Process Economics Factors that affect profitability Capital cost estimation Manufacturing – operating expenses Other economic topics: optimal scheduling choice among alternatives replacement analysis

Factors that Affect Profitability Parameters for Detailed Evaluation of a Project Initial investment Future cash flows Salvage value Economic life Depreciation Depletion Tax credit Taxes Inflation Debt/equity ratio

Factors that Affect Profitability Considering the Time Value of Money – Future Worth Future worth – the value of the investment after a prescribed period of time given some rate of appreciation or depreciation Example: Initial investment P = $100; Interest rate: i = 6% Value of the investment after 1 year: F1 = t = 2 years F2 = t = 3 years F3 = t = n years Fn = (Fn – future worth after n years, interest is compounded once a year at the end of the year);

Factors that Affect Profitability Considering the Time Value of Money – Present Worth Present worth – the current value of a “cash flow” (positive: income or negative: expense) which occurs at some time in the future. For cash flow Fn occurring n years in the future the present worth P is: Summing cash flow of Fi over n years: If Fi = F (constant) Repayment multiplier

Computational Tools for Process Economics Calculations Polymath – PC version Can be downloaded from 2. PolyMathLite -Android version 3. Excel

Factors that Affect Profitability Considering the Time Value of Money – Yearly Repayment Suppose you obtain P = $100000 loan, agreeing to pay i = 10% interest and to repay the loan over n = 25 years. What is the annual pay F?

Factors that Affect Profitability Considering the Time Value of Money – Yearly Repayment Suppose you obtain P = $100000 loan, agreeing to pay i = 10% interest and to repay the loan over n = 25 years. What is the annual pay F?

Measures of Profitability

Measures of Profitability

Measures of Profitability

Measures of Profitability Net Present Value You give a loan of L = $100 to a friend. He offers the following payback schedule: $50 end of 1st year, $ 25 2nd year, $ 25 3rd year, $ 15 4th year, $ 10 5th year. Compare with savings account of 8% interest, and 10 % interest.

Measures of Profitability - Internal Rate of Return Interest rate, internal rate of return

Measures of Profitability- An Example Two alternative projects are under consideration. Project A has a project life of 10 years and requires an initial investment of $100,000 with an annual cash flow after taxes of $20,000 per year for each of five years followed by $10,000 per year for years 6 through 10. Project B has a life of 10 years and requires the same investment but has cash flows of $15,000 per year for each year. Evaluate projects A and B using (a) payback period and (b) net present value for an interest rate of 10 % (i = 0.10).

Measures of Profitability- An Example Two alternative projects are under consideration. Project A has a project life of 10 years and requires an initial investment of $100,000 with an annual cash flow after taxes of $20,000 per year for each of five years followed by $10,000 per year for years 6 through 10. Project B has a life of 10 years and requires the same investment but has cash flows of $15,000 per year for each year. Evaluate projects A and B using internal rate of return

Measures of Profitability Comparing Projects with Different Life Times Suppose project C has a 20-year life and a yearly after-tax cash flow of $48,000 for an initial investment of $300,000. Project D has a 5-year life, with a yearly cash flow of $110,000 for I0 of $300,000. Compare the NPV (i = 0.08) for each option.

Measures of Profitability Comparing Projects with Different Life Times Suppose project C has a 20-year life and a yearly after-tax cash flow of $48,000 for an initial investment of $300,000. Project D has a 5-year life, with a yearly cash flow of $110,000 for I0 of $300,000. Compare IRR for each option. Internal Rate of Return

Project Financial Evaluation Optimization of the Heat Transfer Surface Consider the design of a steam generator. A hot oil stream from a reactor needs to be cooled down, providing a source of heat for steam production. The hot oil enters the generator at 400°F and leaves at an unspecified temperature T2; the hot oil transfers heat to a saturated liquid water stream at 250°F, yielding steam (30 psia, 250°F). The other operating conditions of the exchanger are: U = 100 Btu/(h)(ft2)(°F) overall heat transfer coefficient woilCpoil = 7.5 x 104 Btu/ (°F) (h)

Project Financial Evaluation Optimization of the Heat Transfer Surface The other operating conditions of the exchanger are: U = 100 Btu/(h)(ft2)(°F) overall heat transfer coefficient woilCpoil = 7.5 x 104 Btu/ (°F) (h). The heat exchanger cost $25 per square foot of heat transfer surface. A credit of $2/106 Btu for the steam produced. The exchanger will be in service 8000 h/year. Find the heat exchanger area A and outlet temperature T2 which maximize NPV. Use interest rate of i = 15% and economic life of 10 years

Project Financial Evaluation Optimization of the Heat Transfer Surface Enthalpy Balance: Water converted to steam: The capital cost: The annual credit for the value of the steam:

Project Financial Evaluation Optimization of the Heat Transfer Surface

Project Financial Evaluation Optimization of the Heat Transfer Surface

Project Financial Evaluation Optimization of the Heat Transfer Surface

Project Financial Evaluation Optimization of the Heat Transfer Surface

Project Financial Evaluation Tax Related Considerations Salvage Value Economic Life Straight Line Depreciation where I0 = capital investment (in dollars), Sv = salvage value (in dollars), and n = economic life (years). The book value of the equipment can be found for any year j as I0 - jd.

Project Financial Evaluation Tax Related Considerations Depletion Tax Credit Income Taxes

Project Financial Evaluation Tax Related Considerations Inflation Dept-Equity Ratio

Project Financial Evaluation Computation of Cash Flow

Project Financial Evaluation Computation of Cash Flow – an Example An extruder is to be purchased for manufacturing plastic toys. Capital investment is $24,000 and the equipment has a life of five years, after which the salvage value is $4000. The income from the machine is expected to be $12000 the first year and $15,000 per year thereafter. As the equipment ages, its operating and maintenance costs increase. Assume a tax rate of 50 percent with no investment tax credit. Compute the internal rate of return for (a) 100 percent equity financing.

Project Financial Evaluation Computation of Cash Flow – an Example An extruder is to be purchased for manufacturing plastic toys. Capital investment is $24,000 and the equipment has a life of five years, after which the salvage value is $4000. The income from the machine is expected to be $12000 the first year and $15,000 per year thereafter. As the equipment ages, its operating and maintenance costs increase. Assume a tax rate of 50 percent with no investment tax credit. Compute the internal rate of return for (a) 100 percent equity financing.

Project Financial Evaluation Computation of Cash Flow – an Example Computation of Cash Flow (50% debt/50% equity)

Project Financial Evaluation Computation of Cash Flow – an Example

Project Financial Evaluation Computation of Cash Flow – an Example