CHAPTER 8

PROFITABILITY ANALYSIS

8.1

INTRODUCTION

Chemical plants like glycerine plants are built to make a profit and an estimate of investment required and the cost of production are needed before the profitability of a project can be assessed. Cost estimation is a specialized subject and a profession in its own right, but the design engineer must be able to make rough cost estimates to decide between project alternatives and optimize the design (R. K. Sinnott, 2009).

The costing of equipment which has been estimated of glycerine production will be evaluated by profitability analysis to make sure the project is economically attractive.

8.2

PURCHASED COST

8.2.1

Module Costing Technique

The equipment module cost technique is a common technique to estimate cost of a new chemical plant. This technique relates all costs back to the purchased cost of equipment evaluated for some base conditions. Deviation from these base conditions are handled by using multiplying factors that depend on the following:

1.

The specific equipment type

2. The specific system pressure 3. The specific materials of construction

The bare module cost as in Equation 8.1 is the sum of the direct and indirect costs as presented in Appendix C.1 (R. Turton, 2009).

(8.1)

Where: CBM = bare module equipment cost: direct and indirect costs for each unit FBM = bare module cost factor: multiplication factor to account for the items in Table 7.6 plus the specific materials of construction and operating pressure Cop = purchased cost for base conditions: equipment made of the most common material usually carbon steel and operating at near ambient pressure 8.2.2 Bare Module Cost for Equipment at Base Conditions

The bare module equipment cost represents the sum of direct and indirect costs as shown in Appendix C.1. The conditions specified for the base case are (R. Turton, 2009)

1. Unit fabricated from most common material, usually carbon steel (CS) 2. Unit operated at near-ambient pressure

For Equation 8.1 is used to obtain the bare module cost for the base conditions. For these base conditions, a superscript zero (0) is added to the bare module cost factor and the bare module equipment cost. So, the CoBM and FoBM refer to the base conditions. 8.2.3 Bare Module Cost for Nonbase Case Condition

For equipment made from others materials of construction and/or operating at non ambient pressure, the values for FM and FP are greater than 1.0. In the equipment

module technique, these additional costs are incorporated into the bare module cost factor, FBM. The bare module factor is used for the base case, FoBM in Equation 8.1. The information needed to determine this actual bare module factor is provided in Appendix C.1. The effect of pressure on the cost of equipment is considered first.

Pressure factors for process vessel is

For tvessel>0.0063 m If Fp,

vessel

(8.2)
vessel

is less than 1 (corresponding to tvessel>0.0063 m), then Fp,

=1. For

pressure less than -0.5 barg, Fp, vessel =1.25. Equation 8.2 is used when the thickness of the vessel wall is less than D which is for vessel range D = 0.3 to 4.0 m, occurs at pressure 320 barg.

Pressure factors for other process equipment is

(8.3)

The pressure, P is obtained from operating pressure in equipment and the values constant, C1, C2 and C3 for different equipment are refer to the Appendix C.2 (A.2). 8.2.4 Purchased Equipment Cost

Data for the purchased cost equipment, at ambient operating pressure and using carbon steel construction normally, Cop is (8.4)

Where A is capacity or size parameter of equipment. The data K1, K2 and K3 along with the maximum and minimum values used in the Appendix C.2.

8.2.5

Cost Escalation

(8.5)

The data of purchased equipment cost from survey of equipment manufactures during period 2001 with an average CEPCI of 397. The purchased cost for the equipment is obtained from period 2011 with an average CEPCI of 585. 8.2.6 Estimation Cost of Purchased Equipment

1. Heat exchanger

Heat transfer area: Area of one tube x number of tubes

The purchase cost of heat exchanger Cop can be found in Appendix C.5 (figure A.5) by choosing the fixed tube sheet (shell and tube heat exchanger). So, the value of 210. The purchase cost of heat exchanger is is

The pressure factor, Fp for heat exchanger,

For heat exchanger with fixed tube sheet and floating head, the identification number with material of construction of carbon steel-shell/stainless steel-tube is 4. From Appendix C.3 , FM=2.8. From Appendix C.5, B1=1.63 and B2=1.66.

This is the bare module cost for 2001 (CEPCI = 397). The cost for 2011 can thus be calculated as follows using the CEPCI of 585. Cost in 2011 = Cost in year 2011 x Cost index in 2011 Cost index in 2001

2.

