Project evaluation

The NPV is generally more widely used in project evaluation studies than DCF measures. The NPV provides a direct measure in money terms of the attractiveness of a project and when dealing with more than one project NPVs are additive since they are measured at the same cost of capital. A DCF is, on the other hand, a rate of return and values cannot be combined for multiple projects since they are measured on differing capital investments. 

In the context of the chemical industry, a project can range from initial research studies (on a new product or new route to an existing product) to a capital project costing many millions of pounds or dollars for the installation of a new production unit. The common ground is the ultimate objective of generating profit at some time in the future by the use of present resources (skilled manpower, money). Economic evaluation of a project involves the 

---

J. E. Vade-Riestra, Project Evaluation in the Chemical Process Industries, McGraw-Hid Book Co., Inc., New York, 1983. 

One of the most important activities within a company is project screening. One losing venture can negate the gain of several winners. Therefore, the project evaluators must be careful to obtain the best and most complete information possible so that the economics will accurately model the iiiture real world situation. Possible... 

Valle-Riesta, J. F., Shortcuts in Project Evaluation, ASEE Annual Conference Proceedings, 1985. 

An overall economic evaluation must be made to ensure that the contemplated project for petroleum development will recover sufficient capital to pay for the total cost of development, installation and assembly effort of the company. Further, the capital return must yield a financial return consistent with the overall company risk involved. Thus, it is very important that the petroleum engineer designing a recovery system understand the company s evaluation criteria that will be used by management in judging whether a new project is to go forward. Chapter 7 (Petroleum Economics) has detailed discussions of general engineering economics and product (or project) evaluation criteria. 

Summary of cash flows (Figure 61.8). This document is an essential part of every capital expenditure project evaluation. The forecast thus provided will be needed in the preparation of the overall cash budget. 

Administrative representatives are often shy about developing water reuse projects. Evaluations of the risks related to water reuse have been twisted so as to be employed in political arguments during election campaigns, which may explain the reluctance of politicians. Examples of failure and success of indirect potable reuse projects in the United States are provided by [13]. Such experiences point out the importance of public education as regards the human interaction with the water cycle and the management of water resources. The population should be aware that... 

In a tiny fraction of cases, a quick formula can be used. For most cases, the analysis uses an options tree, with one leaf per possible outcome. However, this falls prey to the curse of dimensionality —the number of leaves on the tree grows exponentially in the number of risk and decision dimensions considered. Thus only a limited, simple set of situations can be optimized in this way because one has to severely limit the decisions and risks that are considered. Tools available to help automate and simplify options analysis, widely used in pharmaceutical project evaluation, include Excel addons such as R1SK [11] and more graphically based solutions such as DPL [12]. Both of these support the creation and evaluation of decision trees and of influence diagrams Figure 11.2 shows a simple example of each of these. A primer in applied decision theory is Clemen s book Making Hard Decisions, other sources may be found in the website of James Vornov, Director of Clinical Research at Guildford Pharmaceuticals, a recent convert to decision theory for options analysis [13]. 

Cost estimation is a specialised subject and a profession in its own right. The design engineer, however, needs to be able to make quick, rough, cost estimates to decide between alternative designs and for project evaluation. Chemical plants are built to make a profit, and an estimate of the investment required and the cost of production are needed before the profitability of a project can be assessed. 

Most proprietary spreadsheets have procedures for calculating the cumulative NPW from a listing of the yearly net annual revenue (profit). Spreadsheets are useful tools for economic analysis and project evaluation. 

Scott, R. (1978) Eng. and Proc. Econ., 3 105. Working capital and its estimation for project evaluation. Taylor, J. H. (1977) Eng. and Proc. Econ. 2, 259. The process step scoring method for making quick capital estimates. 

An approximate estimate of the overall column size can be made once the number of real stages required for the separation is known. This is often needed to make a rough estimate of the capital cost for project evaluation. 

Gives correct ranking in most project evaluations... 

Additional examples of the use of PBP, NPV, and IRR can be found in Appendix B. In Section B.5, we present a more detailed explanation of the various components that constitute the income and expense values that must be used in project evaluation. 

In Chapter 3 we discussed the formulation of objective functions without going into much detail about how the terms in an objective function are obtained in practice. The purpose of this appendix is to provide some brief information that can be used to obtain the coefficients in objective functions in economic optimization problems. Various methods and sources of information are outlined that help establish values for the revenues and costs involved in practical problems in design and operations. After we describe ways of estimating capital costs, operating costs, and revenues, we look at the matter of project evaluation and discuss the many contributions that make up the net income from a project, including interest, depreciation, and taxes. Cash flow is distinguished from income. Finally, some examples illustrate the application of the basic principles. 

Two other factors that need to be considered in project evaluation that are not expressly found in financial statements are inflation and debt-equity ratio. 

Next, let us go through an example of project evaluation that includes most of the factors just discussed. 

---