CHPE308 Engineering Economy Profitability, Investment Alternative and Replacement

Cash Flows for a New Project

Cash Flows for a New Project Project life Land WC S Plant start-up Depreciation period 0 1 2 3 4 5 6 7 8 9 10 11 12 Land FCIL Cumulative Cash Flow Diagram WC Low revenue in 1st year after start-up

Non-discounted Profitability Criteria

Non-discounted Profitability Criteria

Interest Rate Criterion Non-discounted Profitability Criteria Interest Rate Criterion Rate of Return on Investment = ROROI In finance, rate of return, also known as return on investment, rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested.

Non-discounted Profitability Criteria CCP Plant start-up S Payback period, PBP 0 1 2 3 4 5 6 7 8 9 10 11 12 Land Land FCIL WC FCIL WC

MACRS Method Depreciation

MACRS

Taxation, Cash Flow, and Profit

Taxation, Cash Flow, and Profit

Example 10.1

Discounted Profitability Criteria Land End of year, k Investment dk FCIL-Sdk R COMd (R-COMd-dk)(1-t)+dk Cash flow SCF (10) - 150.00 1 (90) (100) 2 (60)+(30)=(90) (190) 3 30.00 120.00 75 30 38.25 (151.75) 4 48.00 72.00 46.35 (105.40) 5 28.80 43.20 37.71 (67.69) 6 17.28 23.92 32.53 (35.16) 7 8.64 (2.64) 8 0.00 28.64 26.00 9 24.75 50.75 10 75.50 11 100.25 12 10+30=40 85 30.25 70.25 170.50 FCIL WC MACRS = % of FCIL WC R+ Salvage Land

Example 10.1 Table E10.1

Example 10.1

Discounted Profitability Criteria

Discounted Profitability Criteria Same basis for criteria as before except we use the discounted cash flows and discounted cumulative cash flow diagram

Discounted Profitability Criteria Cash Basis CCP Net Present Value, NPV CCR Present Value Ratio, PVR

Discounted Profitability Criteria Time Basis PBP Discounted Payback Period, DPBP DPBP = time required, after start-up, to recover the fixed capital investment, FCIL, required for the project, with all cash flows discounted back to time zero.

Discounted Profitability Criteria Interest Basis ROROI Discounted Cash Flow Rate of Return, DCFROR DCFROR = interest or discount rate for which the NPV of the project is equal to zero.

Example 10.2

Discounted Profitability Criteria Land End of year, k Investment dk FCIL-Sdk R COMd (R-COMd-dk)(1-t)+dk Cash flow SCF Disc CF SDisc CF (10) - 150.00 1 (90) (100) (81.82) (91.82) 2 (60)+(30)=(90) (190) (74.38) (166.20) 3 30.00 120.00 75 30 38.25 (151.75) 28.74 (137.46) 4 48.00 72.00 46.35 (105.40) 31.66 (103.80) 5 28.80 43.20 37.71 (67.69) 23.41 (82.39) 6 17.28 23.92 32.53 (35.16) 18.36 (64.03) 7 8.64 (2.64) 16.69 (47.34) 8 0.00 28.64 26.00 13.36 (33.98) 9 24.75 50.75 10.50 (23.48) 10 75.50 9.54 (13.94) 11 100.25 8.67 (5.26) 12 10+30=40 85 30.25 70.25 170.50 22.38 17.12 FCIL WC MACRS = % of FCIL WC R+ Salvage Land Disc CF = CF /(1+i)k

10 + 30 / 1.1^2 = 34.8

Discounted Profitability Criteria FCI = 90/1.1 + 60/1.1^2 = 81.8 + 49.6 = 131.4 Figure E10.2 Cumulative Cash Flow Diagram for Discounted After-Tax Cash Flows for Example 10.1

Discounted Profitability Criteria End of year, k Investment dk FCIL-Sdk R COMd (R-COMd-dk)(1-t)+dk Cash flow SCF Disc CF SDisc CF (10) - 150.00 1 (90) (100) (81.82) (91.82) 2 (60)+(30)=(90) (190) (74.38) (166.20) 3 30.00 120.00 75 30 38.25 (151.75) 28.74 (137.46) 4 48.00 72.00 46.35 (105.40) 31.66 (103.80) 5 28.80 43.20 37.71 (67.69) 23.41 (82.39) 6 17.28 23.92 32.53 (35.16) 18.36 (64.03) 7 8.64 (2.64) 16.69 (47.34) 8 0.00 28.64 26.00 13.36 (33.98) 9 24.75 50.75 10.50 (23.48) 10 75.50 9.54 (13.94) 11 100.25 8.67 (5.26) 12 10+30=40 85 30.25 70.25 170.50 22.38 17.12

Example 10.3

Discounted Profitability Criteria Figure 10.3 Discounted Cumulative Cash Flow Diagrams using Different Discount Rates for Example 10.3

Using CAPCOST for Profitability Calculations Go to COM summary worksheet Rework Example 10.1 using CAPCOST Land = 10 FCIL = 150 (year 1 = 90 and year 2 = 60) WC = 30 R = 75 COMd = 30 t = 45% S = 10 Depreciation = MACRS over 5 years Project life, n = 10 years after start-up Discount (interest) rate = 10% Go to COM worksheet and manually enter the above costs. Note that COMd is not a separate entry but is made up of CUT, COL, CWT, FCI, CRM. The easiest way to solve this problem is to adjust the multipliers for the COMd equation (0FCI +0COL +1(CUT+ CWT + CRM) and lump all the costs into CRM

When Revenue (or one of several other cells) is hit, the pop-up screen to the right is shown.

When the project life cell is hit, the pop-up screen to the right is shown.

When generate CFD button is hit, the pop-up screen to the right is shown.

This slide shown the CFD generated for the problem – this is identical to Figure E10.2

These values are the same Table E10.2