0 оценок0% нашли этот документ полезным (0 голосов)

4 просмотров45 страницdfghjkkjhfghjk

Mar 04, 2018

© © All Rights Reserved

PPTX, PDF, TXT или читайте онлайн в Scribd

dfghjkkjhfghjk

© All Rights Reserved

0 оценок0% нашли этот документ полезным (0 голосов)

4 просмотров45 страницdfghjkkjhfghjk

© All Rights Reserved

Вы находитесь на странице: 1из 45

(WEEK 3-4)

LLF0916 1

Last updated: 7/20/2016

CONTACT HOURS

Total Student

Lecture Tutorial Self – Study Library Search Assignment Exam Learning Time

(hours)

6 6 12 12 2 NIL 38

LLF0916 2

Last updated: 7/20/2016

LEARNING OUTCOMES

• Describe and Perform Cost Estimation of a Chemical Plant

• Describe and Evaluate Eonomics of projects in term of

- Cash Flow Diagram

- Discounted Cash Flow

- Rate of Return

- Discounted Case Flow Rate of Return

LLF0916 3

Last updated: 7/20/2016

INTRODUCTION

earn money, some means of comparing the economic

performance of projects is needed.

criteria are needed when decisions have to be made

between large, complex engineering projects, particularly

when the projects differ widely in scope, time scale and

type of product.

•LLF0916 4

Last updated: 7/20/2016

CASH FLOW AND CASH-FLOW DIAGRAMS

Cash Flow

Life blood of any commercial organization

plant design and construction; and plant operation.

The outputs are goods for sale; and cash returns, are

recycled, to the organisation from the profits earned.

between the earnings and expenditure.

•LLF0916 5

Last updated: 7/20/2016

the forecast cumulative net cash flow over the life of a

project.

investment, operating costs, sales volume and sales price,

that can be made for the project.

required for a project and the timing of the earnings.

•LLF0916 6

CASH-FLOW DIAGRAMS Last updated: 7/20/2016

design the plant

to build the plant, and provide

funds for start-up

up at C, as the process comes on

stream and income is generated

from sales. The net cash flow is

now positive but the cumulative

amount remains negative until the

investment is paid off, at point D.

even point and the time to reach

the break-even point is called the

pay-back time. In a different

context, the term “break-even

point” is used for the percentage

of plant capacity at which the

income equals the cost for

production.

•R.K. Sinnot (2009). Coulson and Richardson’s Chemical Engineering Volume 6. Butterworth-Heinemann

•LLF0916 7

Last updated: 7/20/2016

project is earning a return on the investment.

E - F Toward the end of project life the rate of cash flow may

tend to fall off, due to increased operating costs and falling

sale volume and price, and the slope of the curve changes.

The point F gives the final cumulative net cash flow at the

end of the project life.

•LLF0916 8

Last updated: 7/20/2016

as an isolated system, and taxes on profits and the effect

of depreciation of the investment are not considered.

Tax rates are not constant and depend on government

policy. In recent years, corporation (profits) tax has been

running at around 30 per cent and this figure can be used

to make an estimate of the cash flow after tax.

•LLF0916 9

Last updated: 7/20/2016

Depreciation rates depend on government policy.

Also depends on accounting practices of the particular

company.

At times, it has been government practice to allow higher

depreciation rates for tax purposes in development area.

The effect of government policy must clearly be taken into

account at some stage when evaluating projects,

particularly when considering projects in different

countries.

•LLF0916 10

Last updated: 7/20/2016

COMPOUNDING & DISCOUNTING

Method used to know

Compounding the future value of a

present amount

Present Future

Value Value

Determining the

present value of the

amount to be Discounting

received in future

•LLF0916 11

Last updated: 7/20/2016

A: Receive $10,000 now

B: Receive $10,000 in three years

Which option you choose?

Present Value Future Value

B: $10,000 – interest $10,000

•LLF0916 12

COMPOUNDING & DISCOUNTING Last updated: 7/20/2016

• F= P (1+i)n

F= future value

P = present value

i = interest rate

n = periods

= $11,249

= $8,890

•LLF0916 13

Last updated: 7/20/2016

DISCOUNTING

different times. The technique used to deal with this

issue is discounting

and costs to a common point in time, usually the

present.

present, is called the Present Value.

•LLF0916 14

Last updated: 7/20/2016

DISCOUNTING

benefit received today is worth more than a dollar of

benefit received in the future.

worth more than the same amount in future due to its

potential earnings capacity

invested.

