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Project Economic Evaluation

Project Economic Evaluation. Capital Cost Estimation. Classes of estimates Error Order of magnitude > ±30 % Study ±30 % Preliminary Control ±20 % Definitive ±10 % Detailed ± 5 %. Typical Approval Process. Detailed Design. R&D Data. AFE. $$. AFD.

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Project Economic Evaluation

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  1. Project Economic Evaluation

  2. Capital Cost Estimation Classes of estimatesError Order of magnitude >±30 % Study ±30 % Preliminary Control ±20 % Definitive ±10 % Detailed ± 5 %

  3. Typical Approval Process Detailed Design R&D Data AFE $$ AFD Market Assessment $$$$$ Preliminary Design Customer Identification Construction

  4. Capital Costs Total Capital Investment Fixed Capital Investment Working Capital Land Start-up Expenses

  5. Fixed Capital Investment (FCI)

  6. FCI Components

  7. FCI Components

  8. FCI Components

  9. “6 tenths” Rule for Bare Equipment

  10. FCI Determination Bare Equipment Delivered Equipment Delivery Cost “Factored” Cost Methods Lang Hand Chilton FCI

  11. Bare Equipment Costs 2002 Cost Data

  12. Lang and Hand Methods FCI = Delivered Bare Equipment Cost * Factor * Contingency

  13. Chilton Method

  14. Capital Cost Example Problem Statement A small fluid processing unit is to be constructed adjacent to a larger operating unit in a multi-purpose chemical plant. The present costs of the equipment delivered to the plant site are listed below: EquipmentDelivered Cost $ 12 ft diameter tower $ 200,000 Trays and internals for tower 350,000 Accumulator drum 150,000 Receivers 400,000 Heat exchangers 600,000 Pumps and motors 165,000 Miscellaneous equipment 135,000 Estimate the fixed capital cost using the Lang, Hand, and Chilton methods. Assume 15 % contingency.

  15. CE Cost Index

  16. CE Cost Index

  17. 10 Minute Problem Determine the installed cost using the Lang Method in 2025 for a jacketed / agitated stainless steel reactor to be used for the neutralization of 50 tons per day of a 20 wt. percent H2SO4 solution (sp.gr. = 1.15) using a 50 wt. percent NaOH solution (sp.gr. = 1.54) Holding time in the tank should be one hour based on the total flow to the tank. Assume the tank level is held at 80 percent of the tank height. Reactor Bare Equipment Cost Equation (s = volume in m3) C­e = a + b s­ n a = 61,500 b = 32,500 n = 0.8 Cost basis: Gulf Coast -January 2016

  18. Manufacturing Costs

  19. Operating Cost Components 1989 Cost Basis

  20. Labor Rates 1999 Cost Basis

  21. Global Economy Capital Investment Location Factors US Gulf Coast 1.00 US west Coast 1.25 Western Europe 1.20 Mexico 0.95 Japan 1.15 Pacific Rim 1.00 India 0.85

  22. Corporate Cash Flow

  23. Project Cash Flow Corporation Cash Flow Working Capital Revenue / Sales Expenses Operations Depreciation Taxes Net Income

  24. Project Cash Position Chart

  25. Depreciation IRS Definition “A reasonable allowance for exhaustion, wear and tear, and normal obsolescence of a property used in the trade of business. Such property must have a determinable useful life more than one year.” The IRS permits no more than 2/3 of the value to be written off in the first half of the depreciable life.

  26. Depreciation Methods Straight Line: Declining Balance Where: d = depreciation / yr V = original value Vs = salvage value N = Total depreciable life VBV = book value in year n

  27. Depreciation Methods Double Declining Balance Where: d = depreciation / yr V = original value Vs = salvage value VBV = book value at year n 2 (straight line rate)

  28. Modified Accelerated Cost Recovery System The 3, 5, 7, and 10 year classes use 200 % depreciation and a half year convention. All classes convert to straight-line depreciation in the optimal year, shown with an asterisk (*). A half-year depreciation is allowed in the first and last recovery years. http://accountingexplained.com/financial/non-current-assets/macrs

  29. MACRS Example Basis: Depreciable assets - $ 100

  30. Depreciation Example • FCI = $ 22,000 • Salvage value = $ 2,000 • Depreciable life = 10 yrs. • Determine the annual depreciation charge using: • Straight line • Double declining balance • Hybrid double declining balance plus straight line • MACRS

