Economic Evaluation of the Project

For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him, saying, this man began to build, and was not able to finish. St. Luke 14 28-30 

The decision by company management to commercialize a process is ased almo.st entirely on the economic evaluation made with the coopera- ve efforts of many groups within the company. These groups include ccounting and finance, marketing and sales, and engineering design and peration. 

Every method of economic evaluation requires cost analysis of the ollowing principal subjects. Typical items which might appear under ach subject in a detailed analysis are included for orientation purposes. 

The above outline serves to orient the student on the subject matter which will be covered in more detail in the sections which follow. A thorough background of process design based on material in the preceding chapters will be required to make a satisfactory economic evaluation. 

Capital investment is divided into two parts (1) fixed capital (2) working capital. A fixed capital cost estimate is useful in determining maintenance and depreciation charges under operating costs and it is a necessity in making economic analyses such as return on investment. The working capital (10 to 15 per cent of fixed capital) is the less critical, economically speaking. 

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Following completion of the mass and energy balances, preliminary equipment designs can be undertaken. The final equipment designs and specifications are completed after performing a detailed economic evaluation of the project and an energy conservation study (Section... 

The profits generated by most chemical plants are subject to taxation. Taxes can have a significant impact on the cash flows from a project. The design engineer needs to have a basic understanding of taxation and tax allowances such as depreciation in order to make an economic evaluation of the project. 

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. 

An estimate of manufacturing costs is the next step required for making an economic evaluation of the project. Only costs entering actual production are taken into account. Other important costs such as selling, research, and administrative expenses, income taxes, and return on investment will not be considered until later in this chapter. A 1C. H. Chilton, Chem, Eng., 67(4) 112 (1950). 

During this phase the objectives of the system as well as the system performance specifications are identified. In addition, the technical and economic feasibility of the project is evaluated. 

All eleven references in this category relate directly to Section 6.1, the Economic Evaluation of this project. They contain capital costing methods, cost correlations, typical plant and equipment costs, and economic indicators to account for cost changes with time. 

As this chapter is primarily concerned with cost-estimation procedures, there will be no attempt to go into the theory of economics, but equations are presented for the economic evaluation calculations. A certain amount of basic information is needed to undertake the calculations for an economic evaluation of a project. 

In an economic evaluation of a project, it is often necessary to evaluate the present value of funds that will be received at some definite time in the future. The present value (PV) of a future amount can be considered as the present principal at a given rate and compounded to give the actual amount received at a future date. The relationship between the indicated future amount and the present value is determined by a discount factor. Discounting evaluates each year s flow on an equal basis. It does this by means of the discount, or present value factor, and the reciprocal of the compound interest factor (1 -(- i)" with... 

Step 2. Analysis or solving the heat and material balances sizing and costing the equipment evaluating the economic worth of the project assessing the safety and environmental impact and analyzing the operability. 

The conceptual design of a process is the most responsible for the success or failure of the whole project. Therefore, an unfortunate decision at this stage will be paid later at much higher cost. The economic evaluation of the conceptual design stage is often called preliminary cost estimation. This is also the object of the present chapter. 

In the context of the chemical industry, a project can range from initial research studies (on a new product or new route to an existing product) to a capital project costing many millions of pounds or dollars for the installation of a new production unit. The common ground is the ultimate objective of generating profit at some time in the future by the use of present resources (skilled manpower, money). Economic evaluation of a project involves the... 

An important feature of the feasibility analysis is an evaluation of the project risks inherent to the reahsation of a project. The nature of these risks may be technical, financial, political and economic. Whether the Client is a governmental agency or a pubhc or private company determines the legal position of the Client and... 

Technical and economic evaluations of the feasibility of a dredging project clearly require both a full inventory of the requirements of the Client (expressed as the desired properties of the fill mass) and the boundary conditions, and also a thorough knowledge of the characteristics of the available dredging plant and reclamation methods. 

All structures are subject to foundation design. In some cases piled foundations are preferable. Heavy structures with very strict specifications regarding (differential) settlement will normally require a piled foundation when constructed on reclaimed land overlying soft subsoil. Small sized structures of limited weight can generally be supported by shallow foundations. Based on a technical and economical evaluation of the structural and reclamation design, the decision whether a piled foundation is required should be made in an early phase of the project. 

In the next step, Norskoil s project team evaluates incoming bids. In addition to the economic evaluation of the bids, the project team makes a technical evalnation of the tenders. Here, the proposed organisation, the competence of its members and plans for the work are focused upon. The bidders must... 

Corrosion is basically an economic problem. Thus, the corrosion behavior of materials is an important consideration in the economic evaluation of any project. The two extremes for selecting materials on an economic basis without consideration of other factors are ... 

This section provides a basis guidance on the art of economic evaluation of the particulate factors of corrosion-control appreciation, without compromising the complete integrated corrosion control of the whole project. There is also special guidance regarding corrosion control that should be considered by the designer of structures, equipment, and piping systems. 

Like any other businesses, the evaluation is based on financial criteria with the emphasis being place on assessing the extent to which the project can be funded internally out of revenue income. The likely economic benefits of the project are incorporated into the evaluation to make-up any shortfall from the revenue income. 

The impact of inflation on project economics will be ignored in this section, but would be a feature of more advanced economics courses, and in practice would be included in a company s evaluation of a project. 

The project cashflow forms the basis of the economic evaluation methods which will be described. From the cashflow a number of economic indicators can be derived and used to judge the attractiveness of the project. Some of the techniques to be introduced allow the economic performance of proposed projects to be tested against investment criteria and also to be compared with alternative investments. 

Mark Cook is a Reservoir Engineer and Petroleum Economist. He has worked on international assignments mainly in Tanzania, Oman, the Netherlands and the UK. His main focus is in economic evaluation of field development projects, risk analysis, reservoir management and simulation. After 11 years with a multinational company he co-founded TRACS International of which he is Technical Director. 

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

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