Chapter 8 Costing PDF

CHAPTER 8

PROFITABILITY ANALYSIS

8.1 INTRODUCTION

Chemical plants like glycerine plants are built to make a profit and an estimate of

investment required and the cost of production are needed before the profitability of a

project can be assessed. Cost estimation is a specialized subject and a profession in its

own right, but the design engineer must be able to make rough cost estimates to decide

between project alternatives and optimize the design (R. K. Sinnott, 2009).

The costing of equipment which has been estimated of glycerine production will

be evaluated by profitability analysis to make sure the project is economically attractive.

8.2 PURCHASED COST

8.2.1 Module Costing Technique

The equipment module cost technique is a common technique to estimate cost of a new

chemical plant. This technique relates all costs back to the purchased cost of

equipment evaluated for some base conditions. Deviation from these base conditions

are handled by using multiplying factors that depend on the following:

1. The specific equipment type

2. The specific system pressure

3. The specific materials of construction

The bare module cost as in Equation 8.1 is the sum of the direct and indirect costs as

presented in Appendix C.1 (R. Turton, 2009).

(8.1)

Where:

CBM = bare module equipment cost: direct and indirect costs for each unit

FBM = bare module cost factor: multiplication factor to account for the items in

Table 7.6 plus the specific materials of construction and operating pressure

Cop = purchased cost for base conditions: equipment made of the most common

material usually carbon steel and operating at near ambient pressure

8.2.2 Bare Module Cost for Equipment at Base Conditions

The bare module equipment cost represents the sum of direct and indirect costs as

shown in Appendix C.1. The conditions specified for the base case are (R. Turton,

2009)

1. Unit fabricated from most common material, usually carbon steel (CS)

2. Unit operated at near-ambient pressure

For Equation 8.1 is used to obtain the bare module cost for the base conditions. For

these base conditions, a superscript zero (0) is added to the bare module cost factor

and the bare module equipment cost. So, the CoBM and Fo

BM refer to the base

conditions.

8.2.3 Bare Module Cost for Nonbase Case Condition

For equipment made from others materials of construction and/or operating at non

ambient pressure, the values for FM and FP are greater than 1.0. In the equipment

module technique, these additional costs are incorporated into the bare module cost

factor, FBM. The bare module factor is used for the base case, FoBM in Equation 8.1. The

information needed to determine this actual bare module factor is provided in Appendix

C.1. The effect of pressure on the cost of equipment is considered first.

Pressure factors for process vessel is

For tvessel>0.0063 m (8.2)

If Fp, vessel is less than 1 (corresponding to tvessel>0.0063 m), then Fp, vessel =1. For

pressure less than -0.5 barg, Fp, vessel =1.25. Equation 8.2 is used when the thickness of

the vessel wall is less than ¼ D which is for vessel range D = 0.3 to 4.0 m, occurs at

pressure 320 barg.

Pressure factors for other process equipment is

(8.3)

The pressure, P is obtained from operating pressure in equipment and the values

constant, C1, C2 and C3 for different equipment are refer to the Appendix C.2 (A.2).

8.2.4 Purchased Equipment Cost

Data for the purchased cost equipment, at ambient operating pressure and using

carbon steel construction normally, Cop is

(8.4)

Where A is capacity or size parameter of equipment. The data K1, K2 and K3 along with

the maximum and minimum values used in the Appendix C.2.

8.2.5 Cost Escalation

(8.5)

The data of purchased equipment cost from survey of equipment manufactures during

period 2001 with an average CEPCI of 397. The purchased cost for the equipment is

obtained from period 2011 with an average CEPCI of 585.

8.2.6 Estimation Cost of Purchased Equipment

1. Heat exchanger

Heat transfer area: Area of one tube x number of tubes

The purchase cost of heat exchanger Cop can be found in Appendix C.5 (figure A.5) by

choosing the fixed tube sheet (shell and tube heat exchanger). So, the value of is

210. The purchase cost of heat exchanger is

The pressure factor, Fp for heat exchanger,

For heat exchanger with fixed tube sheet and floating head, the identification number

with material of construction of carbon steel-shell/stainless steel-tube is 4. From

Appendix C.3 , FM=2.8. From Appendix C.5, B1=1.63 and B2=1.66.

)

This is the bare module cost for 2001 (CEPCI = 397). The cost for 2011 can thus be

calculated as follows using the CEPCI of 585.

