Chapter 11 ECONOMICS This chapter covers the plants investments, annual operating or production costs, annual income, net

income, cash flow diagram, economic criteria, and sensitivities. These information will show that the designed bromelain plant is indeed feasible and to begin operation. Investment The fixed capital cost is calculated using the Lang Factor Method [Sinnott, 1999]. Table 11.1 shows the total investment costs. A detailed calculation is shown in Appendix 7.

Table 11.1 Total Investments Once-off % OF TOTAL INVESTMENT 80% 64% AMOUNT (Php) 2,402,051,605.45

Fixed Capital Costs Equipment and Installation Piping, Instrumentation and Control Indirect Costs Buildings, Structures Auxiliary Facilities - utilities, land, civil, etc. Indirect Costs, share of*
*Design, engineering, construction, cost estimation, supervision, contingencies

16%

Miscellaneous Capital (Investments) Licenses Pre-operational Expenses Start-up (excluding working capital items) Working Capital Fixed Capital (typically 15%) Recoverable at end of Plant Life Additional Investment for start-up -Start-up -Initial catalyst charge -Raw materials and intermediates -Finished product inventories TOTAL INVESTMENT COST

14%

420,359,030.95

6%

180,153,870.41

100%

3,002,564,506.82

Annual Operating/Production Costs Table 11.2 shows the total annual production costs.

Table 11.2 Summary of Annual Production Costs TYPICAL VALUE (% of Item) Variable Costs Raw Materials Miscellaneous Materials Utilities Shipping and Packaging Total Variable Costs Fixed Costs Maintenance Operating Labor Benefits, SSS, Health Care Laboratory Costs Supervision Plant Overhead Capital Charges Insurance Local Taxes Royalties Total Fixed Costs Other Costs Sales Expenses General Overheads Research and Development Total of Other Costs AMOUNT (Php)

10%

From Appendix 7 Maintenance From Appendix 7 Negligible

422,728,974.38 12,010,258.03 239,415,230.06 674,154,462.47

5%

Fixed Capital Manning Estimates Operating Labor Operating Labor Operating Labor Operating Labor Fixed Capital Fixed Capital Fixed Capital Fixed Capital

120,102,580.27 8,365,500.00 836,550.00 1,673,100.00 1,673,100.00 4,182,750.00 360,307,740.82 24,020,516.05 48,041,032.11 24,020,516.05 593,223,385.31

10% 20% 20% 50% 15% 1% 2% 1%

20%

Total Variable and Fixed Cost

253,475,569.56 253,475,569.56 1,520,853,417.33

TOTAL ANNUAL PRODUCTION COST

Annual Income The calculation for the total income of the plant from the sales of all products is shown in Appendix 7. The annual gross income is Php 3,873,139,853.54
.

Net Income The net annual income is the annual gross income minus the annual production costs. = = Php 3,873,139,853.54 Php 1,5 ,853,417.33 = , , , .

Economic Criteria a) Rate-of-Return (ROR) The Rate-of-Return (ROR) is defined as the percentage of the total net income divided by the total investment costs. = 1 Php ,35 , 86,436. 1 x1 Php 3, ,564,5 6.8 %

ROR =

The rate-of-return is 78.34%. b) Payback Period The plant is assumed to have a start-up period, of construction and design of the buildings and structures, of about three years. The payback period will include the three years of start-up plus the reciprocal of the Rate-of-Return (ROR). The payback period is 4.28 years.

Cash Flow Diagram The designing and building of the plant is assumed to take 2 years while another year is allotted for the start-up of the plant, using the working capital. The expected plant life is 10 years from the start-up. Considering all these factors, the total project life is 13 years. The cash flow diagram of this project is shown in Figure 11.1. As shown in Figure 11.1, the payback period 1.28 years after start-up. This payback period is feasible, making it attractive to investors.

2.20E+10 2.00E+10 1.80E+10 Cumulative Cash Flow (Php) 1.60E+10 1.40E+10 1.20E+10 1.00E+10 8.00E+09 6.00E+09 4.00E+09 2.00E+09 0.00E+00 -2.00E+09 -4.00E+09 0.00 2.00 4.00 6.00 Years 8.00 10.00 12.00

Figure 11.1 Projected Cash Flow

Sensitivity Analysis

Before doing a sensitivity analysis, the cost drivers are identified first. Based on the small percentage of the economic margin, an increase in the raw materials cost would have a negligible effect on the rate of return of the plant. This means that the major cost drivers are the annual income and the fixed capital costs. In doing the sensitivity analysis, the percentage at which a cost driver is increased or decreased which would correspond to a minimum rate of return for industries and a doubling of the rate of return (100%) must be determined. Many industrial concerns demand a predicted pretax return of at least 30% based on reliable economic estimates before they will consider investing capital in projects that are known to be well engineered and well designed [Peters and Timmerhaus, 1991]. Table 11.3 shows the effect of these sensitivities to the rate of return and the payback period.

2.80E+10 2.60E+10 2.40E+10 2.20E+10 2.00E+10 1.80E+10 1.60E+10 1.40E+10 1.20E+10 1.00E+10 8.00E+09 6.00E+09 4.00E+09 2.00E+09 0.00E+00 -2.00E+09 -4.00E+09 0.00

Projected Cash Flow +17% -37%

Cumulaitve Cash Flow (Php)

2.00

4.00

6.00 Years

8.00

10.00

12.00

Figure 11.2 Sensitivity on Income (Sales)

2.40E+10 2.20E+10 2.00E+10 1.80E+10 1.60E+10 1.40E+10 1.20E+10 1.00E+10 8.00E+09 6.00E+09 4.00E+09 2.00E+09 0.00E+00 -2.00E+09 -4.00E+09 -6.00E+09 0.00

Projected Cash Flow +90% -18%

Cumulaitve Cash Flow (Php)

2.00

4.00

6.00 Years

8.00

10.00

12.00

Figure 11.3 Sensitivity on Fixed Capital Cost

Table 11.3 Sensitivities to Economic Criteria Economic Criteria ROR Payback Period (years) Actual 78.34% 4.28 Sales +17% 100.27% 4.00 -37% 30.61% 6.27 Fixed Capital Cost +90% -18% 30.09% 100.70% 6.32 3.99

Based on the sensitivity analysis, the minimum decrease in the sales is 17%. A decrease greater than 17% would yield to a rate of return less than 30% which would make the project unattractive to investors. The minimum increase in the fixed capital cost is 90%. An increase greater than 17% would yield to a rate of return less than 30% which would make the project unattractive. An increase in sales of at least 17% or a decrease in the fixed capital cost at a maximum of 18% would result to a rate of return of approximately 100%. Comparing the two cost drivers, the same magnitude of decrease in the sales to that of an increase in the fixed capital cost would have a greater decrease in the rate of return. This means that fluctuations in sales would have a greater effect on the rate of return than the fixed capital cost and thus, must be controlled.