•LLF0916 15

Last updated: 7/20/2016

DISCOUNTING

• The rate at which a current value is compounded

is called the interest rate.

called the discount rate.

•LLF0916 16

Last updated: 7/20/2016

In figure 6.8 the net cash flow is shown at its value in the

year in which it occurred. So the figures on the ordinate

show the “future worth” of the project: the cumulative “net

future worth” (NFW).

The money earned in any year can be put to work

(reinvested) as soon as it is available and start to earn a

return.

Money earned in the early years of the project is more

valuable than that earned in later years. This “time value of

money” can be allowed for by using a variation of the

familiar compound interest formula.

•LLF0916 17

Last updated: 7/20/2016

The net cash flow in each year of the project is brought to its

“present worth” at the start of the project by discounting it

at some chosen compound interest rate.

Internal rate of return, IRR (r)- the rate of interest that

equates NPW to 0.

•LLF0916 18

Last updated: 7/20/2016

money. It would be roughly equivalent to the current

interest rate that the money could earn if invested.

The total NPW will be less than the total NFW, and reflects

the time value of money and the pattern of earnings over the

life of the project.

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.

•LLF0916 19

Last updated: 7/20/2016

What lump sum must be paid at the end of FIVE years if $10,000 is

borrowed from a bank at 12% annual interest rate compounded based

on the following interest rate period?

• annually;

• semiannually;

• monthly; and

• daily.

•LLF0916 20

Last updated: 7/20/2016

F=P(1+i)n ……….[1]

periods

•LLF0916 21

Last updated: 7/20/2016

a) Annually

F P(1 i ) n

where

i 0.12

n 1x5 5 periods ( years )

P $10000

F 10000(1.12) 5

$17,623.42

•LLF0916 22

Last updated: 7/20/2016

b) Semiannually

F P(1 i ) n

where

i 0.12 / 2 0.06

n 2 x5 10 periods

P $10000

F 10000(1.06)10

$17908.48

•LLF0916 23

Last updated: 7/20/2016

c) Monthly

F P(1 i ) n

where

i 0.12 / 12 0.01

n 12 x5 60 periods

P $10000

F 10000(1.01) 60

$18167

•LLF0916 24

Last updated: 7/20/2016

d) Daily

F P(1 i ) n

where

i 0.12 / 365 3.288 x10 4

n 365 x5 1825 periods

P $10000

F 10000(1 3.288 x10 4 )1825

$18219

•LLF0916 25

Last updated: 7/20/2016

More Exercises:

1. You want to buy a latest smartphone which cost RM2500.

Instead, your father asked you to buy a less expensive

alternative which is equally good with all the common

functions available, but cost you less RM1000, at RM 1500,

and save the difference of RM1000 in an account earning

8% interest. How much will you get with this saving

accumulated for 30 years?

2. A rich man has made a will where all his grandchildren will

receive RM 50,000. While one of his grandsons, Tom plan

to squander some of it away, how much should he deposit

in an account earning 4% interest per year if he wish to still

having RM50,000 in around 10 years for his wedding plan?

•LLF0916 26

Last updated: 7/20/2016

Cash-flow figures do not show how well the capital invested is being

used; two projects with widely different capital costs may give similar

cumulative cash-flow figures. Some way of measuring the

performance of the capital invested is needed.

is a simple index of the performance of the money invested.

complicated by the fact that the annual profit (net cash flow) will not

be constant over the life of the project. The simplest method is to

base the ROR on the average income over the life of the project and

the original investment.

•LLF0916 27

Last updated: 7/20/2016

investment is ordinarily expressed on an annual percentage

basis. The yearly profit divided by the total initial investment

necessary represents the fractional return, and this fraction

times 100 is the standard percent return on investment.

Profit is defined as the difference between income and

expense.

•LLF0916 28

Last updated: 7/20/2016

LLF0916 29

Last updated: 7/20/2016

best year of the project: the year in which the net cash

flow is greatest.

It can also be based on the book value of the investment,

the investment after allowing for depreciation.

Simple rate of return calculations take no account of the

time value of money.

LLF0916 30

Last updated: 7/20/2016

worth of future earnings, is sensitive to the interest rate

assumed. By calculating the NPW for various interest rates, it

is possible to find an interest rate at which the cumulative

net present worth at the end of the project is zero.

This particular rate is called the “discounted cash-flow rate of

return” (DCFRR) and is a measure of the maximum rate that

the project could pay and still break even by the end of the

project life.

LLF0916 31

Last updated: 7/20/2016

LLF0916 32

Last updated: 7/20/2016

Finding the discount rate that just pays off the project

investment over the project’s life is analogous to paying off a

mortgage. The more profitable the project, the higher the

DCFRR that it can afford to pay.

