Economic evaluation profitability analysis

Calculations of economic profitability can only be predictive in the phase of process development, before a plant is on stream for a long time. Therefore, individual components of costs and market evaluations will bear some uncertainty. This uncertainty is relatively high for pharmaceuticals and agrochemicals. The impact of these uncertainties on the profitability of a process may be quantified by a sensitivity analysis. This analysis provides information about the sensitivity of the process economics to changes in parameters relevant for the profitability (investment costs, price and consumption of raw materials, utility unit costs, product value and demand, etc.), and therefore on the reliability of the result of the economic evaluation. In the early stages of process development, a high sensitivity indicates the areas requiring attention for continued R D work. 

Part I comprises three chapters that motivate the study of optimization by giving examples of different types of problems that may be encountered in chemical engineering. After discussing the three components in the previous list, we describe six steps that must be used in solving an optimization problem. A potential user of optimization must be able to translate a verbal description of the problem into the appropriate mathematical description. He or she should also understand how the problem formulation influences its solvability. We show how problem simplification, sensitivity analysis, and estimating the unknown parameters in models are important steps in model building. Chapter 3 discusses how the objective function should be developed. We focus on economic factors in this chapter and present several alternative methods of evaluating profitability. 

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. 

Next, the technical, economic, and financial feasibility of proposed processes must be demonstrated. Unless the project shows considerable promise when matched against other potential projects, it may be abandoned. Any particular coiT5)any will have several projects to invest in but limited financial resources so that only the most promising projects will be continued. The research engineer should estimate the capital investment required and the production cost of the product. No matter how crade or incon jlete the process data may be, the research engineer must estimate the profitability of the process to determine if further process development is economically worth the effort. This analysis will also uncover those areas requiring further research to obtain more information for a more accurate economic evaluation. 

Project evaluation enables the technical and economic feasibility of a chemical process to be assessed using preliminary process design and economic evaluations. Once a process flowsheet is available, these evaluations can be classified into several steps material balance calculations, equipment sizing, equipment cost determination, utilities requirements, investment cost estimation, sales volume forecasting, manufacturing cost estimation, and finally profitability and sensitivity analysis. 

Finally, the Economic Evaluation should be oriented from the beginning to profitability analysis, by identifying the design elements that have impact on the profitability measures. 

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. 

Chapter 15 Economic Evaluation of Projects Table 15.14 Profitability analysis... 

A thorough presentation of fundamentals of an economic analysis for process design can be found in the classical book of Peters and Timmerhaus (1991). In addition this book contains detailed information about the cost of chemical equipment. A concise but useful treatment can be found in Coulson Richardson volume 6 (1993). The part on economics in Douglas (1987) is particularly well written from the viewpoint of a designer. The chapter written by Holland Wilkinson for Perry s Handbook 7 edition (1997) contains an extended description of the modem concepts of profitability, a comprehensive estimation of manufacturing and fixed-capital costs, as well as an introduction in the accounting and cost control concepts. The economic evaluation of projects from the perspective of the Institution of Chemical Engineers-UK may be found in Allen (1991). 

First, for each defined sub-system of the project potential risks are identified and analyzed. Normally, qualitative techniques are applied such as expert surveys or brainstorming in order to determine factual risks. For risks regarding dates, stochastic methods such as the PERT method are applied. Economical risks can be evaluated in the context of the profitability analysis. 

Economic evaluation that includes an estimate of capital investment, operating costs, and profitability analysis... 

Most proprietary spreadsheets have procedures for calculating the cumulative NPW from a listing of the yearly net annual revenue (profit). Spreadsheets are useful tools for economic analysis and project evaluation. 

At each level of the Hierarchical Approach the feasibility of design alternatives are evaluated by means of an Economic Potential (EP). This index is a measure of profitability representing the difference between earnings and expenses on yearly basis. EP must be high enough to accept further reduction at the other levels of flowsheet development. If EP is not positive and high enough, the analysis stops. It is worthy to note that the raw material costs dominate the operation costs in chemical process industries by more than 60%, particularly in commodities. 

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