Rigorous Profitability Measures

The two principal profitability measures that involve the time-value-of-money in terms of discounted cash flows are the net present value or worth (NPV) and the investor s rate of return (IRR), which is also referred to as the discounted cash flow rate of return (DCFRR). These measures are anomalous in that, when used to compare alternative processes, they often give different results. This has led to substantial disagreement within the finance community (Brealey and Myers, 1984). 

When carrying out a rigorous profitability analysis, some design teams adopt the convention of reducing the process yield by a small amount, such as 2%, to account for the loss of raw materials and products during startups, shutdowns, and periods when there are malfunctions. Often, raw materials are vented or flared during startup. In other cases, one part of the plant shuts down while the remainder continues to operate, with small amounts of intermediate products vented when they are nontoxic and not easily stored, until the idle portion of the plant is restarted. 

Finally, when calculating the cash flow for the last year of operation, it is common to take credit for the working capital investment. Some companies also take credit for a projection of the salvage value of the plant, assuming that it is dismantled and sold at the end of its useful life. Because salvage values are difficult to estimate, and in some cases distort the NPV and IRR, many companies prefer to be conservative and assume a zero salvage value. 

The NPV method is simpler to implement than the IRR method and is well defined, whereas the IRR is not defined in all situations. Because the latter involves an iterative computation of the net present value, the simpler-to-calculate NPV is discussed first. 

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This section concludes with a presentation of the calculations to obtain several of the profitability measures. Normally, this includes one or more of the approximate measures, such as return on investment (ROI) and venture profit (VP), and one or more of the rigorous methods that involve cash flows, such as net present value (NPV) and investor s return on investment (IRR). The latter is also referred to as the discounted cash flow rate of return (DCFRR). In all cases, it is important to indicate clearly the depreciation schedule and, for the rigorous methods, to provide a table that shows the calculation of the annual cash flows, as shown in Example 17.29, as well as plots of cash flow of the type shown in the same example. Finally, the design team should present its judgment of the profitability of the proposed plant. 

Even when the foundations of a theory are rigorous, various approximations creep in by the time the theory is adapted to an interpretation of the experiments under consideration. Some approximations are nearly impossible to justify within the rigorous framework of the theory. Anyone who attempts to trace a linear path from theory to experiment or vice versa is likely to misunderstand how science actually progresses. In order to judge the merits and faults of an approximation in any area one must know the aims, which derive from an unwritten code of the investigators in that area. It is only partly correct to say that theory determines what we measure. Theory indicates the properties we can profitably measure, but it is equally true that experiments modify, or even mangle theory in the process of interpreting the results. 

Given the high complexity of the operation, one of the most important factors in achieving the full impact of any improvement process is a rigorous control system that enables production managers to follow up with full and timely implementation of all the necessary measures, and to identify the bottom-line impact on the profit and loss account. 

DOE is the fastest route to a profitable, reliable, robust, validated process. DOE s requirement of a rigorous design methodology that passes peer review with the scientists most knowledgeable about the process ensures scientific soundness. The depth of DOE s statistical foundation that enables the measurement of multiple effects and interactions in a single set of experiments proves DOE s statistical validity. DOE is also a resource conservator, since it requires less time and... 

Process simulation can guide and minimise the experimental research, but not eliminate it. Actually, the calibration of models requires accurate experimental data. It is the experiment that proves the model, and not the opposite Statistical planning of experiments is nowadays in a large extent obsolete. Instead, the experimental research should take profit from the power of rigorous models incorporated in simulation packages, particularly in the field of thermodynamics. For instance, simple vapour-liquid equilibrium (VLE) experiments in laboratory can be used to Increase the reliability of a feasibility study in innovative processes. Conversely, industrial VLE measurements can be used to calibrate the thermodynamic models incorporated in a simulator when experimental information is not available. 

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