Falling-film Evaporator

The purchase cost of falling film evaporator, at ambient operating pressure and using stainless steel construction, Cop is

From Appendix C.7; K1 = 3.9119, K2 = 0.8627, K3 = -0.0088 and area of evaporator, A = 62.02 m2

Pressure factor, Fp, for the remaining process equipment are given by

where P is a unit of pressure are bar gauge = 1 bar From Appendix C.8; P<10 for falling film evaporators with value of pressure rating is C1=C2=C3=0

The bare module factors for the falling film evaporator is

where; Cop = purchased cost of equipment FBM = bare module cost From Appendix C.5, identification number of falling film evaporator is 26 and from Appendix C.8, the value FBM is 3.90

This is the bare module cost for 2001 (CEPCI = 397). The cost for 2011 can thus be calculated as follows using the CEPCI of 585. Cost in 2011 = Cost in year 2011 x Cost index in 2011 Cost index in 2001

3. Separator The purchase cost of vessel volume Cop can be found in Appendix C.9 which gives 1900 USD/m3. So, the value of is 1900. The purchase cost of separator is

Pressure factor, Fp, for the process vessel are given by

The bare module factors for the separator is

where; Cop = purchased cost of equipment FBM = bare module cost From Appendix C.4, identification number of process vessel is 20 and from Appendix C.3, the value FBM is 3.20. From Appendix C.6, B1=2.25 and B2=1.82.

This is the bare module cost for 2001 (CEPCI = 397). The cost for 2011 can thus be calculated as follows using the CEPCI of 585. Cost in 2011 = Cost in year 2011 x Cost index in 2011 Cost index in 2001

4.

Distillation column

Data needed in the estimation of the cost are:

Tray towers: (8.5)

Thus,

From Table 21.2 in kNovel (pg 720)

Therefore cost of tray tower is estimated below:

Packed Towers: (8.6)

From pg 720

Therefore cost of packed tower is estimated below:

Thus, the estimation cost of distillation column is defined as below:

5.

Splitting Tower

From the Appendix C.2 of Analysis, Synthesis, and Design of Chemical Process book, the values of K can be obtained as followed:

K1 = 3.4974 K2 = 0.4485 K3 = 0.704 While the value of A referred as a reactor volume. Thus A = 9.55 Therefore,

From the purchased cost calculated, the price of purchasing reactor in 2001 is . Therefore, the price of purchasing reactor in 2011 can be determined by using the following formula:

The bare module factors for the splitting tower is

Where,

Bare module cost is depending on the type of material besides the operating condition of splitting tower itself. Therefore, the calculation of bare module cost should involve with those factor.

The value of B1 and B2 can be determined through Appendix C.6 in Analysis, Synthesis, and Design of Chemical Process book. By referring to the same book, the material factor, FM can be got through Appendix C.3. Material factor relies on the type of equipment thus different type of equipment should have different value of material factor. Pressure factor, Fp is taken as 1 since the operating pressure is more than 0.5 barg.

B1 = 2.25 B2 = 1.82 FM = 3.1 Therefore,

Thus,

The bare module cost of splitting tower is 479,194 USD approximately MYR 1,514,244.16. By referring to the Perrys Chemical Handbook, Table 25-57 of Typical Factors of Converting Carbon Steel Cost to Equivalent-Alloy Costs, the factor for converting carbon steel material to the stainless steel type 316 is 2.86. The bare module cost obtained before need to be multiplied with 2.86 factors since the calculation performed before is based on carbon steel material. Thus, the new value of bare module cost is:

Table 8.1: Purchase Cost of Equipment Equipment Unit CBM2001 (MYR) Reactor Separator Falling Evaporator Distillation column Storage tank Heat exchanger Pump 1 2 6 P-102 P-103 Compressor 1 438,742 51,842 14,956 220,098 1,721,126 97,400 646,509 76,392 22,039 324,326 1,721,126 194, 800 3,879,054 79,392 22,039 324,326 20,723,695 film 1 2 2 225,696 3,293,020 CBM2011 (MYR) 4,330,738 332, 575 4, 852, 435 4,330,738 665, 150 9,704, 870 Cost (MYR)

Total purchase cost of equipment (PCE)

8.3 CAPITAL COST ESTIMATION

Total capital cost, CTC of a project consist of the fixed capital cost, CFC and the working capital cost, CWC, plus the cost of land and any other non-depreciable assets, CL. The Equation 8.7 is given by

(8.7)

Where, CTC = Total capital cost CFC = Fixed capital cost CWC = Working capital cost CS = Start up cost FP = Pressure factor to account for high pressure FM = Material factor to account for material of construction CP = Purchase cost for base condition FBM = Bare module cost factor CBM = Bare module equipment cost for base condition 8.3.1 Grass Roots and Total Module Costs

Total module cost refers to the cost of making small-to-moderate expansions or alterations to an existing facility. The total module cost can be evaluated from (R. Turton, 2009) (8.8)

