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# 8-1

CHAPTER 8

PROFITABILITY ANALYSIS

8.0

Introduction

## Economic evaluation is essential in plant design because it involves plant and

production that must be financed. Basic principles of any private companies are to aim
in continuation doing business by gaining a profit. Without gain revenue, ones cannot
do other social responsible such as providing continuing employment, providing money
for local social services through rates and local taxes and providing money for national
activities through corporate taxes and through the taxes paid by the employees.

In this chapter, economy analysis is carrying out to determine the profit margin.
The analysis comprises of the capital cost (total module cost) and manufacturing cost
estimation. Manufacturing cost is the cost that must provided by the investor in order
production can be functioned. After the cost estimation, profitability analysis will be
conducted to give the overall economic feasibility of the plant and find out the payback
period that very concerned by the investors.

8.1

## Specification of 2-EthylHexyl Acrylate Plant

The cost of equipments will be estimated and the feasibility of 2-Ethyhexyl Acrylate will
be evaluated by profitability analysis to make the project is economical attractive. There
are some general assumptions that applied in analyzing the economy of this proposed
plant:
i.

ii.

## The currency exchange rate of US dollar to Ringgit Malaysia is fixed at RM

3.058 as fixed by Malaysian Government

8-2
8.2

Capital Cost

Capital cost is summation of fixed capital investment, working capital and start up. The
capital needed to supply the necessary manufacturing and plant facilities is called the
fixed-capital investment while the necessary for the operation of the plant is termed
working capital.
8.2.1

## Grass-roots capital is the cost of equipment installed in a plant. Equipment module

costing method is used to estimate the cost of equipment used in 2-Ethylhexyl Acrylate
plant. Generally, this method is the best method for making preliminary cost
estimations. For individual calculation of major equipment, refer to APPENDIX C1

Grass-roots capital (GRC) cost make up major portion of the total fixed capital
cost. To calculate the GRC,

## Table 8.1: Grass-Roots Capital (GRC)

Equipment Identification
Reactors
Reactor (R-101)
Reactor (R-102)
Total Reactor
Distillation Columns
Distillation Columns (T-101)
Distillation Columns (T-102)
Total DC
Storage Tanks
Acrylic Acid
2-Ethylhexanol
2-Ethylhexyl Acrylate
Total Storage tank

Unit

Bare Module
Cost (RM)

1
1
2

1,310,896.90
1,581,077.40

1
1
2

1,496,421.58
200,759.42

1
1
2
4

502,345.12
555,323.14
1,135,873.90

Total

2,891,974.30

1,697,180.99

2,193,542.16

8-3
Heat Exchanger
Heater (E-101)
Heater (E-102)
Condenser
Reboiler
Cooler (E-104)
Total Heat Exchanger
Mixer
Pump
Absorber
Cracking Units
Gas Treatment
Incinerator
Total Gas Treatment
Waste Treatment Plant
Holding tank
Reactor
Clarifier
Total Waste Treatment Plant
Total Bare Module Cost, TBM

1
1
2
1
1
6
1
1
1
1

240,608.49
93,834.46
599,786.83
6,306.91
459,625.92

649,000.00

1,400,162.61
181,742.00
5,467.73
730,994.67
45,725.07

649,000.00
14,600.00
105,000.00
78,500.00
198,100.00
9,993,889.55

RM

## Contingency and fee

Contingency, CC

CC = 0.15TBM

1,499,083.43

Fee, CF

CF = 0.03TBM

299,816.69

Capital Cost
Auxiliary Facilities

CC+CF+CTBM=CCAP

11,792,789.67

CSD = 0.05CCAP

499,694.48

CAB=0.04CCAP

399,755.58

## Offsite Facilities, COS

Total Grass Roots Capital Cost (GRC)

COS= 0.20CCAP

1,998,777.91
14,691,017.63

8-4
8.2.2

## Fixed and Total Capital Investment Cost, (TCI)

Fixed capital investment (FCI) signifies the capital that necessary for the installed
process equipment with all auxiliaries that are needed for complete process operation.
It includes direct costs and indirect costs. According to Richard Turton, 2007, Fixed
Capital Investment is Grass root capital cost.