Cost in 2011 = Cost in year 2011 x Cost index in 2011

Cost index in 2001

2. Falling-film Evaporator

The purchase cost of falling film evaporator, at ambient operating pressure and using

stainless steel construction, Cop is

From Appendix C.7; K1 = 3.9119, K2 = 0.8627, K3 = -0.0088 and area of evaporator, A =

62.02 m2

Pressure factor, Fp, for the remaining process equipment are given by

where P is a unit of pressure are bar gauge = 1 bar

From Appendix C.8; P<10 for falling film evaporators with value of pressure rating is

C1=C2=C3=0

The bare module factors for the falling film evaporator is

where; Cop = purchased cost of equipment

FBM = bare module cost

From Appendix C.5, identification number of falling film evaporator is 26 and from

Appendix C.8, the value FBM is 3.90




Cost index in 2001

3. Separator

The purchase cost of vessel volume Cop can be found in Appendix C.9 which gives

1900 USD/m3. So, the value of is 1900. The purchase cost of separator is

Pressure factor, Fp, for the process vessel are given by

The bare module factors for the separator is

where; Cop = purchased cost of equipment

FBM = bare module cost

From Appendix C.4, identification number of process vessel is 20 and from Appendix

C.3, the value FBM is 3.20. From Appendix C.6, B1=2.25 and B2=1.82.




Cost index in 2001

4. Distillation column

Data needed in the estimation of the cost are:

Tray towers:

(8.5)

Thus,

From Table 21.2 in kNovel (pg 720)

Therefore cost of tray tower is estimated below:

Packed Towers:

(8.6)

From pg 720

Therefore cost of packed tower is estimated below:

Thus, the estimation cost of distillation column is defined as below:

5. Splitting Tower

From the Appendix C.2 of Analysis, Synthesis, and Design of Chemical Process book,

the values of K can be obtained as followed:

K1 = 3.4974

K2 = 0.4485

K3 = 0.704

While the value of A referred as a reactor volume. Thus A = 9.55

Therefore,

From the purchased cost calculated, the price of purchasing reactor in 2001 is

. Therefore, the price of purchasing reactor in 2011 can be determined by

using the following formula:

The bare module factors for the splitting tower is

Where,

Bare module cost is depending on the type of material besides the operating

condition of splitting tower itself. Therefore, the calculation of bare module cost should

involve with those factor.

The value of B1 and B2 can be determined through Appendix C.6 in Analysis,

Synthesis, and Design of Chemical Process book. By referring to the same book, the

material factor, FM can be got through Appendix C.3. Material factor relies on the type of

equipment thus different type of equipment should have different value of material

factor. Pressure factor, Fp is taken as 1 since the operating pressure is more than – 0.5

barg.

B1 = 2.25

B2 = 1.82

FM = 3.1

Therefore,

Thus,

The bare module cost of splitting tower is 479,194 USD approximately MYR

1,514,244.16. By referring to the Perry’s Chemical Handbook, Table 25-57 of Typical

Factors of Converting Carbon Steel Cost to Equivalent-Alloy Costs, the factor for

converting carbon steel material to the stainless steel type 316 is 2.86. The bare

module cost obtained before need to be multiplied with 2.86 factors since the

calculation performed before is based on carbon steel material. Thus, the new value of

bare module cost is:

Table 8.1: Purchase Cost of Equipment

Equipment Unit CBM2001

(MYR)

CBM2011

(MYR)

Cost (MYR)

Reactor 1 - 4,330,738 4,330,738

Separator 2 225,696 332, 575 665, 150

Falling film

Evaporator

2 3,293,020 4, 852, 435 9,704, 870

Distillation column 1 - 1,721,126 1,721,126

Storage tank 2 - 97,400 194, 800

Heat exchanger 6 438,742 646,509 3,879,054

Pump P-102 51,842 76,392 79,392

P-103 14,956 22,039 22,039

Compressor 1 220,098 324,326 324,326

Total purchase cost of equipment (PCE) 20,723,695

8.3 CAPITAL COST ESTIMATION

Total capital cost, CTC of a project consist of the fixed capital cost, CFC and the working

capital cost, CWC, plus the cost of land and any other non-depreciable assets, CL. The

Equation 8.7 is given by

(8.7)

Where,

CTC = Total capital cost

CFC = Fixed capital cost

CWC = Working capital cost

CS = Start up cost

FP = Pressure factor to account for high pressure

FM = Material factor to account for material of construction

CP = Purchase cost for base condition

FBM = Bare module cost factor

CBM = Bare module equipment cost for base condition

8.3.1 Grass Roots and Total Module Costs

Total module cost refers to the cost of making small-to-moderate expansions or

alterations to an existing facility. The total module cost can be evaluated from (R.

