Discounted cash flow process

The cost of capital may also be considered as the interest rate at which money can be invested instead of putting it at risk in a manufacturing process. Let us consider the process data listed in Table 9-4 and plotted in Fig. 9-10. If the cost oi capital is 10 percent, then the appropriate discounted-cash-flow curve in Fig. 9-10 is abcdef. Up to point e, or 8.49 years, the capital is at risk. Point e is the discounted breakeven point (DEEP). At this point, the manufacturing process... 

C. G. Sinclair [Chem. Process. E/ig., 47, 147 (1966)] has considered similar parameters to the (EMIP) and (IRP) based on a cumulative-discounted-cash-flow curve. 

Figure 9-13 is a plot of Eq. (9-61) in the form of the number of years n required to reach a certain discounted-cash-flow rate of return (DCFRR) for a given payback period (PBP). The figure is a modification of plots previously published by A. G. Bates [Hydrocarbon Process., 45, 181-186 (March 1966)], C. Estrup [Br Chem. Eng., 16, 171 (February-March 1971)], and F. A. Holland and F. A. Watson [Process Eng. Eeon., 1, 293-299 (December 1976)]. 

Now that you have determined the likely savings in terms of annual process and waste-treatment operating costs associated with each option, consider the necessary investment required to implement each option. Investment can be assessed by looking at the payback period for each option that is, the time taken for a project to recover its financial outlay. A more detailed investment analysis may involve an assessment of the internal rate of return (IRR) and net present value (NPV) of the investment based on discounted cash flows. An analysis of investment risk allows you to rank the options identified. 

Finally, we are in the business to produce products and profits. Broadly, if a product is made in 3-4 reaction steps in the batch-manufacturing environment, the market value should be 10 times the materials. If market value is only twice the raw material cost, the project should be redefined or stopped. In a 10-step process, it is not uncommon that materials are 1/20 of the selling price. A comparison of a two reaction step product using discounted cash flow methods (11) showed that a process with a market value 4 times the materials was greatly preferred over one at 3 times materials. 

Inits economic model (3), NRELused the discounted cash flow method to calculate the yearly total equipment cost for different process sections. To simplify economic comparisons between the two pretreatment designs,... 

The definitions of the terms encountered in discounted cash-flow calculations are taken from the literature.1 3 Discounted cash flow is concerned with the analysis of the value of money as a function of time. The money available at a future date has less value at the present and should be discounted by the interest to present worth (PW). P is the notation for the present sum of money, which should be used in such a manner that it produces a future income more than other forms of investment, irrespective of whether it is used for new equipment or the corrosion mitigation process. Let F be the amount of money available in the future when an investment of P is made. The relation between P and F may be written as ... 

To optimize the flooding processes, we first have to select which optimization criterion to use. Generally, we choose incremental oil recovery factor as a criterion. Alternatively, we may choose maximum NPV as a criterion with economic analysis. The latter choice is more proper because it takes into account discounted cash flow. However, performing economic analysis requires more economic data that are generally not available. The criterion to be used depends on the objective. 

The design of a chemical processing unit to meet a specific consumer demand and the comparison of alternative process costs (by retum-on-investment and discounted-cash-flow analysis) are well covered in texts on process economics and are not treated in this book. 

Under the terms of the Processing Agreement between NZSFC and the Crown, the tolling fee to be paid by the Crown, when the plant operated at design capacity, was to cover all of NZSFC s costs including tax and debt service. Also, at design capacity, the fee was to provide the shareholders with a tax paid discounted cash flow rate of return on qualifying capital at risk of 16 percent adjusted for inflation. 

Based on the above operating and investment costs, several DCF (discounted cash flow) calculations have been carried out. An IRR (internal rate of return) in the range of 16% to 28% has been worked out, which indicates that both the PLACID and FLINT processes are economically very attractive. 

Be able to compute cash flows and depreciation, and use them to project the net present value and investor s rate of return (IRR) (also known as the discounted cash-flow rate of return, DCFRR), two measures that account for projections of revenues and costs over the life of the proposed process, and the time value of money. 

To evaluate the net present value (NPV) of a proposed plant, its cash flows are computed for each year of the projected life of the plant, including construction and startup phases. Tlien, given the interest rate specified by company management (typically 15%), each cash flow is discounted to its present worth. The sum of all the discounted cash flows is the net present value. The NPV provides a quantitative measure for comparing the capital required for competing processes in current terms. However, the result is usually quite sensitive to the assumed interest rate, with proposed processes changing favor as the interest rate varies. An... 

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. 

An evaluation of the after-tax NPy and the discounted cash flow rate of return on investment (DCFROR) for your recommended (optimized) process. 

To obtain a feel for the economic value of the process, a calculation was made based on the assumption that the relative performance of Fig. 14 could be extrapolated directly to a 500-acre field with a 20-ft pay thickness at 1,000-ft depth. An acquisition cost of 50 cents/bbl of waterflood reserves was assigned to the acreage and all development costs were included. Operating costs applicable to the area where assigned and the chemical costs included. An economic summary of the projection is presented in Table 2 and the 6 per cent discounted cash flow curve is shown in Fig. 15 for the two floods. It can be seen from this information that the resulting production gains far override the cost of the polymer. Further economies can be expected from the fact that the polymer solution was produced intact and suitable... 

---