approval data (PAI, PAI-C or RAI) are automatically

retrieved by EPM and cannot be changed. These items are defined
according to the procedure GG-PR-169-501 Technical Study
Additional data, exclusive for the API, are presented next, together with the
procedures to be carried out:
Comments:
Enter, in the reserved fields, the description of comments on the following topics:
Key Performance Indicators
Benefits
Return Evaluation: comment the information in the API and APE;
Budget
Time Schedule
Attachments: describe the documents whose information complement the
evaluation;
Complementary Information/Learning
Vendors comments on performance: Comment on the quality of services
rendered and equipment supplied, observance of durations, safety, etc.

EXAMPLES
EXAMPLE OF API (PAGE 1)

EXAMPLES
EXAMPLE OF API (PAGE 2)

THEORETICAL SELF-EVALUATION
1. Considering the Engineering Process procedures, which of the following

documents are prepared during the Practice 4 - Conception?
A. ( ) Audit the Performance of the Investment (API).
B. ( ) Proposal / Authorization of Investment (PAI).
C. ( ) Requisition / Alteration of Investment (RAI).
D. ( ) Proposal / Authorization of Investment Consolidated (PAI-C).
2. Ensure that the budget items in the standardized Work Breakdown Structure (WBS
elements) are followed, these will be used to _______________.
A.( ) forecast taxes, financing and depreciation rates.
B.( ) define the financial indicators to be consider.
C.( ) calculate the perpetuity of the Capex.
D.( ) generate automatically the Cash Flow.
3. Indicate which units are used to present NPV, Payback and IRR.
A. ( ) US$, US$, US$.

B. ( ) months, US$, % per year.
C. ( ) US$, month, % per year.
D. ( ) % per year, months, US$.
4. Indicate who is responsible for the preparation of PAI and PAI-C.

A. ( ) PCI.
B. ( ) Area Manager.
C. ( ) Unit Director.
D. ( ) Investment Coordinator.

5. Consider the following statement: The PAI approved document releases the
preparation of the Technical Study (TS).
A. ( ) The statement is false. PAI approval releases the investment for
implementation.
B. ( ) The statement is false. PAI approval releases the Preliminary Study.
C. ( ) The statement is false. PAI approval releases the Requisition / Alteration of
Investment.
D. ( ) The statement is true.
6. Indicate which approved document releases the investment for contracting

equipments and establishes reference for the indicators of budget, deadlines and
return.
A. ( ) PAI.
B. ( ) RAI.
C. ( ) PAI-C.
D. ( ) None of the above.
7. Indicate which of the following items must be informed in the PAI and PAI-C
preparation.
A. ( ) Scope.
B. ( ) Time Schedule.
C. ( ) Key Performance Indicators.
D. ( ) All the above.
8. What are RAI purposes: (1) calculate the financial return on investment, (2)
formalize the requests for modification to be submitted for approval, and (3)
register learning achieved with the analysis of facts and causes of changes as
lessons learned?
A. ( ) The purposes of RAI are 1 and 2.
B. ( ) The purposes of RAI are 2 and 3.
C. ( ) The purposes of RAI are 1 and 3.
D. ( ) None of the items presented are purposes of RAI.

9. What are the purposes of AVI: (1) formalize the Capex technical closure; (2)
provide a summary of the technical-economic information required to submit the
Capex for approval; (3) audit the validity of the investment with all areas involved?
A. ( ) 1 and 2 are purposes of AVI.
B. ( ) 2 and 3 are purposes of AVI.
C. ( ) 1 and 3 are purposes of AVI.
D. ( ) None of the items presented are purposes of AVI.
10. Fill in the blanks accordingly. The execution evaluation of the Capex is made
through the __________ and the calculation is performed using __________.
A. ( ) RAI, a single score attributed to the Capex implementation.
B. ( ) AVI, a single score attributed to the Capex implementation.
C. ( ) RAI, the average score of the items evaluated that are applicable to the
Capex.
D. ( ) AVI, the average score of the items evaluated that are applicable to the
Capex.

