Costs profitability analysis

Understand the role of process simulators in process creation and be prepared to lean about their roles in equipment sizing and costing, profitability analysis, optimizatira, and dynamic simulation in the chapters that follow. 

Classical process synthesis consists of the synthesis of the alternatives, their analysis and final evaluation. Hurme and Jarvelainen (1995) have presented a combined process synthesis and simulation system consisting of an interactive rule-based system which is used for generating process alternatives (Fig. 10). The process alternatives are simulated, costed and evaluated through profitability analysis. The developed system concept combines process synthesis, simulation and costing with uncertainty estimation. 

This chapter includes a discussion of how to formulate objective functions involved in economic analysis, an explanation of the important concept of the time value of money, and an examination of the various ways of carrying out a profitability analysis. In Appendix B we cover, in more detail, ways of estimating the capital and operating costs in the process industries, components that are included in the objective function. For examples of objective functions other than economic ones, refer to the applications of optimization in Chapters 11 to 16. 

The ability to understand and apply the concepts of cost analysis, profitability analysis, budgets, income-and-expense statements, and balance sheets are key skills that may be valuable. This section treats two major components of economic... 

One useful tool of risk assessment is to compare the risk before and after prevention or mitigation to determine the difference in risk. A cost benefit analysis can be completed that determines the cost of the mitigation versus the amount of risk reduction. All costs need to be calculated to determine a cost per year. These costs would include fire damage, injury or fatality, insurance cost increases, loss of profits, etc. The cost of the mitigation, including capital and maintenance costs, needs to be determined. 

Removing profit would lead to the right conclusion, analytically, but what advice does it give decision makers If economic profits are indeed positive, but the decision on whether or not to permit firms to develop and introduce a new product is based on AWP less above-normal profits, more products will be judged to be effective than if AWP had been used. But if firms are in fact reimbursed at AWP, their expected profit from investment in R D will rise. The products firms are thus induced to develop because of the excess profits may not be efficient, and, from the standpoint of economic efficiency, they should not be produced. Yet the price signals will be telling firms to invest. Some method will need to be found to resolve this conflict. Efficient decisions based on correct cost-effectiveness analysis may well conflict with the price signals that may follow for implementation of those decisions. This is an issue for both country U and country T. 

This would be a breathtaking change even within a large country like country U. For the Asian Pacific countries, such as country T, consideration would need to be given both to health effects on own population (Hsieh et ah. Chapter 13) and to possible sales to or purchases from abroad. For products developed within its own country, the profits from foreign sales of new products should be added to the measure of benefits from improving own-population health. This would imply a very different role for cost-effectiveness analysis than the traditional public health model. It would need to take economic development goals into account as well, and it may prove difficult to help domestic and export markets separate. 

This chapter attempts to explain some of the economic and commercial inflnences that affect the development of biocatalysts into snccessful mannfacturing processes and products. In this respect, biocatalysts are not special, and are subject to just the same effects as any other developing technology. In this chapter, 1 attempt to discuss many of these important influences, such as process costing, sensitivity analysis and product profitability appraisal. 1 would especially like to emphasise the following points ... 

Attempts could be made to systematically evaluate the social benefits of linking cost-effectiveness analysis not only with reference pricing, but government controls over industry-level profit and promotional expenditure, price-volume agreements, and competitive tendering. 

The next section will explain in more detail the content of different levels. The approach will be applied throughout the whole book, although not in a repetitive manner. Actually, each case study will emphasize only generic conceptual elements. The case study regarding the manufacturing of cyclohexanone by phenol hydrogenation is a kind of leading example. Since the book focuses on technical aspects, there is no place for cost evaluation and profitability analysis. 

Design data and other process information are obtained during the development stage. This information is used as the basis for carrying out the additional phases of the design project. A complete market analysis is made, and samples of the final product are sent to prospective customers to determine if the product is satisfactory and if there is a reasonable sales potential. Capital-cost estimates for the proposed plant are made. Probable returns on the required investment are determined, and a complete cost-and-profit analysis of the process is developed. 

Methods for including the cost of capital in economic analyses have been discussed in Chap. 7. Although the management and stockholders of each company must establish the company s characteristic cost of capital, the simplest approach is to assume that investment of capital is made at a hypothetical cost or rate of return equivalent to the total profit or rate of return over the full expected life of the particular project. This method has the advantage of putting the profitability analysis of all alternative investments on an equal basis, thereby permitting a clear comparison of risk factors. This method is particularly useful for preliminary estimates, but it may need to be refined further to take care of income-tax effects for final evaluation. 