Grass roots refer to a completely new facility in which start the construction on essentially undeveloped land, a grass field. The grass roots cab be evaluated from (R. Turton, 2009) (8.9)

Where n represents the total number of pieces of equipment. Total Bare Modul Cost, TBM = MYR 20,097,704

Total Grass Roots Cost: Contingency and Fee Costs Total bare module cost Contingency, CC Fee, CF Total module cost CTBM CC = 0.15CTBM CF =0.03 CTBM CC+ CF+ CTBM=CBM MYR 20,723,695 3,108,554.25 621,710.85 24,453,960

Auxiliary Facilities Site development, CSD Auxiliary building, CAB Offsite facilities, COF Total CSD =0.05CTBM CAB = 0.04CTBM COS =0.20C TBM

MYR 1,036,184.75 828,947.80 4,144,739 6,009,871.55

Total Gross Roots Cost, GRC = Total Module Cost + Total Auxiliary Facilities = MYR 30,463,832

8.3.2

Fixed Capital Cost

Fixed capital is the total cost of the plant ready for start-up. It is the cost paid to the contractors. It includes the direct cost items that are incurred in the construction of a plant, in addition to the cost of equipments are

1. Equipment erection, including foundations and minor structural work. 2. Piping, including insulation and painting. 3. Electrical, power and lighting. 4. Instruments, local and control room. 5. Ancillary buildings, offices, laboratory buildings, workshops. 6. Storages, raw materials and finished product. 7. Utilities (service), provision of plant for steam, water, air, firefighting services (if not costed separately). 8. Site and site preparation. 9. Process buildings and structures.

In addition to the direct cost of the purchase and installation of equipment, the capital cost of a project will include the indirect costs as listed below. These can be estimated as a function of the direct costs. a) Indirect costs

1. Design and engineering costs, which cover the cost of design and the cost of engineering the plant: purchasing, procurement and construction supervision. Typically 20% to 30% of the direct capital costs. 2. Contractors fees, if contractor is employed his fees (profit) would be added to the total capital cost and would range from 5% to 10% of the direct costs. 3. Contingency allowance, this is an allowance built into the capital cost estimate to cover for unforeseen circumstances (labour disputes, design errors, adverse weather). Typically 5% to 10% of direct costs. Table 8.2: Direct and Indirect Cost Specification Specification Range Direct Cost (DC) / Physical Plant Cost (PPC) Equipment erection Piping Instrumentation Electrical Land Total Direct Cost (MYR) Indirect Cost (IC) Engineering and supervision Construction expenses Legal expenses Contractor fees Contingency Total Indirect Cost (MYR) TOTAL COST/FIXED CAPITAL COST Direct+ Indirect cost 0.3DC 0.1DC 0.1DC 0.05DC 0.1DC 13,694,809.30 4,564,936.43 4,564,936.43 2,282,468.22 4,564,936.43 29,672,086.43 75,321,450.43 0.4GRC 0.7GRC 0.2GRC 0.1GRC 3,000,000 12,185,532.66 21,324,682.16 6,092,766.33 3,046,383.17 3,000,000 45,649,364

MYR

8.3.3

Working Capital

Working capital is the additional investment needed, over and above the fixed capital to start the plant up and operate it to the point when income is earned. It includes the cost of (R. K. Sinnott, 1999):

1. Start-up. 2. Initial catalyst charges. 3. Raw materials and intermediates in the process. 4. Finished product inventories. 5. Funds to cover outstanding accounts from customers.

Most of the working capital is recovered at the end of the project. The total investment needed for a project is the sum of the fixed and working capital. Working capital can vary from as low as 5% of the fixed capital for a simple, single product, process with little or no finished product storage; to as high as 30% for a process producing a diverse range of product grades for a sophisticated market, such as synthetic fibers.

Working capital cost, CWC = 5% CFC Fixed Capital Cost, CFC = Grass Roots Cost + Total Cost = MYR 30,463,832+MYR 75,321,450.43 = MYR105, 785,282.40

Working capital cost, CWC = 5% CFC = 0.05 x MYR 105,785,282.40 = MYR 5,289,264.12

Start-up cost, CS = 3% CFC = 0.03 x MYR 105,785,282.40 = MYR 3,173,558.50

8.3.4

Cost of Land

The land needed for the construction of glycerine plant have been estimated about 5 acres which is approximately to 20234.28 m2.This value of land is including the future expansion of the plant. Kampung Acheh in Perak has been chosen to construct this plant. According to ministry of industrial development authority (MIDA), the land value in Kampung Acheh is MYR 17.00 per square feet.