Turton, 2009)

(8.8)

Grass roots refer to a completely new facility in which start the construction on

essentially undeveloped land, a grass field. The grass roots cab be evaluated from (R.

Turton, 2009)

(8.9)

Where n represents the total number of pieces of equipment.

Total Bare Modul Cost, TBM = MYR 20,097,704

Total Grass Roots Cost:

Contingency and Fee Costs MYR

Total bare module cost CTBM 20,723,695

Contingency, CC CC = 0.15CTBM 3,108,554.25

Fee, CF CF =0.03 CTBM 621,710.85

Total module cost CC+ CF+ CTBM=CBM 24,453,960

Auxiliary Facilities MYR

Site development, CSD CSD =0.05CTBM 1,036,184.75

Auxiliary building, CAB CAB = 0.04CTBM 828,947.80

Offsite facilities, COF COS =0.20C TBM 4,144,739

Total 6,009,871.55

Total Gross Roots Cost, GRC = Total Module Cost + Total Auxiliary Facilities

= MYR 30,463,832

8.3.2 Fixed Capital Cost

Fixed capital is the total cost of the plant ready for start-up. It is the cost paid to the

contractors. It includes the direct cost items that are incurred in the construction of a

plant, in addition to the cost of equipments are

1. Equipment erection, including foundations and minor structural work.

2. Piping, including insulation and painting.

3. Electrical, power and lighting.

4. Instruments, local and control room.

5. Ancillary buildings, offices, laboratory buildings, workshops.

6. Storages, raw materials and finished product.

7. Utilities (service), provision of plant for steam, water, air, firefighting services (if not

costed separately).

8. Site and site preparation.

9. Process buildings and structures.

In addition to the direct cost of the purchase and installation of equipment, the

capital cost of a project will include the indirect costs as listed below. These can be

estimated as a function of the direct costs.

a) Indirect costs

1. Design and engineering costs, which cover the cost of design and the cost of

engineering the plant: purchasing, procurement and construction supervision.

Typically 20% to 30% of the direct capital costs.

2. Contractor’s fees, if contractor is employed his fees (profit) would be added to the

total capital cost and would range from 5% to 10% of the direct costs.

3. Contingency allowance, this is an allowance built into the capital cost estimate to

cover for unforeseen circumstances (labour disputes, design errors, adverse

weather). Typically 5% to 10% of direct costs.

Table 8.2: Direct and Indirect Cost Specification

Specification Range MYR

Direct Cost (DC) / Physical Plant Cost (PPC)

Equipment erection 0.4GRC 12,185,532.66

Piping 0.7GRC 21,324,682.16

Instrumentation 0.2GRC 6,092,766.33

Electrical 0.1GRC 3,046,383.17

Land 3,000,000 3,000,000

Total Direct Cost (MYR) 45,649,364

Indirect Cost (IC)

Engineering and supervision 0.3DC 13,694,809.30

Construction expenses 0.1DC 4,564,936.43

Legal expenses 0.1DC 4,564,936.43

Contractor fees 0.05DC 2,282,468.22

Contingency 0.1DC 4,564,936.43

Total Indirect Cost (MYR) 29,672,086.43

TOTAL COST/FIXED CAPITAL

COST

Direct+ Indirect cost 75,321,450.43

8.3.3 Working Capital

Working capital is the additional investment needed, over and above the fixed capital to

start the plant up and operate it to the point when income is earned. It includes the cost

of (R. K. Sinnott, 1999):

1. Start-up.

2. Initial catalyst charges.

3. Raw materials and intermediates in the process.

4. Finished product inventories.

5. Funds to cover outstanding accounts from customers.

Most of the working capital is recovered at the end of the project. The total

investment needed for a project is the sum of the fixed and working capital. Working

capital can vary from as low as 5% of the fixed capital for a simple, single product,

process with little or no finished product storage; to as high as 30% for a process

producing a diverse range of product grades for a sophisticated market, such as

synthetic fibers.

Working capital cost, CWC = 5% CFC

Fixed Capital Cost, CFC = Grass Roots Cost + Total Cost

= MYR 30,463,832+MYR 75,321,450.43

= MYR105, 785,282.40

Working capital cost, CWC = 5% CFC

= 0.05 x MYR 105,785,282.40

= MYR 5,289,264.12

Start-up cost, CS = 3% CFC

= 0.03 x MYR 105,785,282.40

= MYR 3,173,558.50

8.3.4 Cost of Land

The land needed for the construction of glycerine plant have been estimated about 5

acres which is approximately to 20234.28 m2.This value of land is including the future

expansion of the plant. Kampung Acheh in Perak has been chosen to construct this

plant. According to ministry of industrial development authority (MIDA), the land value in

Kampung Acheh is MYR 17.00 per square feet.

