Process Economics
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Transcript of Process Economics
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Process Economics
Manufacturing costs and Profitability Measures
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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.
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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
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Process EconomicsTypes of Capital
Cost of LandFixed Capital InvestmentWorking Capital
Accounts Payable Accounts Receivable Raw Material Inventories Work in Progress Finished Goods Inventories
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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
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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.
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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.
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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
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Process EconomicsProper Interest Rates (Hurdle Rates)
Corporate Earnings Stocks Bonds Asset Sales Loans
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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
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Process EconomicsSome Useful Concepts
Scenario AnalysisStochastic Methods
(Monte Carlo)
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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 $10 Depreciation Double Declining Balance over 7 years
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Process Economics“Cash Flow Table Non-Discounted After Tax
Cash Flows”End of Year
Investment Depreciation FCI less
Total
Depreciation
Revenue Manufacturing
Cost
Cash Flow
Cumulative Cash Flow
0 -10 150 -10 -10
1 -90 150 -90 -100
2 -90 150 -90 -190
3 42.86 107.14 75 30 44.36 -145.64
4 30.61 76.53 75 30 40.68 -104.96
5 21.87 54.66 75 30 38.06 66.9
6 15.62 39.04 75 30 36.19 -30.71
7 11.16 27.89 75 30 34.85 4.13
8 7.97 19.92 75 30 33.89 38.02
9 9.92 10 75 30 34.48 72.5
10 10 75 30 31.5 104
11 10 75 30 31.5 135.5
12 10 75 30 81.5 217
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Process Economics“Cash Flow Diagram”
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Process Economics
Results of Cash Flow Evaluation Payback Period 3.7 Years Cumulative Cash Position 21.7 Million Cumulative Cash Ratio 2.142 Rate of Return on Investment 14.5 %
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Process Economics
Industry Low-Risk Projects
Average Projects High Risk Projects
Industrial Chemicals
11 25 44
Petroleum 16 25 39Pulp and Paper 18 28 40Pharmaceuticals 24 40 56Metals 8 15 24
Paints 21 30 44Fermentation 10 30 49
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Process EconomicsTypical Cumulative Cash Flow Diagram
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Analysis with CapCost Takes the data you have supplied for capital
and operating costs Does discounted or non-discounted cash flow
analysis Calculates measures of profitability
Net Present Value Rate of Return on Investment Payback Period
Let’s watch a brief demo
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Monte Carlo With CapCostAdd Estimates of Variability
Probable Variation of Key Parameters over Plant Life
Lower Limit Upper Limit Base ValueFCIL -20% 30% 7,390,000$
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$
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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
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Process EconomicsHypothetical Trajectories in the World Crude Oil Market
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Process Economics“Boston” Learning Curve”