DCFROR

DCFROR Discounted cash flow rate % Ri, i 2 Annual production rates Ib/yr... 

Discounted Cash Flow In the discounted cash flow method, all the yearly after-tax cash flows are discounted or compounded to time zero depending upon the choice of time zero. The following equation is used to solve for the interest rate i, which is the discounted cash flow rate of return (DCFROR). 

Discounted Cash Flow Rate of Return (DCFROR)... 

This particular rate is called the discounted cash flow rate of return (DCFROR) and is a measure of the maximum interest rate that the project could pay and still break even by the end of the project life ... 

The value of i is found by trial-and-error calculations or by using the appropriate function in a spreadsheet. A more profitable project will be able to pay a higher DCFROR. 

DCFROR can also be compared directly with interest rates. Because of this, it is sometimes known as the interest rate of return or internal rate of return (IRR). 

Estimate the NPV at a 12% interest rate and the DCFROR for the project described in Example 6.8, using the MACRS depreciation method. 

The DCFROR can then be found by adjusting the interest rate until the NPV is equal to zero. This is easily accomplished in the spreadsheet using the Goal Seek tool, giving DCFROR = 40%. 

The DCFROR (IRR) of the project after 15 years of production at full capacity can be found by either adjusting the interest rate (manually or using the goal seek function) until the NPV at the end of year 18 is equal to zero, or by using the IRR function in the spreadsheet over the range year 1 to year 18. The working capital should be included as a recovered cost in year 18. 

The answer obtained in either case is DCFROR = 7.85%. This is the maximum interest rate at which this proj ect can be financed to break even in 15 years of production. 

The results of a sensitivity analysis are usually presented as plots of an economic criterion such as NPV or DCFROR vs. the parameter studied. Several plots are sometimes shown on the same graph using a scale from 0.5 x base value to 2 x base value as the abscissa. 

The interest rate criterion is known as discounted cash flow rate of return (DCFROR) or internal rate of return (IRR), which is defined as the discount rate calculated by setting NPV = 0 in Eq. [6.1] at the end of the period of the project. An IRR higher than the internal hurdle rate means that a project is worth investing from the perspective of a given company. 

Figure 6.3 Evaluation of economic sustainability. OSBL, Outside the battery limits WC, working NPV, net present value FCI, fixed capital investment DPBP, discounted payback period DCFROR, discounted cash flow rate of return.

DCFROR, Discounted cash flow rate of return NPJ net present value TPC, total project cost. 

The ideas discussed in Chapter 9 are extended to evaluate the profitability of chemical processes. Profitability criteria using nondiscounted and discounted bases are presented and include net present value (NPV), discounted cash flow rate of return (DCFROR), and payback period (PBP). A discussion of evaluating equipment alternatives using equivalent annual operating costs (EAOC) and other methods is presented. Finally, the concept of evaluating risk is covered and an introduction to the Monte Carlo method is presented. 

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 in order for the net present value of the project to be equal to zero. Thus, we can write... 

Therefore, the DCFROR represents the highest after-tax interest or discount rate at which the project can just break even. 

It is worth noting that for evaluation of the discounted cash flow rate of return, no interest rate is required because this is what we calculate. Clearly, if the DCFROR is greater than the internal discount rate, then... 

For the problem presented in Exanples 10.1 and 10.2. determine the discounted cash flow rate of return DCFROR). 

The value of the DCFROR is found at NPV equals 0. Interpolating from Table E10.3 gives ... 

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