Economics - 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. 

This chapter includes a discussion of how to formulate objective functions involved in economic analysis, an explanation of the important concept of the time value of money, and an examination of the various ways of carrying out a profitability analysis. In Appendix B we cover, in more detail, ways of estimating the capital and operating costs in the process industries, components that are included in the objective function. For examples of objective functions other than economic ones, refer to the applications of optimization in Chapters 11 to 16. 

The ability to understand and apply the concepts of cost analysis, profitability analysis, budgets, income-and-expense statements, and balance sheets are key skills that may be valuable. This section treats two major components of economic... 

Removing profit would lead to the right conclusion, analytically, but what advice does it give decision makers If economic profits are indeed positive, but the decision on whether or not to permit firms to develop and introduce a new product is based on AWP less above-normal profits, more products will be judged to be effective than if AWP had been used. But if firms are in fact reimbursed at AWP, their expected profit from investment in R D will rise. The products firms are thus induced to develop because of the excess profits may not be efficient, and, from the standpoint of economic efficiency, they should not be produced. Yet the price signals will be telling firms to invest. Some method will need to be found to resolve this conflict. Efficient decisions based on correct cost-effectiveness analysis may well conflict with the price signals that may follow for implementation of those decisions. This is an issue for both country U and country T. 

For more detailed discussion of plant economics and profitability analysis, the reader should refer to a specific textbook such as Peters and Timmerhaus. The following quotation from Backhurst and Harker (1973 p.47) provides an interesting summary ... 

The benefit analysis shows that the proposed three pilot wind-power generation plants become economically profitable as regards diesel-electric generation after several years. 

Therefore, the economic potential at the I/O level could be seen merely as a tool for selecting the chemical route, and at the same time for setting targets when purchasing raw materials. As a rule of thumb, the ratio of selling prices of products to the purchasing prices of raw materials should be a minimum of two when the payback time of the total capital investment is greater than five years. Preferably, this ratio should be about three for a payback time of three years [3]. More accurate calculations may be carried out easily by means of profitability analysis tools. 

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. 

Example 5 Comparison of alternative investments by different profitability methods. A company has three alternative investments which are being considered. Because all three investments are for the same type of unit and yield the same service, only one of the investments can be accepted. The risk factors are the same for all three cases. Company policies, based on the current economic situation, dictate that a minimum annual return on the original investment of 15 percent after taxes must be predicted for any unnecessary investment with interest on investment not included as a cost. (This may be assumed to mean that other equally sound investments yielding a 15 percent return after taxes are available.) Company policies also dictate that, where applicable, straight-line depreciation is used and, for time-value of money interpretations, end-of-year cost and profit analysis is used. Land value and prestartup costs can be ignored. 

In profitability assessments, annual cash flows are more meaningful than net profit. The net annual cash flow after taxes (CFxt) is the net profit after taxes less the annual expenditure of capital for additions and modifications. Net annual cash flows are used in discounted cash flow calculations to determine the NPV and the rate of return, which are two key measures used in economic decision 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. 

The chapter starts by introducing the basic concepts of an economic analysis, as prices, breakdown of the capital and manufacturing costs, profit, as well as the formation of cash flow. Because the time-value of money plays a central role the next section presents some basic elements of financial methods. Two other sections deal with the detailed estimation of capital and operation costs. Simplified equations based on typically cost ratios can be used for quick estimations. These ratios are also helpful for the control of more detailed computations. The chapter ends with a more detailed description of the profitability analysis, both by traditional and modem methods. Note that the methods developed in this chapter can be applied using spreadsheets. 

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

Income from Salable Products. This covers the sale of the by-products as well as the principal productfs), which is primarily monitored by the market and sales group. The interrelationships among selling price, market demand and supply, production capacity, and investment return require careful economic analysis. In many cases, particularly new ventures, this can only be detei mined by a profitability analysis, e.g.,... 

Equipment specifications were prepared and illustrated in Chap. 4. Table 6-22 could thus be worked out, using individual equipment cost estimates from this book and others. The installed cost on a 1958 basis for the process equipment alone was 216,570. Table 6-24 was next prepared from figures available from the process flow sheet and other reasonable economic facts as discussed in here. Note that short-cut methods were employed where possible since only comparative economies were desired for this type of profitability analysis. Results show that a crude BHC plant at the production level recommended is unprofitable and definitely should not be considered further. 

Design a 250,000 Ib/yr Lindane (99 per cent 7 isomer of benzene hexachloride) plant based on process information given in the current literature [e.g., see Chem. Eng. Progr., 52 281 (1956) Chem, Week, 78 54 (1956) Ind. Eng. CAem., 48(10) 41A (1956)], Develop the process flow. sheets, equipment specifications, and plant layout. Examine the economics of producing Lindane including (1) fixed and capital cost estimates by one or more of the methods outlined in Chap. 6, (2) profitability analysis showing return on investment and pay-out time, (3) break-even point analysis of the project, (4) economic estimates for a plant producing 500,000 Ib/yr and 750,000 Ib/yr. 

This study is part of a broader research activity of the Department of Agricultural Economics and Engineering. It provides cost and profitability analysis and consequently points out investment opportunities to farmers and other agricultural operators, with respect to the organic fruit production. This contribution draws heavily on a recent article published in Italian (Canavari et al, 2004). 

In this Paper, based on the traditional RCM, the concept of risk and risk matrix is introduced into the decision-making flow of RCM, and the risk matrix diagram is generated based on comprehensive consideration of device security, mission fulfillment and economy. Furthermore, the traditional RCM decision making logics is improved in order to enhance the effectiveness and precision of analysis process, to work out reasonable and scientific preventive maintenance period for gas lines and to achieve unification of economic profit and security (Das et al. 2011). 

The operating pressures, reflux rates, and numbers of trays are a good basis for comparison of the two sequences. It is preferable, however, to determine the capital and operating costs and to compare the sequences on the basis of profitability. For this purpose. Aspen IPE can be used to estimate the costs, as discussed in Section 16.7, and an economics spreadsheet can be used to carry out the profitability analysis, as discussed in Section 17.8. 

Be able to use Aspen IPE in the Aspen Engineering Suite and an economics spreadsheet to carry out a profitability analysis for a potential process. 

This section is provided on the CD-ROM that accompanies this book. It shows how to use purchase and installation cost estimates from Aspen IPE and other sources, together with an economics spreadsheet by Holger Nickisch (2003) to estimate profitability measures for the monochlorobenzene separation process, which was introduced in Section 4.4. In Section 16.7, Aspen IPE was used to estimate the total permanent investment for this process. The economics spreadsheet, Profitability Analysis — l.O.xls, is on the CD-ROM that accompanies this book. 

Commercial profitability analysis is the first step in the economic appraisal of a project from a national view point. It is concerned with assessing the feasibility of an investment based on its likely financial results for the individual firm. This analysis comprises two parts (a) investment profitability analysis and (b) financial analysis. These are complementary and non-subslitutable. Investment profitability analysis is a measure of the return on a capital investment irrespective of tiie sources of hnance. F andal analysis takes into consideration the sources of finance and disposal of the net cash flows that accrue to service the finance in a manner that allows smooth implementation and operation of a project. Figure 21.1 summarizes this dichotomy. 

The parameters in the economic analysis can be used as a benchmark for comparison of pretreatment methods which gives a clear picture of the most economically profitable pretreatment. The impact of pretreatment on other unit operations, such as fermentation and downstream processing, also need to be studied. Process economic... 

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