Pay-back period

Although the reasoning seems sound, opportunity costs are not really expenses. Though it is true that the cash will be unavailable for other investments, opportunity cost should be thought of as a comparison criteria and not an expense. The opportunity forgone by using the cash is considered when the project competes for funds and is expressed by one of the financial analysis factors discussed earlier (net value of present worth, pay back period, etc.). It is this competition for company funds that encompasses opportunity cost, so opportunity cost should not be accounted directly against the project s benefits. 

Pay-back time as a criterion of investment performance does not, by definition, consider the performance of the project after the pay-back period. 

Resource analysis for the development of FCP1 suggested that 180 000 per annum would need to be expended on R D, for a two year time period, to achieve a 10% yield at Step 2. The R D spend would therefore total 360 000. The pay back period for a successful project would be only twelve months. The probability of success was thought to be good for a 10% and very good for a 5% improvement in the yield. On this basis the fall back position for the project would pay back the R D expenditure in just two years. A decision was made to go ahead with the project. 

Return on investment. How quickly will there be a return on the investment, what will be the pay back period ... 

See the original reference for more examples with binary and ternary mixtures. Also the sensitivities of the steam cost, materials of constructions and pay back period on the design and operation are presented in detail in Al-Tuwaim and Luyben (1991). 

The results shown in the Figure 8 present attractive economic effectiveness with a short pay back period and good profit rates. On the basis of the clear economic parameters, this application becomes visible as a good and practical solution for CO2utilization potential. 

The relahonship between capital cost, pay-back period, and likely acceptance is given in Table 3. Pay-back period can be considered as long if it exceeds two years medium if it is between one and two years and short if less than one year for common waste minimizahon ophons. 

Table 3 Relationship between Capital Cost, Pay-back Period, and Likely Acceptance...

Capital Cost Pay-back Period Likely Acceptance... 

Preliminary cost estimates based on bench scale studies indicate that for a plant capacity 3,75,000 TP A, total investment would be around Rs. 550 millions. Pay back period for the above investment with straight line depreciation and 15 years of plant life is estimated to be around 1 to 2 years. 

If the existing production plant has not yet reached the end of its economic life, the total costs CjNx must also include the sunk-cost. This is the basic economic principle. In the case of investment this is modified by use of the following parameters Net present value (NPV = discounted cash flow in ten years minus investment), internal rate of return (IRR) and pay back period (PBP). Generally should be NPV > investment, IRR > cost of capital and PBP < 5 years. 

For the evaluation of such additional investments, the concept of pay-back period is often nsed. The simple payback period (Ppb) is... 

The length of an acceptable pay-back period depends on flnaneing arrangements. With a passive system, it may be the period of the mortgage loan (20-25 years). With an aetive system, it should not be more than the life expectancy of the collector array (18-20 years), but the average householder would not consider a period greater than 10 to 15 years. In a commercial or industrial situation, pay-back periods of 3 to 5 years are often demanded. 

The earlier enthusiasm for solar cooling and air conditioning systems has subsided in spite of the improvement in CoP to 0.9 or even 1, they are often not only expensive but also use so much parasitic energy that there would be no pay-back period even in energy terms. With the improvement and cost reduction of solar photovoltaic cells, it may now be more effective to use such PV cells to generate electricity, which then drives a compression chiller. With direct coupling of electrical output to the compressor... 

In their publication the operator states that the investment for the membrane system is lower than for a competing absorption system, combined with considerable savings in energy, personal and maintenance costs, resulting, as they say, in a negative pay-back period. 

The resource planning conducted by a firm is influenced by the type of supply chain that the firm is involved with and the firm s own business strategy. For example, if a firm is a member of a supply chain where the number of suppliers of its products is being reduced and the firm was selected as one of the partners to receive more volume, the firm would have an incentive to invest in more capacity. If, on the other hand, the firm is one of many generic suppliers of a product in a supply chain where the customer treats all competitors products as commodities, the firm would have an incentive to compete on the basis of price. This would cause the firm to resist investment in capacity with a long pay back period and instead to focus on reducing other costs. 

For everyday decision-making, it is convenient to express the result in terms of a time pay-back period by which to ratio annual cost-savings to arrive at the discounted total of future savings. Having evaluated this figure once for the project, it becomes a criterion which can quickly be applied to each application. 

The benefit factors should initially be listed, and should always be quantified, where possible, so that the pay-back period can be established. Some benefits are easier to quantify than others. 

The costs are then balanced against the benefits (both qualitative and quantitative) and then an objective decision may be made on whether to allocate resources to the project or not. This will usually be based on the length of the pay-back period. Most health and safety projects will generally have a pay-back period of between three and five years - i.e. medium-term rather than short-term. 

This subject is an integral part of any chemical engineering course because in the last resort all process projects must be economically justifiable. Macro or national economics are not normally part of a chemical engineering course but an understanding of company finance and techniques for costing competing projects are essential. Thus, in industry there are commonly references to the bottom line and pay-back periods . 

In the North Sea there is a weather window during the summer when it is possible to tow out platforms and complete the installation. If because of delays in construction the fabrication is finished in October instead of April, the six months delay may well cost a year s production. For a project costing 200 million generating an annual income of 50 million when on stream , the pay back period can be defined as capital cost/annual income, which in this case is 4 years. If the project is delayed 12 months and the interest charged on the 200 million is 25 per cent per annum, what then is the pay-back period and by how many years is the breakeven point delayed ... 

One is the pay-back period this is the time required for the project to achieve a positive net cash flow. For the project in the table, this is four years, since the first positive cumulative cash flow is 47,130, at the end of year 3 (remembering that we start from year 0). We can also calculate the internal rate of return (IRR) on the project. This is the cost of capital which would lead to the NPV being precisely zero it is calculated by solving the equation 5... 

A proposal will normally be rejected out of hand if its NPV is not positive, if its payback period is greater than some pre-set threshold or if its IRR is less than the current cost of capital. If there still remain projects between which a choice must be made, the organization should probably choose those which have the highest positive NPV. This, however, usually reflects a long term view and other pressures may cause companies to accept the projects with the highest IRRs or the shortest pay-back periods. (Note that a shorter pay-back period generally means less risk, because our assumptions about market conditions are likely to be more reliable over the shorter period.)... 

Making allowance for a shorter network, each branch of ours is nearly 1 km long, and for some experimentation on the system by the assistants of Professor LEFEB VRE the cost of a new investment should be somewhat lower than ours. It wouldn t exceed 15 millions BEF or 750.000 DEM. The pay-back period is thus somewhere between 3.5 and 10 years depending on the price of gasoil. 

Cost benefit analysis requires a value to be placed upon the costs of improvements suggested or decided upon. These will include the cost of reducing the risk, eliminating the hazard, any capital expenditure needed and any ongoing costs applicable. An estimate of the pay-back period will be needed. Decisions on action to be taken are often based on... 

Pay back period (with interest rate of 18%) = 1.86 years... 

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