Total Capital Cost, CTC = CFC +CWC + CL

= MYR105, 785,282.40+ MYR 5,289,264.12+ MYR 3,702,600

= MYR 114,777,146.50

8.4 COST OF MANUFACTURING

In order to estimate the manufacturing cost, should be provided the process information

provided on the PFD (process flow diagram), an estimate of the fixed capital investment

and an estimate of the number of operators required to operate the plant. The fixed

capital investment is the same as either the total module cost or the grass roots cost (R.

Turton, 2009).

The Equation 8.10 is used to evaluate the cost of manufacture becomes:

Cost of manufacture (COM) = Direct Manufacturing Cost (DMC) + Fixed Manufacturing

Cost (FMC) + General Expenses (GE) (8.10)

The cost of manufacturing, COM, can be determined when the following costs

are known or can be estimated:

1. Fixed Capital Investment (FCI): (CTM or CGR)

2. Cost of operating labor (COL)

3. Cost of utilities (CUT)

4. Cost of waste treatment (CWT)

5. Cost of raw materials (CRM)

8.4.1 Estimation Cost of Raw Material

Table 8.3: Raw Material Cost

Raw material Price (MYR/yr)

Crude palm oil MYR3.00/kg x 105,684,214 kg/yr = MYR317,052,642

Water MYR1.44/m3 x 6.302 m3/kg x 24h/day x 365/yr =MYR79,496

Total 317,211,634

8.4.2 Estimation Cost of Operating Labor

The operating labor requirement for chemical processing plants is given by Equation

8.11:

(8.11)

Where NOL is the number of operators per shift, P is the number of processing steps

involving the handling of particulate solids such as transportation and distribution,

particulate size control and particulate removal. Nnp is the number of non particulate

processing steps and includes compression, heating, and cooling, mixing and reaction

(R. Turton, 2009).

In general for the processes considered the value of P is zero and the value of

Nnp is given by

(8.12)

Table 8.4: Cost of Operating Labor

Equipment Type Quantity Nnp

Reactor 1 1

Separator 2 2

Distillation Column 1 1

Heat exchanger 6 6

Storage Tank 2 -

Evaporator 2 -

Pump 2 -

Compressor 1 -

Total 17 10

Since P =0 and Nnp = 10

For one equipment

A chemical plant normally operates 24 hours/day (R. Turton, 2009).

A single operator works on the average 49 weeks a year which is 3 weeks’ time off for

vacation and sick leave, five 8-hour shifts a week.

Four and one-half operators are hired for each operator needed in the plant at any time.

For all equipment:

Cost of Operating Labor per Year:

For 1 month wages of mechanical engineers is MYR 30024/Year

8.4.3 Estimation Cost of Utilities

The costs of utilities are directly influenced by the cost of fuel. Specific difficulties

emerge when estimating the cost of fuel, which directly impact the price of utilities such

as electricity, steam, thermal fluids, compressed air, cooling and process water. The

quantities required can be obtained from the energy balances and the flow-sheets. The

prices can be taken from the electrical company such as Tenaga Nasional Berhad and

it will depend on the primary energy sources and the plant location (R. K. Sinnott,

1999).

Cost of Utilities required:

Yearly cost = flow rate x costs x period x stream factor (8.13)

Since, assuming the plants operating days per year is 350 days. The plant is most

reliable and well-managed is typically shut down the plant for two week a year for

scheduled maintenance. So, stream factor is

Total heat load after heat integration consists of

1. Hot utilities

Power = 404.920 kW

Efficiency of drives, ξdr = 80.96%

2. Cold Utilities

Power =10.365 kW


Pump in the plant consist of

1. Pump (P-103)

Power =2.242x104 kW


2. Pump (P-102)

Power =142.3 kW


Evaporator in plant consist of

1. Evaporator (V-102)

Flow rate = 6089 kg/h

2. Evaporator (V-103)

Flow rate = 4915 kg/h

Total utilities cost = MYR (10,083+5036+11,241,151+75,411+982,034+792,691)/yr

= MYR 13,106,406/yr

8.4.4 Fixed Capital Investments (FCI)

Fixed capital investment is the total cost of designing, constructing and installing a plant

and the associated modification needed to prepare the plant site. The fixed capital

investment is made up of (R. K. Sinnott, 2009):

1. The inside battery limits (ISBL) investment – the cost of the plant itself

2. The modifications and improvements that must be made to the site infrastructure,

known as off-site or OSBL investment

3. Engineering and construction costs

4. Contingency charges

The value of fixed capital investments (FCI) is equal to the cost of grass roots which is

MYR 30,463,832.

