Estimating Production Costs and Revenues

The revenues and variable costs of production are obtained by multiplying the product, feed, or utility flow rates from the flowsheet by the appropriate prices. The difficult step is usually finding good price data. 

This section describes the most widely used sources of price data. Some pricing terminology is given in Table 6.8. 

In many large companies the marketing or planning department develops official forecasts of prices for use in internal studies. These forecasts sometimes include multiple price scenarios, and projects must be evaluated under every scenario. Company forecasts are occasionally made available to the public. See, for example. Shell (2002) or Shell (2005), which can be downloaded from www.Shell.com. When an 

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Several journals publish chemicals and fuel prices on a weekly basis. 

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A measure of economic goodness, which does not involve sales revenues for products and is also used for preliminary estimates when comparing alternative flowsheets during process synthesis, is the annualized cost. It is the sum of the production cost and a reasonable return on the original capital investment where, again, the reasonable return on investment, i i , is taken here as 0.2. Thus,... 

Some tools can be used in order to calculate the economic indicators. For instance, ECON [29] is an economic analysis software. The input for the software is the dimensions of aU process equipment and the prices of raw materials and final products, then the software estimates costs and revenues presenting as an output the traditional economic indicators for process investment analysis, for example, the total capital investment cost, operating cost, ROI, and NPV. 

Maintaining a secure EHR with connection to various ever-changing platforms has proven to be quite expensive and complicated the healthcare provider is fully responsible for any occurrence of a security breach at the provider s office. A current survey [4] estimates that 54% of the EHR users are not satisfied with their system interconnectivity. Furthermore, there is a dismal effect on doctor-patient relationships, with diminished productivity, efficiency, and revenue generation while contending with the high cost of EHR adoption, estimated at 5000- 50,000 per physician. 

Given estimates of both the real cost of bringing LIMS technology into the laboratory, and the dollar value benefits to be accrued from it, there only remains to make a final comparison. Since costs and benefits are not necessarily experienced in the same time frames, the financial analysis methods by which the firm makes capital investment decisions must be used. The LIMS which appears to be desirable from a technical and operational viewpoint must be proven to be a productivity or revenue improving capital investment and not just another overhead expense item. 

The project team must detail all past costs that the project has incurred since its inception (start of EvP) on an annual basis. In addition, an annual project financial information table (ProFIT) data sheet should be presented. This sheet contains the revenue and cost forecasts for the upcoming ten-year period. It computes net present value (NPV) of future cash flows and return on capital employed (ROCE) automatically. At this stage, the team is expected to include detailed production costs data as well as estimates of plant costs (based on an engineering estimate, for example). The ten-year projection should be provided for three scenarios base, optimistic, and pessimistic. These cases are not meant to be simple percentage changes of the sales projections. Instead, the team should try to identify the drivers of the project s success and construct alternatives for the future that lead to different results for the project. The base case should be the most likely case. The optimistic scenario should be based on the positive development of some (not all) key success factors. The pessimistic scenario is usually the minimum feasible case, meaning a situation where the organization would still prusue the project, but some factors do not develop in a positive way. 

Table II shows the estimated revenue requirements. Electricity and cogenerated products costs are based on regulated utility financing, while steam costs are based on non-regulated industrial financing. The cogeneration case costs are shown on a total product basis, since two products are involved. Figure 1 shows the selling price of electricity as a function of the selling price of steam for the cogeneration case.

An important cost consideration in cleaner production initiatives is the cost of any necessary technology. Many environmental problems require novel technical solutions based on research and development, involving cost, time, and technical risk. Uncertainties in estimating Tier 1,2, and 3 costs, and the costs of technology development, invite a probabilistic approach to estimation of costs, revenues, and related profitability. This approach was adopted by Moilanen and Martin, for example, using expected inonetary values or risk-weighted cash flows. 

I Costs of Production Sales revenues from new products must be reduced to reflect the cash outlays required to manufacture and sell them, and the ongoing R D costs required to produce follow-on products or to justify new uses for the NCE. The net cash flows induce additional tax liabilities as well. OTA estimated these costs using data as available and... 

In order to determine the economic viability the running coasts and revenues have been estimated (Table 2.3) as well. The main contribution to the fixed costs can be found in the membrane overhaul that is supposed to take place every three years. The oxygen price for large-scale production is taken to be equal to the price for gaseous oxygen from a cryogenic plant. The small-scale price is taken to be equal to that of a PSA plant. 

In order to appraise the profitability of peach production, the costs of production have been compared to the market prices using the isoprofit and the isorevenue curves (Figure 1). These lines represent a set of points in output space that all yield the same profit or revenue (Bowles, 2004). In this specific case, the isoprofit curve shows all the combinations of yields and market prices that nullify the farmer s profit, considering the total production cost aheady estimated. The isorevenue curve shows all the combinations of yields and market prices that nullify the farmer s revenue, considering the calculated full cost (Bertazzoli et al, 1994). 

After the individual cost factors have been estimated, a rough cost effectiveness calculation is possible [Solinas 1997]. This should provide information on the return on investment (= ratio of profit to capital employed) for the planned project. Investment in the process under consideration will be profitable if the sum of the revenues exceeds the total outlay and the profit (revenue-outlay) makes it possible to amortize and pay reasonable interest on the capital invested. The return on investment provided by a process can be increased by minimizing the production costs. Exposing the main cost factors (raw material, energy, waste disposal, personnel costs, depreciation) will therefore indicate the direction the development should take in order to improve the process (Table 6.2-1). 

In many industries, the provision of spare parts and associated services represents a significant component of supply chain profits. Some studies [23] estimate US sales of spare parts and after-sales services to be 8% of the annual gross domestic product (GDP) or 1 trillion. Others [28] surest, for example, that in 2001, General Motors earned relatively more profits from its 9 billion in after-sales revenues than it did from 150 billion in car sales. Another estimate [124] suggests that the total cost of ownership of a product may far exceed the amount spent on the initial product purchase and may vary between five and twenty times the original product cost. The main conclusion from these studies is that managing spare parts supply chains and related services after a product is sold may have a significant impact on both primary demand as well as on profits. 

Having completed an estimate for the total permanent investment, Cjpi, in Table 16.9, of a proposed plant, it remains to estimate the total annual sales revenue, S, the total annual production cost, C, and the annual pre-tax and after-tax earnings. This includes the development of the so-called Cost Sheet. Then the working capital can be estimated and added to the total permanent investment to give the total capital investment for the plant, as shown in Table 16.9. These provide the ingredients for an approximate measure of economic goodness, called the return on investment, defined by... 

All of the profitability measures discussed so far give only a snapshot view at a given point in time. The total annual sales revenues, S, and the total annual production cost, C, are estimated at critical points, normally for the third operating year. Furthermore, a simple depreciation... 

All the techniques that have been discussed in this chapter use the fixed capital cost and the operating costs in order to evaluate the profitability of a process. Clearly, the accuracy of such predictions will depend on the accuracy of the estimates for the different costs. When screening alternative processes, it is sometimes useful to evaluate the difference between the revenue from the sale of products and the cost of raw materials. This difference is called the profit margin or sometimes just the margin. 

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