Profitability analysis operating costs

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 payback period(or payout time) is the number of years from plant start-up required to recover all expenses involved in a project, if all the pre-tax profits were used for this purpose. Depreciation charges are not included in the operating costs. Expenses not incurred directly in the design and construction of the plant are excluded, the analysis is intended to demonstrate the best means of allocating the present and future resources of a company. A payback period of less than five years is usually required for a project to proceed. However, the payback period does not consider the timing of the payments or the profits earned by the plant after the payback period. 

An analysis of costs and profits for any business operation requires recognition of the fact that physical assets decrease in value with age. This decrease in value may be due to physical deterioration, technological advances, economic changes, or other factors which ultimately will cause retirement of the property. The reduction in value due to any of these causes is a measure of the depreciation. The economic function of depreciation, therefore, can be employed as a means of distributing the original expense for a physical asset over the period during which the asset is in use. 

With the simple relations described above, you can analyse and understand quite a lot of the operation of a firm. You should, however, be aware of the limitations of this kind of analysis. Our Cost-Sales-Profit analysis assumes that a firm is working at a steady state... 

Based upon an analysis of the data, the model generated a profit-and-loss statement for operating costs over seven years. The results are displayed below and demonstrate the lower operating costs that could be expected with the carbon dioxide system. 

For consequence analysis, we have developed a dynamic simulation model of the refinery SC, called Integrated Refinery In-Silico (IRIS) (Pitty et al., 2007). It is implemented in Matlab/Simulink (MathWorks, 1996). Four types of entities are incorporated in the model external SC entities (e.g. suppliers), refinery functional departments (e.g. procurement), refinery units (e.g. crude distillation), and refinery economics. Some of these entities, such as the refinery units, operate continuously while others embody discrete events such as arrival of a VLCC, delivery of products, etc. Both are considered here using a unified discrete-time model. The model explicitly considers the various SC activities such as crude oil supply and transportation, along with intra-refinery SC activities such as procurement planning, scheduling, and operations management. Stochastic variations in transportation, yields, prices, and operational problems are considered. The economics of the refinery SC includes consideration of different crude slates, product prices, operation costs, transportation, etc. The impact of any disruptions or risks such as demand uncertainties on the profit and customer satisfaction level of the refinery can be simulated through IRIS. 

A social cost-benefit analysis gives information on the profit of a project and further on the influence of the project on employment, production, consumption, savings, trade balance, redistribution of income etc. Here the Guidelines for project evaluation of the Unido [9] are used. Both the investment and operating costs of a project have to be divided into... 

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. 

The environmental analysis consists of evaluating the risks on health and environment, even if prevention measures have been incorporated in design. The requirements formulated in project definition should be examined on the base of the proposed solutions. For example, the cost of antipollution measures should be added to the operating costs, and their impact on profitability estimated. For this section we recommend the book of Allen Rousselot (1997). 

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. 

The simplified cost models developed for total capital investment and operating costs allows a quick analysis of profitability. For instance, the gross profit before taxes can be obtained by subtracting total operating costs TOC (Eq. 15.30) from sales S ... 

Thus, a more modem concept of the profitability analysis should consider the project as a source of profit as any other business. Capital and operating costs are only intermediate figures as inputs of a profitability analysis. 

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). 

The financial analysis program can estimate fuel or power sale prices for a range of values of plant investment and operating cost. Comparisons can also be made of the effects on profitability of improvements or deficiencies in performance or cost, which might result from changes in interest rates, capital investments, or from further R D... 

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. 

When the appropriate specifications are made. Aspen IPE computes annual operating costs, as well as a complete profitability analysis, the results of which appear in this Investment Analysis spreadsheet. These notes discuss capital cost estimation only because the spreadsheet, Profitability Analysis-l. O.xls, which is discussed in Section 17.8 of the textbook, is used to compute operating costs, working capital, and profitability measures. 

To initiate the profitability analysis, on the Menu, press the Create Report button to produce the Create Report dialog box. After entering the Report Name, to which the word Report is automatically appended, and the directory into which the report file is to be stored (i.e., the report path), press the Create Report button. The results, which are placed in an EXCEL report file, include sections on the Investment Summary, which presents cost estimates for all entries associated with the total permanent investment, the working capital, and the total capital investment (i.e the entries shown in Table 16.9). Also included are sections on the Variable Costs at design capacity (not production during a specific year) of operations and for the Fixed Costs. These correspond to the entries shown in Table 17.1. Then, a section on the cash flows, and the elements that contribute to them, is displayed for each year during the life of the project. Finally, a section on the NPV and the IRR is provided. Each section is accessed by clicking on the appropriate tab at the bottom of the frame. 

It is desired to carry out a profitability analysis for the monochlorobenzene (MCB) separation process using (a) purchase costs and bare module factors, (b) purchase and installation costs estimated by Aspen IPE. In Section 16.7, the latter estimates were computed, beginning with the ASPEN PLUS simulation in the file, MCB.bkp. Plant location is the Gulf Coast. The design time is estimated to be one year, the construction time at one year, and the total operating life of the project at 15 years. Assume that 5% of the total permanent investment is... 

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