8.4.6 Operating Costs

An estimate of the operating or manufacturing costs, the cost of producing the product,

is needed to judge the viability of a project, and to make choices between possible

alternative processing schemes. These costs can be estimated from the flow-sheet

which gives the raw material and service requirement and the capital cost estimate (R.

K. Sinnott, 1999).

The cost producing a chemical product including the items below this is divided

into two groups.

1. Fixed manufacturing costs: costs that do not vary with production rate. These are the

bills that have to be paid whatever the quantity produced.

2. Variable manufacturing costs: costs that are dependent on the amount of product

produced.

Table 8.5: Summary of manufacturing costs (R. K. Sinnott, 1999)

Description Specification Cost (MYR/yr)

Fixed Capital Investments

(FCI)

- 30,463,832

Fixed manufacturing costs

1. Operating labor, OL

2. Maintenance

3. Laboratory costs

4. Supervision

5. Plant overheads

6. Capital charges

7. Insurance

8. Local taxes

9. Royalties

-

10%FCI

20%OL

20%OL

50%OL

15%FCI

1%FCI

2%FCI

1%FCI

390,312

3,046,383.20

78,062

78,062

195,156

4,569,574.80

304,638.32

609,276.64

304,638.32

Total 9,576,103.28

Variable costs

1. Raw materials

2. Utilities

3. Miscellaneous materials

(waste treatment)

10% Maintenance

317,211,634

13,106,406

304,638.32

Total 330,622,678.30

Total manufacturing

expenses, AME

Fixed manufacturing

cost + Variable cost

340,198,781.60

General expenses

1. Administration

2. Distribution and selling

expenses

3. Research and

development

10% from supervision,

operating labor and

maintenance

10%FCI

7%FCI

351,475.72

3,046,383.20

2,132,468.24

Total annual general expenses, AGE 5,530,327.16

Cost of Manufacture, COM AME + AGE 345,729,108.80

8.5 PROFITABILITY ANALYSIS

There are three bases used for the evaluation of profitability which are:

a) Time

b) Cash

c) Interest rate

8.5.1 Depreciation Value

Assumption:

i. Use 5 years MACRS

ii. Project life of years is 10 years

iii. Taxation rate, t = 45%

iv. Using two methods which are double declining balance depreciation method, DDB

and straight line depreciation value method, SL

The MACRS method requires depreciation of the total FCIL, without regard for the

salvage value. Calculations are given below by using a basis MYR 29, 543,625:

For DDB, (8.14)

For SL, (8.15)

k dk DDB dk SL

1 6092766.33

2 9748426.128 5415792.293

3 5849055.677 4177896.912

4 3509433.406 3509433.406

5 2105660.044 3509433.406

6 1754716.703

A MACRS method over a short period of time is used which is 5 years for the class life.

In general, it is better to depreciation an investment as soon as possible. This is

because the more depreciation is in given year, the less taxes paid (R. Turton, 2009).

The MARCS method uses a double declining balance method and switches to

a straight line method when straight-line method yields a greater depreciation allowance

for that year. The straight –line method is applied to the remaining depreciable capital

over the remaining time allowed for depreciation. The half-year convention assumes

that the equipment is bought midway through the first year for which depreciation is

allowed. In the first year, the depreciation is only half of that for a full year. For sixth

year, the depreciation is for half-year (R. Turton, 2009). The depreciation schedule for

equipment with a 9.5 years class life and 5 year recovery period, using MARCS method

is shown in Table 8.7.

Table 8.6: Depreciation Schedule for MARCS Method for Equipment with a 9.5 Year

Class Life and a 5-Year Recovery Period

Year Depreciation Allowance (% of Capital

Investment)

1 6092766.33

2 9748426.128

3 5849055.677

4 3509433.406

5 3509433.406

6 1754716.703

8.5.2 Taxation, Cash Flow and Profit

Taxation has direct impact on the profits realized from building and operating a plant.

Tax regulations are complex, and companies have tax accounts and attorneys to

ensure compliance and to maximize the benefit from these laws.

