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Process Economics

Process Economics. Manufacturing costs and Profitability Measures. Capacity Factor Estimate C=K(A/B) b

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Process Economics

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  1. Process Economics Manufacturing costs and Profitability Measures

  2. Capacity Factor Estimate • C=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.

  3. 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

  4. Process EconomicsTypes of Capital • Cost of Land • Fixed Capital Investment • Working Capital • Accounts Payable • Accounts Receivable • Raw Material Inventories • Work in Progress • Finished Goods Inventories

  5. Process Economics Elementary 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

  6. Process Economics TIME VALUE of MONEY • Compound Interest • Annuities (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.

  7. 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.

  8. Process Economics • Rate 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

  9. Process Economics • Proper Interest Rates (Hurdle Rates) • Corporate Earnings • Stocks • Bonds • Asset Sales • Loans

  10. Process Economics • Depreciation • 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

  11. Process EconomicsSome Useful Concepts • Scenario Analysis • Stochastic Methods (Monte Carlo)

  12. 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

  13. Process Economics“Cash Flow Table Non-Discounted After Tax Cash Flows”

  14. Process Economics“Cash Flow Diagram”

  15. 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 %

  16. Process Economics

  17. Process EconomicsTypical Cumulative Cash Flow Diagram

  18. 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

  19. Monte Carlo With CapCost • Add Estimates of Variability

  20. Probability Curves Generated • Let’s see a brief demo

  21. Process EconomicsHypothetical Trajectories in the World Crude Oil Market

  22. Process Economics“Boston” Learning Curve”

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