Economic evaluation of project

As the purpose of investing money in chemical plant is to earn money, some means of comparing the economic performance of projects is needed. 

For small projects, and for simple choices between alternative processing schemes and equipment, the decisions can usually be made by comparing the capital and operating costs. More sophisticated evaluation techniques and economic criteria are needed when decisions have to be made between large, complex projects, particularly when the projects differ widely in scope, time scale and type of product. Some of the more commonly used techniques of economic evaluation and the criteria used to judge economic performance are outlined in this section. For a full discussion of the subject one of the many specialist texts that have been published should be consulted Brennan (1998), Chauvel et al. (2003) and Vale-Riestra (1983). The booklet published by the Institution of Chemical Engineers, Allen (1991), is particularly recommended to students. 

Making major investment decisions in the face of the uncertainties that will undoubtedly exist about plant performance, costs, the market, government policy, and the world economic situation, is a difficult and complex task (if not an impossible task) and in a large design organisation the evaluation would be done by a specialist group. 

The overall cost of capital sets the interest rate that is used in economic evaluation of projects. The total portfolio of projects funded by a company must meet or exceed this interest rate if the company is to achieve its targeted return on equity and hence satisfy the expectations of its owners. 

As the purpose of investing money in a chemical plant is to earn money, some means of comparing the economic performance of projects is needed. Before a company agrees to spend a large amount of capital on a proposed project, the management must be convinced that the project will provide a sound investment compared to other alternatives. This section introduces the principal methods used for making economic comparisons between projects. 

B-C The heavy flow of capital to build the plant and provide funds for startup, including working capital. 

C-D The cash flow curve turns up at C, as the process comes on stream and income is generated from sales. The net cash flow is now positive, but the cumulative amount remains negative until the investment is paid off, at point D. 

Point D is known as the break-even point and the time to reach the break-even point is called the payback time. (In a different context, the term break-even point is also sometimes used for the percentage of plant capacity at which the income equals the cost for production.) 

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General References Allen, D. H., Economic Evaluation of Projects, 3d... 

A systematic approach for economic evaluation of projects includes the following major steps ... 

Allen, D.H. (1990) A Guide to the Economic Evaluation of Projects, 3rd edn. The Institutions Chemical Engineers, Rugby. 

Powell [3] reviewed the basics of various discounted cash flow techniques for project evaluation. Discounting is a method that accounts for the time value of money to provide either for the capital or to convert the cash flows to a common point in time so that they are summed. Ward [4] proposed a new concept known as the net return rate (NRR) that provides a better indication of a project s profitability. Techniques and criteria for economic evaluation of projects are widely available in the literature and texts [5,6,7,8,9,10]. A summary of the conventional decision criteria is given here. 

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