Working capital consists of the total amount of money invested in raw materials
and supplies carried in stock, finished products in stock and semi-finished products in
the process of being manufactured, account receivable, cash kept on hand for monthly
payment of operating expenses; salaries, wages and raw material purchases.

## Majority of chemical plant, working capital is assumed 10% of fixed capital

investment whereas start up cost is 7% out of fixed capital investment cost. Below is the
equation from Richard Turton, 2007:
Total Capital Investment = Fixed Capital Investment + Working Capital
+ Start Up
Table 8.3: Total Capital Investment Cost
Fixed Capital Investment
Working Capital
Start Up Cost
TOTAL CAPITAL INVESTMENT

10%
7%

FCI
FCI

14,691,017.63
1,469,101.76
1,028,371.23
17,188,490.63

8-5
8.3

## Manufacturing Cost Estimation

Manufacturing cost is the cost associated with day-to-day operation of chemical plant
and must be estimated before the economic feasibility of a proposed process can be
assessed. The cost of manufacturing (COM) for a chemical plant includes direct
manufacturing cost (DMC), fixed manufacturing cost (FMC) and general expenses
(GME). The equation below is used to evaluate the cost of manufacturing from Richard
Turton, 2007:
= + +

Direct Manufacturing cost (DMC) is the costs that represent operating expenses
that vary with production rate. Direct manufacturing cost includes cost incurred by raw
materials, product credit, catalyst, operating labor, supervisory and clerical labor,
utilities, maintenance and repairs. All the factorial is based on Ulrich, (1984) and Sinnot,
(1996).

## Fixed Manufacturing cost is the cost that independent of changes in production

rate. Local taxes, insurances, depreciation and plant overhead are the fixed
manufacturing cost.

## General Expenses represent an overhead burden that is necessary to carry out

business functions such as management, sales, financing and research function.

i.

ii.

iii.

iv.

v.

8-6
8.3.1

## Cost of Operating Labor, COL

Operating labors are determined by the numbers of operators required per equipment
unit per shift.
Table 8.4: Estimation of Operating Labor
Equipment Type

Units
2
1
2
2
1
4
1
4

Reactor
Mixer
Pump
Distillation Column
Absorber
Heat Exchanger
Cracking Units
Storage Tanks
Total
= [6.29 + 31.7 1

NNP
2
1
0
2
1
4
1
4
11

+ 0.23(11)]0.5 = .

i.

ii.

iii.

3 330

= 990

1 5 49

= 245

990

= 4.04

245

= RM 1300/yr

## Labor cost, COL

= RM 405,600.00/ yr

8-7
8.3.2

## Cost of Raw Material, CRM and Revenue

Table 8.5: Annual Cost of Raw Material and Revenue of product

## Price for Raw Material:

Acrylic Acid

RM 3,150.00/ tonne*

2-Ethylhexanol

RM 2,750.00/ tonne*

PTSA

RM 2,950.00/ tonne*

Acrylic Acid

2-Ethylhexanol

PTSA

## Selling Price for Product:

2-Ethylhexyl Acrylate

RM 3530/ tonne*

Production Rate:
2-Ethylhexyl Acrylate

## 111055.2362 tonne / year

Annual Cost:
Acrylic Acid

RM 137,338,740.00 / year

2-Ethylhexanol

RM 232,883,085.60 / year

PTSA

RM 5,676,582.86 / year

## Total Raw Material

RM 375,898,408.46 / year

Revenue:
2-Ethylhexyl Acrylate

RM 392,024,983.68 / year

* Sources: ICIS.com

8.3.3

## Cost of Utilities, CUT

In this process, a very basic assumption was made where there are two types of utilities
in our plant, which are electricity and water. The price of electricity and cooling water
are base on the price following Pahang rates

8-8
a) Water
Purchase price for industrial usage:
=

RM0.84 / m3

Density water =

1000 kg / m3

> 277 m3

Sources: www.mida.com.my
Table 8.6: Cost of Water
Heat Exchanger
E-103
E-104
Heater (E-101)
E-102
Total

kg/hr
13678.3650
75784.7052
360
279.56

m3/yr
108332.6508
600214.8649
2851200
2214.1152

Cost (RM/year)
90,999.43
504,180.49
57,024.00
1859.856768
654,063.77

b) Electricity
At peak hour,
Electricity price

RM 0.281 /kWh

Sources: www.tnb.com.my

Steam Factor

.
.

