Cash-flow

When synthesizing a flowsheet, these criteria are applied at various stages when there is an incomplete picture. Hence it is usually not possible to account for all the fixed and variable costs listed above. Also, there is little point in calculating taxes until a complete picture of operating costs and cash flows has been established. 

As the design progresses, more information is accumulated. The best methods of assessing the profitability of alternatives are based on projections of the cash flows during the project life. ... 

Figure A.2 shows the cash-flow pattern for a typical project. The cash flow is a cumulative cash flow. Consider curve 1 in Fig. A.2. From the start of the project at A, cash is spent without any...

Figure A.2 Cash-flow pattern for a typical project. (From Allen, IChemE, 1980 reproduced by permission of the Institution of Chemical Engineers.)...

The predicted cumulative cash-flow curve for a project throughout its life forms the basis for more detailed evaluation. Many quantitative measures or indices have been proposed. In each case, important features of the cumulative cash-flow curve are identified and transformed into a single numerical measure as an index. 

Net present value (NPV). Since money can be invested to earn interest, money received now has a greater present value than money received at some time in the future. The net present value of a project is the sum of the present values of each individual cash flow. In this case, the present is taken to be the start of a project. 

Time is taken into account by discounting the annual cash flow Acf with the rate of interest to obtain the anitual discounted cash flow -Adcf- Thus, at the end of year 1,... 

The sum of the annual discounted cash flows over n years SAdcf is known as the net present value (NPV) of the project ... 

Discounted cash-flow rate of return. Discounted cash-flow rate of return is defined as the discount rate i which makes the NPV of a project zero (curve 3 in Fig. A.2) ... 

The value of i given by this equation is known as the discounted cash-flow rate of return (DCFRR). It may be found graphically or by trial and error. 

Predicting future cash flows for a project is extremely difficult with many uncertainties, including the project life. However, providing that consistent assumptions are made, projections of cash flows can be used to choose between competing projects. 

Keywords exploration, appraisal, feasibility, development planning, production profile, production, abandonment, project economics, cash flow... 

The production phase commences with the first commercial quantities of hydrocarbons ( first oil ) flowing through the wellhead. This marks the turning point from a cash flow point of view, since from now on cash is generated and can be used to pay back the prior investments, or may be made available for new projects. Minimising the time between the start of an exploration campaign and first oil is one of the most important goals in any new venture. 

Then the values of the leaves are placed on the diagram, starting in the far most future the right hand side. The values represent the NPVs of the cash flows which correspond to the individual leaves. 

Cash surplus is also commonly known as net cash flow. 

Note that capital allowances do not appear in the expression since they are not items of cash flow. Capital allowances are calculated in order to determine the fiscal costs and thus the amount of tax payable. 

The project cashflow s constructed by performing the calculation for every year of the project life. Atypical project cashflow is shown in Figure 13.9, along with a cumulative cashflow showing how cumulative revenue is typically split between the capex, opex, the host government (through tax and royalty) and the investor (say the oil company). The cumulative amount of money accruing to the company at the endof the project is the cumulative cash surplus or field life net cash flow. 

From the cash flow and cumulative cashflow some basic economic indicators can be determined. The cashflow determines the economic lifetime of the field. When the cashflow turns permanently negative due to decreasing revenues (e.g. revenues are... 

The point at which the cumulative cash flow turns positive indicates the payout time (or payback time). This is the length of time required to receive accumulated net revenues equal to the investment. This indicator says nothing about the cash flow after the payback time and does not consider the total profitability of the investment opportunity. 

The project cashflow discussed so far follows a pattern typical of E P projects a number of years of expenditure (giving rise to cash deficits) at the beginning of the project, followed by a series of cash surpluses. The annual cashflows need to be evaluated to incorporate the timing of the cash flows, to account for the effect of the time value of monef. The technique which allows the values of sums of money spent at different times to be consistently compared is called discounting. 

In Section 13.2, a number of economic indicators were derived from the annual cash flow the most useful being the economic life of the project, determined when the annual cashflow becomes permanently negative. 

Life cycle cost analysis is the proper tool for evaluation of alternative systems (11,12). The total cost of a system, including energy cost, maintenance cost, interest, cash flow, equipment replacement and/or salvage value, taxes, inflation, and energy cost escalation, can be estimated over the useflE life of each alternative system. A Hst of life cycle cost items which may be considered for each system is presented in Tables 3 and 4. Reference 14 presents a cash flow analysis which also includes factors such as energy cost escalation. 