The capitalized-cost profitability concept is useful for comparing alternatives which exist as possible investment choices within a single overall project. For example, if a decision based on profitability analysis were to be made as to whether stainless steel or mild steel should be used in a chemical reactor as one part of a chemical plant, capitalized-cost comparison would be a useful and appropriate approach. This particular case is illustrated in Example 9 of Chap. 7. 

Example 5 Comparison of alternative investments by different profitability methods. A company has three alternative investments which are being considered. Because all three investments are for the same type of unit and yield the same service, only one of the investments can be accepted. The risk factors are the same for all three cases. Company policies, based on the current economic situation, dictate that a minimum annual return on the original investment of 15 percent after taxes must be predicted for any unnecessary investment with interest on investment not included as a cost. (This may be assumed to mean that other equally sound investments yielding a 15 percent return after taxes are available.) Company policies also dictate that, where applicable, straight-line depreciation is used and, for time-value of money interpretations, end-of-year cost and profit analysis is used. Land value and prestartup costs can be ignored. 

With the simple relations described above, you can analyse and understand quite a lot of the operation of a firm. You should, however, be aware of the limitations of this kind of analysis. Our Cost-Sales-Profit analysis assumes that a firm is working at a steady state... 

USD 1 billion sales, 5% profitability, total procurement spend 60% of sales labor costs 20% of total costs profit margin of new drug 40% USD 15 billion sales volume, 25% profit Source McKinsey analysis... 

W. C. Lawler, Cost-Volume-Profit Analysis in J. L. Livingstone and T. Grossman (eds.) The Portable MBA in Finance and Accounting, Wiley, New York, 2002, pp. 102-124... 

A social cost-benefit analysis gives information on the profit of a project and further on the influence of the project on employment, production, consumption, savings, trade balance, redistribution of income etc. Here the Guidelines for project evaluation of the Unido [9] are used. Both the investment and operating costs of a project have to be divided into... 

Based on a depreciation of 5 years and 10% interest rate a cost -benefit analysis is included in table 2. In the same table a cost - benefit analysis is given in case the corn miller would be able to replace the liquid fuel required, by gas from corn cobs. Then the corn mill is enlarged with a suitable gasifier for 2000 Tsh. The economic advantages of the gasifier for the corn miller are evident in view of the profit increase. 

Consequently, investment decisions require capital budgeting. This plant profitability analysis is the evaluation and the selection of the best investments from a set of alternatives. Methods for evaluating investments include NPV and rate of return, among others, for private companies and benefit-cost ratio for public works projects. All these come under the purview of plant profitability analysis. 

Allocation of all direct and indirect costs (highlighting environmental, safety and health costs) to a product or product line for the purposes of inventory valuation, profitability analysis and pricing decisions... 

Profitability- Analysis A document supplying information on the profit potential of the final plant. Several standard methods such as return on investment, venture profit, payback period, and annualized cost are used to calculate the expected profitability [957]. 

The economic evaluation of the project should be oriented to profitability analysis, as explained in Chapter 14. The estimation of capital investment and operation costs is necessary, but the figures are only intermediate steps to profitability measures. These should be compared with similar processes, or other industrial projects, on a longer-term vision based on a lifecycle analysis. The economic analysis can be done at best with a spreadsheet. 

The chapter starts by introducing the basic concepts of an economic analysis, as prices, breakdown of the capital and manufacturing costs, profit, as well as the formation of cash flow. Because the time-value of money plays a central role the next section presents some basic elements of financial methods. Two other sections deal with the detailed estimation of capital and operation costs. Simplified equations based on typically cost ratios can be used for quick estimations. These ratios are also helpful for the control of more detailed computations. The chapter ends with a more detailed description of the profitability analysis, both by traditional and modem methods. Note that the methods developed in this chapter can be applied using spreadsheets. 

The common measure of different costs is money. Therefore, a profitability analysis must take into account the time-value of money. The practical way to evaluate the profitability is to forecast the evolution of the cash flow over a longer period of time, theoretically over the plant lifecycle. The next section will discuss in more detail the formation of the cash flow. 

Thus, a more modem concept of the profitability analysis should consider the project as a source of profit as any other business. Capital and operating costs are only intermediate figures as inputs of a profitability analysis. 

Equipment specifications were prepared and illustrated in Chap. 4. Table 6-22 could thus be worked out, using individual equipment cost estimates from this book and others. The installed cost on a 1958 basis for the process equipment alone was 216,570. Table 6-24 was next prepared from figures available from the process flow sheet and other reasonable economic facts as discussed in here. Note that short-cut methods were employed where possible since only comparative economies were desired for this type of profitability analysis. Results show that a crude BHC plant at the production level recommended is unprofitable and definitely should not be considered further. 

---