Investment proposals

Sections 13.1 to 13.8 will deal mainly with the economics of a field development. Exploration economics is introduced in Section 13.8. The general approach to this section will be to look at an investment proposal from an operator s point of view. 

From an overall economic viewpoint, any investment proposal may be considered as an activity which initially absorbs funds and later generates money. The funds may be raised from loan capital or from shareholders capital, and the net (after tax and costs) money generated may be used to repay interest on loans and loan capital, with the balance being due to the shareholders. The shareholders profit can either be paid out as dividends, or reinvested in the company to fund the existing venture or new ventures. The following diagram indicates the overall flow of funds for a proposed project. The detailed cash movements are contained within the box labelled the project . 

Most processes operate in the context of an existing site in which a number of processes are linked to the same utility system. The utility systems of most sites have evolved over a period of many years without fundamental questions being addressed as to the design and operation of the utility system. The picture is complicated by individual production processes on a site belonging to different business areas, each assessing investment proposals independently from one another and each planning for the future in terms of their own business. Yet, the efficiency of the site infrastructure and the required investment is of strategic importance and must be considered across the site as a whole, even if this crosses the boundaries of different business areas. 

Allen [9] has provided a systematic procedure for assessing investment proposals for new plant and equipment, exploiting new technology, and replacing uneconomic, inefficient, and obsolete plants, process, and equipment. 

Country Studies. Often managers need an in-depth, yet broad and up-to-date understanding of a country s strategic market potential and situation before the first field trip or investment proposal. There are over 190 country studies available. Each study consists of analysis, statistics, forecasts, and information of relevance to managers. The studies are continually updated to insure that the reports have the most relevant information available. In addition to raw information, the reports provide relevant analyses which put a more general perspective on a country (seen in the context of relative performance vis-a-vis benchmarks). 

Finally, in analyzing investment proposals, it is necessary to identify and evaluate project sensitivity to changes in major variables such as output prices, input prices, sales and production volumes, etc. Sensitivity analysis can assist in overcoming ranking problems in assessment. 

Industry and Business Sectors. Ghemical engineering affects almost every industry and business that manufactures, handles, transports, and sells chemicals. Ghemical engineers are called on to help evaluate the practicality and earning potential of investment proposals in which the manufecture or use of chemicals is to be considered. 

The Department of Transport and British Railways Board shall make a thorough study of appraisal procedure of safety elements of investment proposals so that the cost-effectiveness of safe operation of the railway occupies its proper place in a business-led operation. 

The field development plan s prime purpose is to serve as a conceptual project specification for subsurface and surface facilities, and the operational and maintenance philosophy required to support a proposal for the required investments. It should give management and shareholders confidence that all aspects of the project have been... 

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. 

If the company is fully self-financing for its new ventures, then the appropriate discount rate would be the rate of return of the alternative investment opportunities (e.g. other projects) since this opportunity is foregone by undertaking the proposed project. This represents the opportunity cost of the capital. It is assumed that the return from the alternative projects is at least equal to the cost of capital to the company (otherwise the alternative projects should not be undertaken). 

Capital Investment Cost. The capital investment involved in a proposed project is important because it represents the money that must be raised to get the project started, is used in profitabiUty forecasts, and is reflected in the estimated manufacturing cost of a product. The capital investment is classified herein as fixed capital, working capital, and land cost. Sample capital investment estimate forms provide for separate materials (M) and labor (L) categories, or just combined M L figures. 

A design represents a considerable investment by the organization. There is therefore a need for a formal mechanism for management and the customer (if the customer is sponsoring the design) to evaluate designs at major milestones. The purpose of the review is to determine whether the proposed design solution is compliant with the... 

Reductions of investment and processing costs are general benefits that have been predicted for a long time so far, this has not yet been demonstrated. This is strongly coupled with an onset of mass fabrication, proposed to have similar benefits as for microelectronics, which has not happened so far. 

Considerable effort would be necessary to maintain such a library of emulsion information. Nevertheless, the time and attention already devoted to emulsion experimentation represent an investment from which the science deserves no little dividend. Communication to, through, and from a proposed information center may be the only means of avoiding much expensive and unnecessary duplication of work. It would definitely expedite the interpretation and significance of all accessible emulsion data. 

Materials chemistry proposals were jointly reviewed and split-funded, and in 1987 and 1988, 33 cooperative research projects were initiated. In 1989, the partnership was expanded to include the Division of Chemical and Thermal Systems (NSFs home for chemical engineering), and the program was renamed Materials Chemistry and Chemical Processing (MCCP). In 1989, 1990, and 1991, each of the three participating NSF divisions invested about three-quarters of a million dollars in additional... 

It is proposed to build a plant to produce a new product. The estimated investment required is 12.5 million pounds and the timing of the investment will be ... 

The problem with the payout period is that it does not consider the timing of the payments or the profits earned by the plant after the payout period is over. To illustrate the importance of the former, suppose a plant has the same prestartup expenses as the one in Example 10-3. Assume it has a profit of 5,000,000 per year for the first 5 years and from then on earns 7,000,000 per year. The payout time for this plant is 5 years, the same as for the plant in Example 10-3. The return on investment of the two mature plants is the same. Yet this proposed plant has a definite advantage over the one in Example 10-3. This is illustrated in the following example. 

Gives rate of return that is a familiar measure and indicates relative merits of a proposed investment... 

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