Profitability analysis payback period

Economic analysis can determine the discounted profitability criteria in terms of payback period (PBP), net present value (NPV), and rate of return (ROR) from discounted cash flow diagram, in which each of the annual cash flow is discounted to time zero for the LHS system. PBP is the time required, after the construction, to recover the fixed capital investment. NPV shows the cumulative discounted cash value at the end of useful life. Positive values of NPV and shorter PBP are preferred. ROR is the interest rate at which all the cash flows must be discounted to obtain zero NPV. If ROR is greater than the internal discount rate, then the LHS system is considered feasible (Turton et al., 2003). 

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. 

The total-cost method does not in general provide a satisfactory means for making most insulation investment decisions, since an economic return on investment is required by investors and the method does not properly consider this factor. Return on investment is considered by Rubin ( Piping Insulation—Economics and Profits, in Practical Considerations in Piping Analysis, ASME Symposium, vol. 69,1982, pp. 27-A6). The incremental method used in this reference requires that each incremental in of insulation provide the predetermined return on investment. The minimum thickness of installed insulation is used as a base for calculations. The incremental installed capital cost for each additional V2 in of insulation is determined. The energy saved for each increment is then determined. The value of this energy varies directly with the temperature level [e.g., steam at 538°C (1000°E) has a greater value than condensate at 100°C (212°F)]. The final increment selected for use is required either to provide a satisfactory return on investment or to have a suitable payback period. 

Profitability- Analysis A document supplying information on the profit potential of the final plant. Several standard methods such as return on investment, venture profit, payback period, and annualized cost are used to calculate the expected profitability [957]. 

The use of fixed capital investment, FCI, in the calculations for payback period and rate of return on investment given above seems reasonable, because this is the capital that must be recovered by project revenue. Many alternative definitions for these terms can be found, and the reader will find that total capital investment (FCI + WC + Land) is often used instead of fixed capital investment. When the plant has a salvage value (S), the fixed capital investment minus the salvage value (FCI - S) could be used instead of FCI. However, because the salvage value is usually very small, we prefer to use FCIj alone. Example 10.1 is a conprehensive profitability analysis calculation using nondiscounted criteria. 

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