Coulson Richardson,1999

Electricity cost =

0.281

Equipment
Pump
reactor
reactor
Total

kW
17.225
970.9
76.18

efficiency
0.7
0.85
0.85

Cost (RM/year)
54,763.69
2,542,067.49
199,458.96
2,796,290.14

8-9
8.3.4

Range

## Direct Manufacturing Cost

Raw Material
Utilities
operating labor
Waste Treatment Plant
Maintenances
10%
supervision
10%
Laboratory Charges
7%
Patents and royalties
1%
Fixed Manufacturing Cost
Local taxes
1%
Insurances
1%
25%
Depreciation
10%
Total Manufacturing Expenses, AME
General Expenses
Distribution & Selling Expenses
Research & Development

Specification

Cost

FCI
Operating Labor
Operating Labor
FCI

375,898,408.46
3,450,353.91
405,600.00
198,100.00
1,718,849.06
40,560.00
28,392.00
171,884.91

FCI
FCI
Operating Labor
FCI

10%

supervision,
operating labor &
Maintenance

5%
4%

FCI
FCI

## Annual General Expenses, AGE

Cost of Manufacturing cost, COM = AME+AGE
Revenue from Sales
Annual Net Profit, ANP
Income Taxes

30%

ANP

Rate of Return

## ANNP/ FCI 100%

171,884.91
171,884.91
101,400.00
1,718,849.06
384,076,167.21

175,940.91
859,424.53
687,539.63
1,722,905.06
385,799,072.28
392,024,983.68
6,225,911.40
1,867,773.42
4,358,137.98
25.35

8-10
8.4

Profitability Analysis

The profitability of the project will be the largest factor that makes a project
economically attractive. The feasibility of 2-Ethylhexyl Acrylate production in Malaysia is
evaluated by profitability analysis. At this level, almost all the design and cost
information required for the profitability analysis were obtained. Based on the
information available, the best methods assessing the profitability of alternatives are
based on projections of the cash flows during the project file.

## A proposed capital investment and its associated expenditures can be

recovered by revenue (or savings) over time in addition to a return on the capital that is
sufficiently attractive in view of the risks involved of the potential alternatives uses.
8.4.1

## Cash Flow and Cash Flow Diagram

The flow of cash is the living of any commercial organization. The cash flow in a
manufacturing company has a similarity with material flows in a process plant. The
inputs are the cash needed to pay for research and development; plant design and
construction; and plant operation (Sinnot, 1996).

A cash flow diagram is the forecast cumulative net cash flow over the life of a
project. The cash flows are based on the best estimates of investment, operating costs,
sales volume and sales price that can be made for the project (Sinnot, 1996). A cash
flow diagram can shows a clear picture on the required sources for a project and timing
of earnings.

## To calculate depreciation, the plant adopts Double Balance Method.

Working Capital

= RM 1,469,101.76

## Total production cost, APC

= RM 385,799,072.28

## Total Capital Investment, TCI = RM 17,188,490.63

Income

= RM 392,024,983.6

8-11

Yr

Capital
Investment,
TCI

Sales Income,
AS

Depreciation,

Total
Expanses
APC

Cash
Income
(AS - APC)

