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

2. 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

3. 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);

4. 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

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

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

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

8. Measures of Profitability

9. Measures of Profitability

10. Measures of Profitability

11. 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.

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

13. 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).

14. 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

15. 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.

16. 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

17. 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)

18. 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

19. 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:

20. Project Financial Evaluation Optimization of the Heat Transfer Surface

21. Project Financial Evaluation Optimization of the Heat Transfer Surface

22. Project Financial Evaluation Optimization of the Heat Transfer Surface

23. Project Financial Evaluation Optimization of the Heat Transfer Surface

24. 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.

25. Project Financial Evaluation Tax Related Considerations
Depletion
Tax Credit
Income Taxes

26. Project Financial Evaluation Tax Related Considerations
Inflation
Dept-Equity Ratio

27. Project Financial Evaluation Computation of Cash Flow

28. 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.

29. 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.

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

31. Project Financial Evaluation Computation of Cash Flow – an Example

32. Project Financial Evaluation Computation of Cash Flow – an Example