For most large corporation, the basic federal taxation rate is 35%. In addition,

corporations must also pay state, city, and other local taxes. The overall taxation rate is

often in range of 40% to 50% (R. Turton, 2009). Table 8.8 provides the terms and

equation used to evaluate the cash flow and the profits produced from a project.

Table 8.8: The terms and equation used to evaluate the cash flow and the profits

produced from a project

Description Formula Equation

Expenses= Manufacturing costs +

Depreciation

= COMd + d (8.16)

Income tax= (Revenue – Expenses)(Tax rate) = (R - COMd – d)(t) (8.17)

After tax(net profit)= Revenue – Expenses –

Income tax

= (R - COMd – d)(1- t) (8.18)

After tax Cash Flow = Net Profit +

Depreciation

= (R - COMd – d)(1- t)+d (8.19)

Variables:

t = Tax rate

COMd = Cost of Manufacturing Excluding

Depreciation

d = Depreciation: depends upon method use

R = Revenue from sales

8.5.3 Nondiscounted Profitability Criteria

There are four nondiscounted profitability criteria as follow (R. Turton, 2009):

1. Time criterion

The term used for this criterion is the payback period (PBP), also known by a variety of

other names, such as payout period, payoff period, and cash recovery period. The

payback period can be defined as follow:

PBP = Time required after start-up to recover the Fixed Capital Investment, FCIL, for the

project

2. Cash criterion

The criterion used here is the cumulative cash position (CCP), which is simply the worth

of the project at the end of its life. For criteria using cash or monetary value, it is difficult

to compare projects with dissimilar fixed capital investment, and sometimes it is more

useful to use the cumulative cash ratio (CCR), which is defined as:

(8.20)

The definition effectively gives the cumulative cash position normalized by the initial

investment. From Table 8.10, the value of CCR was calculated which gives 4.25.

Projects with cumulative cash ratios greater than 1 are potentially profitable, whereas

those with ratios less than unity cannot be profitable.

3. Interest rate criterion

The criterion used here is called the rate of return on investment (ROROI) and

represents the non discounted rate at which money is made from our fixed capital

investment. ROROI also represented the percentage increase or decrease of an

investment over a period of time. It gives ideas of how much an investment is growing

or declining. The rate of return is given by

ROROI = Average Annual Net Profit (8.21)

Fixed Capital Investment (FCIL)

Sum of All Positive Cash Flows

CCR =

Sum of All Negative Cash Flows

Table 8.9: Rate of Return calculations (R. Turton, 2009)

Description Typical value Cost (MYR)

Revenue from sales

(IOI Oleochemical

Company and Network

Timur Sdn. Bhd,

September 2011)

RM2.10/kg of Glycerine

RM4.00/kg of Fatty Acid

Total

21,000,000

328,424,734

370,424,734.10

Annual net profit, ANP Revenues from sales – COM

= 370,424,734.10– 345,287,211

25,137,523.08

Income taxes 30% from ANP 7,541,256.92

Net annual profit, ANNP ANP – Income taxes

= 25,137,523.08– 7,541,256.92

17,596,266.16

The rate of return is often calculated for the anticipated best year of the project

which is the year in the net cash flow is greatest. It can also be based on the book value

of the investment, the investment after allowing for depreciation (R. K. Sinnott, 1999).

So, the return rate on investment is 40% over the period of a year by referring to the

Figure 8.1. A higher ROR indicates better returns and a negative ROROI indicates

losses.

Table 8.10: Nondiscounted After-Tax Cash Flows

End of

Year

(k)

Investment dk FCI - ∑dk R COMd (R - COMD -dk)(1-t) + dk Cash Flow Cumulative

Cash Flow

0 3,702,600 30,463,832 -3,702,600 -3,702,600

1 21324682.16 30,463,832 -21324682.16 -25,027,282

2 14428413.62 30,463,832 -14428413.62 -39,455,696

3 6092766.33 24,371,065 370,424,734 345,729,109 16324338.76 16324338.76 -23,131,357

4 9748426.128 14,622,639 370,424,734 345,729,109 17969385.67 17969385.67 -5,161,971

5 5849055.677 8,773,584 370,424,734 345,729,109 16214668.97 16214668.97 11,052,698

6 3509433.406 5,264,150 370,424,734 345,729,109 15161838.95 15161838.95 26,214,537

7 3509433.406 1,754,717 370,424,734 345,729,109 15161838.95 15161838.95 41,376,376