Net Profit

Federal
Income
Taxes AIT

Net Profit
after Taxes

Net Cash
Income

Cummulative
Cash Flow
0.00

2578273.59

-2578273.59

-2578273.59

5156547.19

-5156547.19

-7734820.78

10922771.61

-10922771.61

-18657592.39

392024983.68

12,833,199.74

385799072.28

6225911.40

-6607288.34

-1850040.73

-4757247.60

8075952.14

-10581640.26

395945233.51

11549879.76

385799072.28

10146161.24

-1403718.53

-393041.19

-1010677.34

10539202.43

-42437.83

399904685.85

10394891.79

385799072.28

14105613.57

3710721.79

1039002.10

2671719.69

13066611.47

13024173.64

403903732.71

9355402.61

385799072.28

18104660.43

8749257.82

2449792.19

6299465.63

15654868.24

28679041.89

407942770.04

8419862.35

385799072.28

22143697.76

13723835.41

3842673.92

9881161.50

18301023.84

46980065.73

412022197.74

7577876.11

385799072.28

26223125.46

18645249.35

5220669.82

13424579.53

21002455.64

67982521.37

10

416142419.71

6820088.50

385799072.28

30343347.44

23523258.94

6586512.50

16936746.43

23756834.94

91739356.31

11

420303843.91

6138079.65

385799072.28

34504771.63

28366691.98

7942673.76

20424018.23

26562097.88

118301454.19

12

424506882.35

5524271.69

385799072.28

38707810.07

33183538.39

9291390.75

23892147.64

29416419.33

147717873.51

13

428751951.17

4971844.52

385799072.28

42952878.90

37981034.38

10634689.63

27346344.75

32318189.27

180036062.79

14

433039470.68

0.00

385799072.28

47240398.41

47240398.41

13227311.55

34013086.85

34013086.85

214049149.64

15

437369865.39

0.00

385799072.28

51570793.12

51570793.12

14439822.07

37130971.04

37130971.04

251180120.68

16

441743564.05

0.00

385799072.28

55944491.77

55944491.77

15664457.70

40280034.07

40280034.07

291460154.76

17

446160999.69

0.00

385799072.28

60361927.41

60361927.41

16901339.67

43460587.74

43460587.74

334920742.49

18

450622609.68

0.00

385799072.28

64823537.41

64823537.41

18150590.47

46672946.93

46672946.93

381593689.43

19

455128835.78

0.00

385799072.28

69329763.50

69329763.50

19412333.78

49917429.72

49917429.72

431511119.15

20

459680124.14

0.00

385799072.28

73881051.86

73881051.86

20686694.52

53194357.34

53194357.34

484705476.49

8-12

## Undiscounted Cash Flow

600.0
500.0
400.0
300.0
200.0
100.0
0.0

-100.0

WC + Land

10 11 12 13 14 15 16 17 18 19 20 21

year

8.4.2

## Discounted Cash Flow

The economic feasibility of this plant is evaluated using the Discounted Cash Flow
Analysis (DCF), which is the most regularly, used method of economic evaluation in the
chemical industry. The method of approach for a profitability evaluation discounted cash
flow takes into account the time value of money and is based on the amount of the
investment that is unreturned at the end of each year during the estimated life of the
project. A minimum acceptable level of DCF is set by the cost of capital to the company
considering an investment. If the project shows a DCF greater than the cost of capital
then the project will show a profit, conversely a DCF below the cost of capital indicates
a loss-making project. The discount rate is chosen to reflect the earning power of
money. From the discounted rates, net present value can be determined.

8-13
Table 8.9: Discounted (10%) Cash Flow Analysis
Year Net cash income Discount factor (fd) Discounted cash flow

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

0
-2578273.59
-5156547.19
-10922771.61
8075952.14
10539202.43
13066611.47
15654868.24
18301023.84
21002455.64
23756834.94
26562097.88
29416419.33
32318189.27
34013086.85
37130971.04
40280034.07
43460587.74
46672946.93
49917429.72
53194357.34

1 1+
0.0000
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
0.3505
0.3186
0.2897
0.2633
0.2394
0.2176
0.1978
0.1799
0.1635
0.1486

## Net cash income f d

0
-2343885.086
-4261609.247
-8206439.978
5515983.974
6544015.515
7375761.531
8033422.728
8537562.689
8907091.418
9159288.288
9309853.264
9372977.744
9361428.249
8956708.824
8888859.253
8766109.005
8598445.591
8394539.757
8161898.641
7907002.266