  31. A chemical plant can be installed for $ 1,000,000.Operating income is estimated to be $ 600,000 annually – this is revenue minus annual expenses. Assume 10 yr straight line depreciation and a 50 percent tax rate. Land can be purchased for $ 100,000. Plant construction will take two years and at start-up $ 100,000 of working capital will be required. The plant salvage value is $ 50,000 and will be realized as income during the 10th year of operation – do not include the salvage value in the depreciation calculation. Determine the cash flow for each year. FCI Land Cash Flow ($ 350,000) Working Capital Revenue Expenses Operations Operating Income ( $ 600,000) Depreciation ( $100,000) ($ 500,000) Net Income ($ 250,000) Taxes ($ 250,000)

  32. Design Project Example A mixed natural gas liquids (NGL) stream is being debutanized in a distillation tower. The feed currently enters the tower subcooled at 100 F. To save energy, your supervisor has suggested installing a heat integration system which will cross-exchange the hot column bottoms stream with the feed. Her approach will also require a booster pump be added to the feed line. Existing system data: Feed rate: 40,000 std BBL / day Feed composition: 25 wt % iC4, 25 wt% n C5, 50 wt % n-hexane Feed temperature = 100 F Current feed pressure = 80 psig Bottoms stream conditions - bubble point at 120 psig. Revised process information: The column bottoms flow rate should be based on 100 % recovery and 100 % purity of iC4 in column overhead. Pump discharge pressure = 150 psig

  33. Base Case Q Q

  34. Process Revision Q q q

  35. Aspen Simulation (Base Case)

  36. Aspen Simulation

  37. Time Value of Money Future Sum Annuity Payments Present Worth Discrete Interest Continuous Interest

  38. Future Worth S Where: S = future sum P = principal i = interest rate n = number of periods P

  39. Future Worth Example Manhattan Island was purchased in 1626 for $ 24.00 (P). Taxable real estate value in 1984 = $ 24 billion Who got the best deal assuming a 6 % discrete yearly interest rate S P = $ 24

  40. Annuity (Loan) P Where: R = uniform payments P = principal i = interest rate n = number of periods R R R R

  41. Annuity (Loan) Example $ 62,000 Calculate your monthly payments (R) for a new $ 62,000 Corvette assuming a interest rate of 6 percent and a loan period of 60 months R R R R

  42. 10 Minute Problem You plan to borrow $200,000 to purchase a new house. The nominal interest rate is fixed at 6.5 % p.a., compounded monthly. a. What is the monthly payment on a 30-year mortgage? b. What is the monthly payment on a 15-year mortgage? c. What is the difference in the amount of interest paid over the lifetime of each loan? P R R R R

  43. Annuity (Uniform Payments) F Where: A = uniform payments F = future sum i = interest rate n = number of periods A A A A A

  44. Annuity Example My daughter wants to go to Stanford !!! How much do I deposit in her college fund each year to pay her first year’s tuition of $ 65,000 in 5 years ?? The bank will pay me 4 % interest. $65,000 A A A A A

  45. 10 Minute Problem • An IRA is an investment vehicle available to most individuals to save for retirement. The benefit is that the interest is not taxed until you withdraw money, and most retirees are in a lower tax bracket than when they worked. Under current laws, the maximum annual contribution is $5000 until age 50 and $6000 thereafter, including the year one turns 50. Suppose that you make the maximum contribution every year for 40 years, beginning at age 25 until age 65. • What is the future value of this retirement fund after 40 years, assuming an effective annual interest rate of 9%? • b. What effective annual interest rate is required for the future value of this investment to be $2 million after 40 years? F A A A A A

  46. Capitalized Cost Where: Cv = installed equipment cost (original) CR = replacement cost

  47. Capitalized Cost Example An engineer buys equipment for $ 12,000 – she wants a fund set up so she can have $ 10,000 every 10 years to replace the equipment (the salvage value for the unit is $ 2,000) How much money should be put in the annuity and what is the capitalized cost ?? The annual interest rate is 6 percent Replacement Value ($ 10,000) P 10 years Capitalized Cost = Initial Investment + Annuity

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