8 1754716.703 0 370,424,734 345,729,109 14372216.43 14372216.43 55,748,592

9 0 370,424,734 345,729,109 13582593.92 13582593.92 69,331,186

10 0 370,424,734 345,729,109 13582593.92 13582593.92 82,913,780

11 0 370,424,734 345,729,109 13582593.92 13582593.92 96,496,374

12 9,795,366 0 374,127,334 345,729,109 15619023.92 25,414,390 121,910,764

Figure 8.1: Cumulative Cash Flow Diagram for Nondiscounted After-Tax Cash Flows

-60,000,000

-40,000,000

-20,000,000

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

0 2 4 6 8 10 12 14

No

nd

isc

ou

nte

d C

ash

Flo

w (

MY

R)

Time after Project Start (Years)

Nondiscounted After-Tax Cash Flow

PBP = 4.82 years

FCIL =MYR 30,463,832

CCP= MYR 121,910,764

CCR = 4.09

ROROI = 40%

8.5.4 Discounted Profitability Criteria

The difference between the nondiscounted and discounted criteria is that for the latter it

discounts each of the yearly cash flows back to time zero. The discounted cumulative

cash flow diagram will be used to evaluate profitability. There have three different types

of criteria (R. Turton, 2009):

1. Time criterion

The discounted payback period (DPBP) is similar to the nondiscounted which is

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.

The project with the shortest discounted payback period is the most desirable.

2. Cash criterion

The discounted cumulative cash position, is known as the net present value (NPV) or

net present worth (NPW) of the project, is defined as

NPV = Cumulative discounted cash position at the end of the project

The NPV of a project is influenced by the level of fixed capital investment, and a

better criterion for comparison of projects with different investment levels is present

value ratio (PVR):

PVR = Present Value of All Positive Cash Flows

Present Value of All Positive Cash Flows

A value of unity for a project represents a break-even situation. Values greater

than 1 is profitable processes, whereas less than 1 represent unprofitable projects.

Table 8.11: Discounted Cash Flows

End of Year (k) Non discounted Cash flow Discounted Cash Flow Cumulative Discounted Cash Flow

0 -3,702,600 -3,702,600 -3,702,600

1 -21324682.16 -19386074.69 -23,088,675

2 -14428413.62 -11924308.77 -35,012,983

3 16324338.76 12264717.33 -22,748,266

4 17969385.67 12273332.2 -10,474,934

5 16214668.97 10068033.71 -406,900

6 15161838.95 8558462.818 8,151,563

7 15161838.95 7780420.743 15,931,983

8 14372216.43 6704745.035 22,636,728

9 13582593.92 5760345.731 28,397,074

10 13582593.92 5236677.937 33,633,752

11 13582593.92 4760616.306 38,394,368

12 25,414,390 8097807.945 46,492,176

Figure 8.2: Cumulative Cash Flow Diagram for Discounted After- Tax Cash Flows

-40,000,000

-30,000,000

-20,000,000

-10,000,000

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

0 2 4 6 8 10 12

Dis

co

un

ted

Ca

sh

Flo

w (

MY

R)

Time After Project Start (years)

Discounted After-Tax Cash Flows

PVR = 2.32

DPBP = 5 years

NPV = MYR 46,492,176

Discounted land + WC = MYR 8,425,157

Based on the nondiscounted cash flow and discounted cash flow, there are significant

effects of discounting the cash flows to account for time value of money. From these

results, the following observations can be made.

1. In term of the time basis, the payback period increases as the discount rate

increases. From the calculation, it increases from 4.82 to 5 years.

2. In term of cash basis, replacing the cash flow with the discounted cash flow

decreases at the end of the project which is dropped from MYR 121,910,764 to

46,492,176.

3. In terms of cash ratios, discounting the cash flows gives a lower ratio which is

dropped from 4.09 to 2.32.

As the discount rate increases, all of the discounted profitability criteria will be reduced.

3. Interest Rate Criterion

The discounted cash flow rate of return (DCFROR) is defined to be the interest rate at

which all the cash flows must be discounted to get the net present value of the project

to be equal to zero (R. Turton, 2009).

DCFROR = Interest or discount rate for which the net present value of the project is

equal to zero

If the DCFROR is greater than the internal discount rate, the project is

considered to be profitable. Table 8.12 showed the NPVs for several different discount

rates were calculated and the results.

