Process Economics

Manufacturing costs and Profitability Measures

Capacity Factor EstimateC=K(A/B)b

Cost of plant of size A is equal to known cost of plant K of size B multiplied by ratio of sizes A/B raised to a power b. the exponent “b” generally varies between 0.5 and 0.85 depending on nature of process. Table 19 page 186 Peters and Timmerhaus). If the two units were built at different times inflation must be taken into account (Engineering News Record Index). Location factors are often applied, these include the effects of climate, local regulations, degrees of unionization etc.

Process EconomicsPreliminary Feasibility Study

Raw Material Costs Thermodynamics and kinetics of processes Available facilities, new facilities,materials of construction Conversion Costs (Fixed and Marginal) Depreciation Markets, Competition, Selling prices, Product properties Research Costs Plant Location, Product distribution,Taxes and Insurance Compliance issues, current and anticipated General Administrative Costs

Process EconomicsTypes of Capital

Cost of LandFixed Capital InvestmentWorking Capital

Accounts Payable Accounts Receivable Raw Material Inventories Work in Progress Finished Goods Inventories

Process EconomicsElementary Profitability Measures

(Time Value of Money not considered)

Return on Investment (Before or After Tax) Expected Profit/Total Capital Investment

Payout Time Number of years from plant startup required to

recover all expenses involved in a project if all pretax profits were used for this purpose

Process Economics

TIME VALUE of MONEYCompound InterestAnnuities (Mortgages)Present Value The money that must be

invested at time zero required to yield the same total income if all incomes are invested at the stated interest rate when received.

Process EconomicsProfitability where Inflation taken into consideration

Net Present Value - A good Profitability Measure

The net present value of a project is what is obtained when the sum of the present values of all expenditures is subtracted from the sum of the present values of all incomes. This puts all costs and incomes on a comparable basis.

Process EconomicsRate of Return - Another Good

Profitability Measure This is the interest rate that gives a net

present value of zero. This is an iterative procedure, which is a

relatively trivial problem with current computer algorithms.

These two methods are known as Discounted Cash flow procedures

Process EconomicsProper Interest Rates (Hurdle Rates)

Corporate Earnings Stocks Bonds Asset Sales Loans

Process EconomicsDepreciation

As any plant operates its tends to wear out or become obsolete. Depreciation is the means by which this loss in value can be deducted as a business expense.

Different Types of Depreciation Straight Line Declining Balance Sum of the Years Digits

Process EconomicsSome Useful Concepts

Scenario AnalysisStochastic Methods

(Monte Carlo)

Process Economics“Non-Discounted Profitability Assessment”

A new chemical plant will require the following capital investment $ million

Cost of Land $10.0 Total Fixed Capital Yr 1 $90.0 Yr 2 $60.0 Working Capital $30 Yearly Sales Revenue $75 Manufacturing cost $30 Taxation Rate 30 % Salvage Value $10 Depreciation Double Declining Balance over 7 years

Process Economics“Cash Flow Table Non-Discounted After Tax

Cash Flows”End of Year

Investment Depreciation FCI less

Total

Depreciation

Revenue Manufacturing

Cost

Cash Flow

Cumulative Cash Flow

0 -10 150 -10 -10

1 -90 150 -90 -100

2 -90 150 -90 -190

3 42.86 107.14 75 30 44.36 -145.64

4 30.61 76.53 75 30 40.68 -104.96

5 21.87 54.66 75 30 38.06 66.9

6 15.62 39.04 75 30 36.19 -30.71

7 11.16 27.89 75 30 34.85 4.13

8 7.97 19.92 75 30 33.89 38.02

9 9.92 10 75 30 34.48 72.5

10 10 75 30 31.5 104

11 10 75 30 31.5 135.5

12 10 75 30 81.5 217

Process Economics“Cash Flow Diagram”

Process Economics

Results of Cash Flow Evaluation Payback Period 3.7 Years Cumulative Cash Position 21.7 Million Cumulative Cash Ratio 2.142 Rate of Return on Investment 14.5 %

Process Economics

Industry Low-Risk Projects

Average Projects High Risk Projects

Industrial Chemicals

11 25 44

Petroleum 16 25 39Pulp and Paper 18 28 40Pharmaceuticals 24 40 56Metals 8 15 24

Paints 21 30 44Fermentation 10 30 49

Process EconomicsTypical Cumulative Cash Flow Diagram

Analysis with CapCost Takes the data you have supplied for capital

and operating costs Does discounted or non-discounted cash flow

analysis Calculates measures of profitability

Net Present Value Rate of Return on Investment Payback Period

Let’s watch a brief demo

Monte Carlo With CapCostAdd Estimates of Variability

Probable Variation of Key Parameters over Plant Life

Lower Limit Upper Limit Base ValueFCIL -20% 30% 7,390,000$

Price of Product -10% 10% 93,360,000$ Working Capital -50% 10% 4,169,000$

Income Tax Rate* -20% 20% 42%Interest Rate* -10% 20% 10%

Raw Material Price -10% 15% 33,600,000$ Salvage Value -80% 20% 739,000$

Probability Curves Generated

Let’s see a brief demo

0

250

500

750

1000

-60 -40 -20 0 20 40 60 80

Net Present Value (millions of dollars)

Cum

ulat

ive

Num

ber

of D

ata

Poi

nts

Process EconomicsHypothetical Trajectories in the World Crude Oil Market

Process Economics“Boston” Learning Curve”