ANSWERS
ANSWERS
1. B
2. A
3. C
4. D
5. A
6. C
7. D
8. B
9. C
10. D

REFERENCES
REFERENCES
BERKUN, S. The Art of Project Management. Sizing up a decision (what's at stake),

item 8.1. ISBN: 0-596-00786-8, 392 p. e-books, OReilly, 2005.
BLANK, L.; TARQUIN, A. Engenharia Econmica. 6.ed. So Paulo:McGraw-Hill,

2008.
DINSMORE, P.C. Transformando estratgias empresariais em resultados atravs da

gerncia de por projetos. Rio de Janeiro: Qualitymark, 1999.
HELDMAN, K. Gerncia de Projetos. Fundamentos. Captulo 3. Iniciando o projeto.

p. 49-76. Rio de Janeiro:Editora Campus, 2005.
HEERKENS, G.R. PREPARING. Project Management. Detailed Project Plan: step by

step. Defining your project, p. 48-76. New York:McGrawHill, 2002.
PROJECT MANAGEMENT INSTITUTE.A guide to the Project Management Body of

Knowledge: PMBOK, 4 ed. 2008.
PROJECT MANAGEMENT INSTITUTE. Um guia do conjunto de conhecimentos em

gerenciamento de projetos: PMBOK, 4 ed. 2009.
VIEIRA, M.F. Gerenciamento de projetos de tecnologia da informao. Rio de

Janeiro:Ed.Campus, 2003.


ENG-002 Student Guide

Încărcat de

Informații document

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

ENG-002 Student Guide

Încărcat de

Drepturi de autor:

Formate disponibile

ENGINEERING PROCESS

Engineering ENG-002 - Calculation of Return 1

Rev. Data Revision description Resp.

Engineering ENG-002 - Calculation of Return 2

REVISION CONTROL ................................................................................................. 2

Engineering ENG-002 - Calculation of Return 3

Engineering ENG-002 - Calculation of Return 4

Basic knowledge concerning the Calculation of Return on

Basic knowledge concerning the Proposal / Authorization of

Basic knowledge concerning the Requisition / Alteration of

Basic knowledge concerning the Acceptance Validity of

Basic knowledge concerning the Audit the Performance of

Engineering ENG-002 - Calculation of Return 5

1. Study the contents concerning the ENG-002 Module Pages 08 to 18

2. Study the contents concerning the ENG-002 Module Pages 19 to 26

3. Study the contents concerning the ENG-002 Module Pages 27 to 34

4. Study the contents concerning the ENG-002 Module Pages 35 to 40

5. Study the contents concerning the ENG-002 Module Pages 41 to 47

6. Theoretical Self-Evaluation ENG-002 Module Pages 48 to 50

Engineering ENG-002 - Calculation of Return 6

TERMS AND DEFINITIONS

The investment coordinator is responsible for the application of these procedures,

Engineering ENG-002 - Calculation of Return 7

Figure 1 - Engineering Process Practices

Practice 4 Preliminary Study (PS) preparation;

The calculation of Return on Investment (ROI) aims to calculate the

Engineering ENG-002 - Calculation of Return 8

ATTENTION: This procedure is applicable to Capex which do have

The return on investment calculation intends to calculate KPIs to help evaluate

Engineering ENG-002 - Calculation of Return 9

To prepare and approve the ROI calculation, do the following:

Engineering ENG-002 - Calculation of Return 10

Observe that the return on investment calculation will be

Payback: Presents the payback value (months) calculated or indicates that

Engineering ENG-002 - Calculation of Return 11

Compare the Indicators results in order to better evaluate the Capex,

Engineering ENG-002 - Calculation of Return 12

Variables x Return Calculation Key Performance

Figure 3 graphically represents how the return calculation variables positively

Figure 3: Positive influence in the Capex result

Engineering ENG-002 - Calculation of Return 13

Engineering ENG-002 - Calculation of Return 14

Buildings and Improvements 4 25

Machinery, Equipment and Facilities 10 10

Furniture and fixtures 10 10

According to calculations provided by EPM, depreciation is linear and begins at the

Engineering ENG-002 - Calculation of Return 15

NET CASH FLOW

presents concentrated expenses in the first 0 10 20 30 40 50 60

Engineering ENG-002 - Calculation of Return 16

NET PRESENT VALUE (NPV)

the income and expenses values 300

NPV (US$ thousand)

analysis, brought to present value 100

from the investment approval (n=0) 100

until when the present accrued 0

accrued expenses values, using the -200

Capex discount rate (% per year). -300

Payback is also defined as the -400

recovery period of the invested -500

capital. Applied Payback (m onths)

INTERNAL RETURN RATE (IRR)

the Net Present Value (NPV) of the 300

cash flows during the Capex period of 200