Table 8.12: NPV for Glycerine Project as a Function of Discount Rate

Interest/Discount rate NPV (MYR)

0% 46,492,176

10% 13329987.94

15% 4,796,091

20% -967840.5494

The value of the DCFROR is found at NPV equals 0. Interpolating from Table

8.12 gives:

Figure 8.3 provides the cumulative discounted cash flow diagram for several

discount factors. It shows the effect of changing discount factors on the profitability and

shape of the curves. It also includes curves for the DCFROR with 19.20%. It can be

seen that the NPV for the project is zero. If the acceptable rate of return were set at

20%, then the project would not be considered an acceptable investment because it is

indicated by negative NPV for I =20%. For project having a short life and small discount

factors, the effect of discounting is small, and nondiscounted criteria may be used to

give an accurate measure of profitability. Normally, large projects that involved many

millions of ringgit of capital investment discounting techniques is always used (R.

Turton, 2009).

Table 8.13: Discounted Cumulative Cash Flow with Different Discount Rates

Discount rate, I = 10% Discount rate, I = 20%

End of

Year

(k)

Discounted cash

flow (DCF)

fd = 1/(1+i)n

Discounted

cash flow

DCC =DCFx fd

Cumulative

discounted

cash flow fd = 1/(1+i)n

Discounted

cash flow

DCC=DCFx fd

Cumulative

discounted

cash flow

0 -3,702,600 1 -3702600 -3702600 1 -3702600 -3702600

1 -19386074.69 0.909090909 -17623704.26 -21326304 0.83333333 -16155062.24 -19857662.24

2 -11924308.77 0.826446281 -9854800.639 -31181105 0.69444444 -8280769.981 -28138432.22

3 12264717.33 0.751314801 9214663.657 -21966441 0.5787037 7097637.343 -21040794.88

4 12273332.2 0.683013455 8382851.034 -13583590 0.48225309 5918852.334 -15121942.54

5 10068033.71 0.620921323 6251456.812 -7332133.4 0.40187757 4046116.942 -11075825.6

6 8558462.818 0.56447393 4831029.142 -2501104.3 0.33489798 2866211.881 -8209613.72

7 7780420.743 0.513158118 3992586.068 1491481.81 0.27908165 2171372.637 -6038241.083

8 6704745.035 0.46650738 3127813.041 4619294.86 0.23256804 1559309.407 -4478931.676

9 5760345.731 0.424097618 2442948.905 7062243.76 0.1938067 1116393.594 -3362538.082

10 5236677.937 0.385543289 2018966.038 9081209.8 0.16150558 845752.7226 -2516785.359

11 4760616.306 0.350493899 1668566.973 10749776.8 0.13458799 640721.7596 -1876063.6

12 8097807.945 0.318630818 2580211.167 13329987.9 0.11215665 908223.0502 -967840.5494

Discount rate, I = 19.20%

fd = 1/(1+i)n

Discounted cash flow

DCC =DCFx fd

Cumulative discounted cash

flow

1 -3702600 -3702600

0.838926174 -16263485.48 -19966085.48

0.703797126 -8392294.247 -28358379.72

0.590433831 7241504.035 -21116875.69

0.495330395 6079354.485 -15037521.2

0.415545633 4183727.444 -10853793.76

0.348612108 2983583.768 -7870209.989

0.292459823 2275460.47 -5594749.519

0.2453522 1645023.946 -3949725.573

0.205832383 1185665.687 -2764059.887

0.172678173 904259.9807 -1859799.906

0.144864239 689643.0603 -1170156.846

0.121530402 183940.9069 -986215.9387

Figure 8.3: Discounted Cumulative Cash Flow Diagrams Using Different Discount Rate

-40,000,000

-30,000,000

-20,000,000

-10,000,000

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

0 2 4 6 8 10 12 14

Dis

co

un

ted

Ca

sh

Flo

w (

MY

R)

Time after project start (Years)

Discounted After- Tax Cash Flows

Discount rate = 10%

Discount rate = 19.20% at NPV=0 (DCFROR)

Discount rate = 20%

Discount rate = 0%

REFFERENCES

Aspen Hysis Simulation Basis Guideline AspenTech

http://www.tnb.com.my (March 2009)

IOI Oleochemical Company and Network Timur Sdn. Bhd, September 2011

Malaysian Industrial Development Authority (MIDA), August 2010

R. Sinnott and G. Towler (1999), Chemical Engineering Design, 3rd Edition, Elsevier

Ltd

R. Sinnott and G. Towler (2009), Chemical Engineering Design, 5th Edition, Elsevier

Ltd

R. Turton, R. Ballies, W. B. Whiting and J. A. Shaeiwitz (2009), Analysis, Synthesis and

Design of Chemical Processes, 3rd Edition, Pearson Education International

Robert H. Perry, Don W. Green and James O. Maloney (1997), 7th Edition, McGraw-Hill

Higher Education

http://www.tnb.com.my/

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