Ref 91. Discounted cash-flow models account for use of capital, working capital, income taxes, time value of money, and operating expenses. Real after-tax return assumed to be 12.0%. Short-rotation model used for sycamore and poplar. Herbaceous model used for other species. Costs ia 1990 dollars. Dry tons. 

Fig. 2. (— —) Cumulative and (—° —) 8% discounted cash flow rate for development of a hypothetical agrochemical in constant 1994 U.S. dollars, where A represents the time the patent was first issued B, first registered use C, manufacturing plant start-up D, positive cumulative cash flow and E, patent...

A.nnual Cash Dlow. The net aimual cash flow is the actual cash generated by the project ia a given year. This can be defined for any project year as... 

The aimual cash flow is an important management consideration and is the starting point for profitabiUty analysis. 

DecoveTj of Capital. In Figure 1, the annual book depreciation is used to retire the fixed capital investment. Whereas this accounting model does not correspond to the typical money flow, it is one possible model for recovery of capital. This model assumes that the investment is reduced each year by the amount of the annual depreciation. Another model (22) assumes that a uniform yearly book depreciation payment is made to an interest-bear sinking fund that accumulates to the depreciable fixed capital amount at the end of the venture. Using this second model, the investment is outstanding throughout the lifetime of the project. This also does not correspond to the actual money flow in most cases. ProfitabiUty analysis utilizes a third model based on discounted cash flows. 

Discounted Ca.sh Flows. Because the flows below the cash flow box in Figure 1 tend to be arbitrary management decisions that are generally difficult to predict, the prediction of profitabiUty is based on the expected cash flows instead of earnings. As a result, some logical assumptions to account for the cost of capital and the recovery of the investment must be made. 

If money is borrowed, interest must be paid over the time period if money is loaned out, interest income is expected to accumulate. In other words, there is a time value associated with the money. Before money flows from different years can be combined, a compound interest factor must be employed to translate all of the flows to a common present time. The present is arbitrarily assumed often it is either the beginning of the venture or start of production. If future flows are translated backward toward the present, the discount factor is of the form (1 + i) , where i is the annual discount rate in decimal form (10% = 0.10) and n is the number of years involved in the translation. If past flows are translated in a forward direction, a factor of the same form is used, except that the exponent is positive. Discounting of the cash flows gives equivalent flows at a common time point and provides for the cost of capital. 

Net Present Va.Iue, Each of the net annual cash flows can be discounted to the present time using a discount factor for the number of years involved. The discounted flows are then all at the same time point and can be combined. The sum of these discounted net flows is called the net present value (NPV), a popular profit criterion. Because the discounted positive flows first offset the negative investment flows in the NPV summation, the investment capital is recovered if the NPV is greater than zero. This early recovery of the investment does not correspond to typical capital recovery patterns, but gives a conservative and systematic assumption for investment recovery. 

This gives two choices ia interpreting calculated NRR values, ie, a direct comparison of NRR values for different options or a comparison of the NRR value of each option with a previously defined NRR cutoff level for acceptabiUty. The NPV, DTC, and NRR can be iaterpreted as discounted measures of the return, iavestment, and return rate, analogous to the parameters of the earher example. These three parameters characterize a venture over its entire life. Additional parameters can be developed to characterize the cash flow pattern duting the early venture years. Eor example, the net payout time (NPT) is the number of operating years for the cumulative discounted cash flow to sum to zero. This characterizes the early cash flow pattern it can be viewed as a discounted measure of the expected operating time that the investment is at risk. 

Internal Return Rate. Another rate criterion, the internal return rate (IRR) or discounted cash flow rate of return (DCERR), is a popular ranking criterion for profitabiUty. The IRR is the annual discounting rate that makes the algebraic sum of the discounted annual cash flows equal to zero or, more simply, it is the total return rate at the poiat of vanishing profitabiUty. This is determined iteratively. 

Possible numerators include the gross income net pretax income net after-tax income gross profit, ie, gross income minus book depreciation cash flow or net income. An average return value is selected by defining a typical or mature proof year as the basis of calculation. The denominator can be the original total investment, depreciated book-value investment, lifetime averaged investment, or fixed capital investment. 

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