1. CHPE404 Engineering Economy Profitability Analysis
Dr Mustafa Nasser

2. Cash Flows for a New Project

3. Cash Flows for a New Project
Project life
Land WC S
Plant start-up
Depreciation period
Land
FCIL
Cumulative Cash Flow Diagram WC
Low revenue in 1st year after start-up

4. Non-discounted Profitability Criteria

5. Non-discounted Profitability Criteria

6. Interest Rate Criterion
Non-discounted Profitability Criteria
Interest Rate Criterion
Rate of Return on Investment = ROROI

7. Non-discounted Profitability Criteria
CCP
Plant start-up S
Payback period, PBP
Land
Land
FCIL WC
FCIL WC

8. MACRS Method Depreciation

9. MACRS

10. Taxation, Cash Flow, and Profit

11. Taxation, Cash Flow, and Profit

12. Example 10.1

13. 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

14. Example 10.1
Table E10.1

15. Example 10.1

16. Discounted Profitability Criteria

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

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

19. 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.

20. 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.

21. Example 10.2

22. 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
R – COMd = 75-30
= 45 WC
MACRS = % of FCIL WC
R+ Salvage
Land
Disc CF = CF /(1+i)k

23. Discounted Profitability Criteria
Figure E10.2 Cumulative Cash Flow Diagram for Discounted After-Tax Cash Flows for Example 10.1

24. 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

25. Example 10.3

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

27. 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

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

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

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

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

32. These values are the same Table E10.2