Cumulative
Discounted
cash flow
0
-2343885.086
-6605494.334
-14811934.31
-9295950.337
-2751934.823
4623826.709
12657249.44
21194812.13
30101903.54
39261191.83
48571045.1
57944022.84
67305451.09
76262159.91
85151019.17
93917128.17
102515573.8
110910113.5
119072012.2
126,979,014.43

8-14
Table 8.10: Discounted (20% and 32%) Cash Flow Analysis
Discount rate, i= 20%
Year

Net Cash
Income

Discounted
factor (fd)

Discounted cash
flow

1 1+
0.0000

0

-2578273.59

0.8333

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

-5156547.19
-10922771.61
8075952.14
10539202.43
13066611.47
15654868.24
18301023.84
21002455.64
23756834.94
26562097.88
29416419.33
32318189.27
34013086.85
37130971.04
40280034.07
43460587.74
46672946.93
49917429.72
53194357.34

0.6944
0.5787
0.4823
0.4019
0.3349
0.2791
0.2326
0.1938
0.1615
0.1346
0.1122
0.0935
0.0779
0.0649
0.0541
0.0451
0.0376
0.0313
0.0261

Cumulative
Discounted
cash flow

Cumulative
Discounted
cash flow

Discounted
factor (fd)

Discounted cash
flow

1 1+
0.0000

0

-2148561.33

-2148561.33

0.6250

-1611421.00

-1611421.00

-3580935.55
-6321048.39
3894652.84
4235469.08
4375981.74
4368986.42
4256233.23
4070416.61
3836861.47
3574939.25
3299247.19
3020583.33
2649162.53
2410003.18
2178662.17
1958909.68
1753084.28
1562458.68
1387524.45

-5729496.88
-12050545.26
-8155892.42
-3920423.34
455558.41
4824544.82
9080778.06
13151194.67
16988056.14
20562995.39
23862242.58
26882825.91
29531988.44
31941991.62
34120653.79
36079563.47
37832647.75
39395106.42
40,782,630.88

0.3906
0.2441
0.1526
0.0954
0.0596
0.0373
0.0233
0.0146
0.0091
0.0057
0.0036
0.0022
0.0014
0.0009
0.0005
0.0003
0.0002
0.0001
0.0001

-2014276.25
-2666692.29
1232292.50
1005096.67
778830.74
583189.29
426103.92
305625.95
216067.16
150988.05
104508.12
71760.80
47202.64
32205.98
21835.85
14725.02
9883.38
6606.52
4400.13

-3625697.24
-6292389.53
-5060097.03
-4055000.36
-3276169.63
-2692980.34
-2266876.42
-1961250.47
-1745183.31
-1594195.27
-1489687.15
-1417926.36
-1370723.72
-1338517.73
-1316681.88
-1301956.86
-1292073.48
-1285466.97
(1,281,066.83)

WC + Land

8-15

8-16
8.4.3

## Net Present Value

Net present value is the final cumulative discounted cash flow value at the end of the
project. Below is the summary of net present value for different rates.

Rate of Interest, I
(%)
10
20
60

(year)
5.0
5.4
>20

## Net Present Value

(RM)
126,979,014.43
40,782,630.88
(1,281,066.83)

10 % of rate of interest is the choice of the project because it has the highest
NPV that will make the project become attractive and profitable.

From the Net Present Value, Discounted Cash Flow Rate of Return (DCFROR)
can be determined. DCFROR is interest rate at which all the cash flows must be
discounted in order for the net present value of the project to be equal to zero. This rate
of return is equivalent to the maximum interest rate (which is normally, after taxes). This
is because money could be borrowed to finance the project under conditions where the
net cash flow to the project over its life would be just sufficient to pay all principal and
interest accumulated on the outstanding principal (Timmerhaus & Peters, 1991).
According to the discounted cash flow analysis, Table 8.10,

When NPV = 0
Rates of Interest
10%
x
60.00%
DCFROR

## Net Present Value

(RM)
126979014.43
0
-1281066.83
59.50%

8-17
8.4.4

Sensitivity Analysis

A sensitivity analysis is a tool for decision making. Sensitivity analysis is the study of
how the variation in the variable parameter affected the target parameter. Sensitivity
analysis can be useful for range of purposes which are:
i.

making.

ii.