DCFRR provides a useful way of comparing the performance

of capital for different projects; independent of the amount

of capital used and the life of the plant, or the actual interest

rates prevailing at any time.

Other name: interest rate of return and internal rate of

return

LLF0916 33

Last updated: 7/20/2016

PAYBACK TIME

project to pay off the initial investment from income;

point D on Cash Flow Diagram.

Pay-back time is a useful criterion for judging projects that

have a short life, or when the capital is only available for a

short time.

It is often used to judge small improvement projects on

operating plant. Typically, a pay-back time of 2 to 5 years

would be expected from such projects.

LLF0916 34

Last updated: 7/20/2016

INFLATION

• Inflation is the rate at which the general level of prices for

goods and services is rising and, consequently, the

purchasing power of currency is falling. Central banks

attempt to limit inflation, and avoid deflation, in order to

keep the economy running smoothly.

Inflation depreciates money in a manner similar to, but

different from, the idea of discounting to allow for the time

value of money.

The effect of inflation on the net cash flow in future years can

be allowed for in a similar manner to the net present worth

calculation (slide 18), using an inflation rate in place of, or

added to, the discount rate r.

Inflation may well affect the sales price, operating costs and

raw material prices differently.

LLF0916 35

Last updated: 7/20/2016

SUMMARY

There is no one best criterion on which to judge an investment

opportunity. A company will develop its own methods of economic

evaluation, using the techniques discussed in this section, and will

have a “target” figure of what to expect for the criterion used, based

on their experience with previous successful, and unsuccessful,

projects.

considered when evaluating projects.

Safety.

Environmental problems (waste disposal).

Political considerations (government policies).

Location of customers.

Availability of labour.

Availability of supporting services.

Company experience in the particular technology.

LLF0916 36

Last updated: 7/20/2016

of income-tax effects. A proposed manufacturing plant

requires an initial fixed-capital investment of $900,000 and

$100,000 of working capital. It is estimated that the annual

income will be $800,000 and the annual expenses including

depreciation will be $520,000 before income taxes. A

minimum annual return of 15 percent before income taxes is

required before the investment will be worthwhile. Income

taxes amount to 34 percent of all pre-tax profits.

•LLF0916 37

Last updated: 7/20/2016

(a) The annual percent return on the total initial investment before

income taxes.

(b) The annual percent return on the total initial investment after

income taxes.

(c) The annual percent return on the total initial investment before

income taxes based on capital recovery with minimum profit.

income taxes assuming straight-line depreciation and zero salvage

value. Assuming operating life of 5 years.

•LLF0916 38

Last updated: 7/20/2016

EXAMPLE

A plant is producing 10,000 t/y of a product. The overall yield is 70 per

cent, on a mass basis (kg of product per kg raw material). The raw

material costs £10/t, and the product sells for £35/t. A process

modification has been devised that will increase the yield to 75 per cent.

The additional investment required is £35,000, and the additional

operating costs are negligible. Is the modification worth making?

the current price, the earnings on each additional ton of production

will equal the sales price less the raw material cost.

results in a reduction in raw material requirements, rather than

increased sales, and the earnings (savings) are from the reduction in

annual raw material costs.

LLF0916 39

Last updated: 7/20/2016

EXAMPLE

The second way gives the lowest figures and is the safest basis for

making the evaluation.

At 10,000 t/y production

Raw material requirements

Saving = 953 t/y

ROR = (9530/35000)x 100% = 27%

Payback year = 100/27 = 3.7 years (assume the cost savings are

constant)

LLF0916 40

Last updated: 7/20/2016

EXAMPLE

estimated investment required is 12.5 million pounds and the timing

of the investment will be

Year Cost

Year 1 1.0 Million (Design)

Year 2 5.0 Million (Construction)

Year 3 5.0 Million (Construction)

Year 4 1.5 Million (Working Capital)

LLF0916 41

Last updated: 7/20/2016

EXAMPLE

£400,000 per year up to year 9

£10 per ton of product up to year 13

LLF0916 42

Last updated: 7/20/2016

EXAMPLE

Calculate

1. The net cash flow in each year.

No account needs to be taken of tax in this exercise; or the scrap value of the

equipment and value of the site at the end of the project life. For the

discounting calculation, cash flows can be assumed to occur at the end of the

year in which they actually occur

LLF0916 43

Last updated: 7/20/2016

EXAMPLE

LLF0916 44

Last updated: 7/20/2016

LLF0916 45