Para 8.5 — GOODS_MANUAL

= 0 + 1 (1 + )1 + 2 (1 + )2 + 3 (1 + )3 + ⋯ (1 + ) 2. The discount rate is r (in fraction), CF0 is the quoted price, CF1 , CF2 , CF3 , and CFn are the costs in 1st, 2nd, 3rd, and so on nth years. One possible rate to be used is the interest rate of the General Provident Fund (GPF).

A B C D 1 Expenses Offer 1 Offer 2 Offer 3 2 The initial investment, including costs of initial spares, installation/ commissioning, Training, etc ₹ 4,00,000 ₹ 5,00,000 ₹ 6,00,000 3 Annual expenditure on operation (fuel, consumables) ₹ 1,50,000 ₹ 1,00,000 ₹ 50,000 4 Free Warranty 1st Year ₹ 0 ₹ 0 ₹ 0

3. The terminal disposal value of the equipment is also to be taken as negative expenditure, but since these are most likely to be the same for all bidders and there is uncertainty in estimating this, it is usually not included in calculating NPV in procurement decisions.

4. The above formula for NPV need not be manually calculated; it can be calculated using the NPV function in Excel. 5. This is shown by a solved example below:

a) The discounting rate is taken as 7%. There are three offers against a tender for vehicles at different quoted costs. Offer 1 (lowest quoted price) incurs the highest operating cost, offer 2 (higher quoted price) incurs a somewhat lesser operating cost, and offer 3 (highest quoted price) incurs the least operating cost. The free warranty is for 2 years, and the firms have quoted 5 years’ AMC after that at the annual fee mentioned below. In this evaluation, NPV expenditures up to the AMC duration (2-year warranty and 5 years’ AMC) were made. It may be seen that offer 3, with the highest quoted price, has the lowest NPV due to low operating costs despite a higher AMC Fee. This offer may, therefore, be considered an L1 offer.

8.5. Net Present Value (NPV) 1. Net Present Value (NPV) or Net Present Worth (NPW) of equipment procurement is the sum of the present values of the net cash flows for all the years of the equipment's economic life. The net cash flows are discounted to arrive at the NPV of equipment by applying a predetermined discount rate as per the formula below:

8.6. Turnkey Contract In the context of the procurement of goods, a turnkey contract may include the manufacture, supply, assembly, installation/ commissioning of equipment (or a group of plant and machines working in tandem – even though some of the machines may not be manufactured by the supplier himself) and some incidental works or services. Generally, in the tender enquiry documents for a turnkey contract, the purchase organization specifies the performance and output required from the plant proposed to be set up and broadly outlines the various parameters it visualizes for the desired plant. The inputs and other facilities that the purchase organization will provide to the contractor are also indicated in the tender document. The contractor will design the plant and provide a quote accordingly. The responsibility of the contractor will include supplying the required goods, machinery, equipment, etc., needed for the plant; assembling, installing, and erecting the same at the site as needed; commissioning the plant to meet the required output, etc., as specified in the tender enquiry documents.

A B C D 5 Free Warranty 2nd Year ₹ 0 ₹ 0 ₹ 0 6 AMC in 3rd Year ₹ 40,000 ₹ 50,000 ₹ 60,000 7 AMC in 4th Year ₹ 40,000 ₹ 50,000 ₹ 60,000 8 AMC in 5th Year ₹ 40,000 ₹ 50,000 ₹ 60,000 9 AMC in 6th Year ₹ 40,000 ₹ 50,000 ₹ 60,000 10 AMC in 7th Year ₹ 40,000 ₹ 50,000 ₹ 60,000 11 NPV ₹ 13,51,644.26 ₹ 12,17,992.50 ₹ 10,84,340.74