## Enhancing communication from modelers to decision makers by making

recommendation more credible and understanding.

iii.

## Increased understanding or quantification of the system.

iv.

Model development.

For this plant, one-way sensitivity analysis is used. It is the simplest form of
sensitivity analysis and understandable. One-way sensitivity analysis is to simply vary
one value in the model by a given amount, and examine the impact that the change has
on the models result.

=

## Where = variable parameter

The sensitivity analysis was analysis at year 10 for the target parameter is Net
Present Value and the variable parameters are Revenue, Cost of Manufacturing, COM
and Fixed Capital investment, FCI.
Table 8.11: Sensitivity Analysis
Increment
-1%
0%
1%

Revenue (RM)
388,104,733.84
392,024,983.68
395,945,233.51

## Present Value (RM)

90,821,962.75
91,739,356.31
92,656,749.87

Sensitivity Analysis
0.234

8-18
Increment
-1%
0%
1%

COM (RM)
381,941,081.55
385,799,072.28
389,657,063.00

## Present Value (RM)

90,821,962.75
91,739,356.31
92,656,749.87

Sensitivity Analysis

Increment
1%
0%
1%

FCI (RM)
17,016,605.73
17,188,490.63
17,360,375.54

## Present Value (RM)

90,821,962.75
91,739,356.31
92,656,749.87

Sensitivity Analysis

0.238

5.337

From the analysis above, the most influence in changing the Net Present Value is
Revenue because it changes the Net Present Value in 0.234 year, faster than Cost of
Manufacturing and Fixed Capital Investment.

8.4.5

Payback Period

## A. Simple Payback Period

Pay-back time is the time required after the start of the project to pay off the initial
investment from income. Payback time is a practical measure for evaluate projects that
have a short life. It is often used to assess small improvement projects on operating
plant. Usually, a payback time of 2 to 5 years would be expected from such projects
theoretically. Practically it takes more than that because of disturbances occurred.
Table 8.12: Simple Payback Period Analysis
Year
1
2
3
4
5
6
7
8
9
10
11
12

## Cumulative Cash Flow

-2578273.59
-7734820.78
-18657592.39
-10581640.26
-42437.83
13024173.64
28679041.89
46980065.73
67982521.37
91739356.31
118301454.19
147717873.51

8-19
13
14
15
16
17
18
19
20

180036062.79
214049149.64
251180120.68
291460154.76
334920742.49
381593689.43
431511119.15
484705476.49

By Interpolation, of the cumulative cash flow in year 5 and 6, the payback period of 2Ethyhexyl Acrylate plant is 5.0 years.
B. Discounted Payback Period

Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

-2343885.09
-6605494.33
-14811934.31
-9295950.34
-2751934.82
4623826.71
12657249.44
21194812.13
30101903.54
39261191.83
48571045.10
57944022.84
67305451.09
76262159.91
85151019.17
93917128.17
102515573.76
110910113.52
119072012.16
126979014.43

## By Interpolation, the payback period of 2-Ethyhexyl Acrylate plant is 5.4 years.

8-20
8.5

Conclusion

The Total Capital Investment (TCI) of this plant is RM 17,188,490.63 and the annual
Total Production Cost (TPC) is approximately RM 385,799,072.28. The net annual profit
after taxes is RM 4,358,137.98 per year. The plant spends 3 years for start-up and its
operating life is 20 years. For discounted cash flow, the payback period is 6 years with
Net Present Value (NPV) amounts RM 126,979,014.43 at 10% rate of interest. Based
on the plant economic evaluation, it can be concluded that this plant is economically
feasible and have a good rate of return on investment which is 25.35 %. Therefore, it is
practical to build a plant in Malaysia.