Total Capital Cost, CTC = CFC +CWC + CL = MYR105, 785,282.40+ MYR 5,289,264.12+ MYR 3,702,600 = MYR 114,777,146.50 8.4 COST OF MANUFACTURING

In order to estimate the manufacturing cost, should be provided the process information provided on the PFD (process flow diagram), an estimate of the fixed capital investment and an estimate of the number of operators required to operate the plant. The fixed capital investment is the same as either the total module cost or the grass roots cost (R. Turton, 2009).

The Equation 8.10 is used to evaluate the cost of manufacture becomes:

Cost of manufacture (COM) = Direct Manufacturing Cost (DMC) + Fixed Manufacturing Cost (FMC) + General Expenses (GE) (8.10)

The cost of manufacturing, COM, can be determined when the following costs are known or can be estimated:

1. Fixed Capital Investment (FCI): (CTM or CGR) 2. Cost of operating labor (COL) 3. Cost of utilities (CUT) 4. Cost of waste treatment (CWT) 5. Cost of raw materials (CRM) 8.4.1 Estimation Cost of Raw Material

Table 8.3: Raw Material Cost Raw material Crude palm oil Water Total Price (MYR/yr) MYR3.00/kg x 105,684,214 kg/yr = MYR317,052,642 MYR1.44/m3 x 6.302 m3/kg x 24h/day x 365/yr =MYR79,496 317,211,634

8.4.2

Estimation Cost of Operating Labor

The operating labor requirement for chemical processing plants is given by Equation 8.11: (8.11)

Where NOL is the number of operators per shift, P is the number of processing steps involving the handling of particulate solids such as transportation and distribution, particulate size control and particulate removal. Nnp is the number of non particulate processing steps and includes compression, heating, and cooling, mixing and reaction (R. Turton, 2009).

In general for the processes considered the value of P is zero and the value of Nnp is given by (8.12)

Table 8.4: Cost of Operating Labor Equipment Type Reactor Separator Distillation Column Heat exchanger Storage Tank Evaporator Pump Compressor Total Quantity 1 2 1 6 2 2 2 1 17 Nnp 1 2 1 6 10

Since P =0 and Nnp = 10

For one equipment

A chemical plant normally operates 24 hours/day (R. Turton, 2009). A single operator works on the average 49 weeks a year which is 3 weeks time off for vacation and sick leave, five 8-hour shifts a week.

Four and one-half operators are hired for each operator needed in the plant at any time.

For all equipment:

Cost of Operating Labor per Year: For 1 month wages of mechanical engineers is MYR 30024/Year

8.4.3

Estimation Cost of Utilities

The costs of utilities are directly influenced by the cost of fuel. Specific difficulties emerge when estimating the cost of fuel, which directly impact the price of utilities such as electricity, steam, thermal fluids, compressed air, cooling and process water. The quantities required can be obtained from the energy balances and the flow-sheets. The prices can be taken from the electrical company such as Tenaga Nasional Berhad and it will depend on the primary energy sources and the plant location (R. K. Sinnott, 1999).

Cost of Utilities required: Yearly cost = flow rate x costs x period x stream factor (8.13)

Since, assuming the plants operating days per year is 350 days. The plant is most reliable and well-managed is typically shut down the plant for two week a year for scheduled maintenance. So, stream factor is

Total heat load after heat integration consists of

1. Hot utilities Power = 404.920 kW Efficiency of drives, dr = 80.96%

2. Cold Utilities Power =10.365 kW Efficiency of drives, dr = 99.59%

Pump in the plant consist of

1. Pump (P-103) Power =2.242x104 kW Efficiency of drives, dr = 96.50%

2. Pump (P-102) Power =142.3 kW Efficiency of drives, dr = 91.30%

Evaporator in plant consist of

1. Evaporator (V-102) Flow rate = 6089 kg/h

2. Evaporator (V-103) Flow rate = 4915 kg/h

Total utilities cost = MYR (10,083+5036+11,241,151+75,411+982,034+792,691)/yr = MYR 13,106,406/yr

8.4.4

Fixed Capital Investments (FCI)

Fixed capital investment is the total cost of designing, constructing and installing a plant and the associated modification needed to prepare the plant site. The fixed capital investment is made up of (R. K. Sinnott, 2009): 1. The inside battery limits (ISBL) investment the cost of the plant itself 2. The modifications and improvements that must be made to the site infrastructure, known as off-site or OSBL investment 3. Engineering and construction costs 4. Contingency charges

The value of fixed capital investments (FCI) is equal to the cost of grass roots which is MYR 30,463,832.

8.4.6

Operating Costs

An estimate of the operating or manufacturing costs, the cost of producing the product, is needed to judge the viability of a project, and to make choices between possible alternative processing schemes. These costs can be estimated from the flow-sheet which gives the raw material and service requirement and the capital cost estimate (R. K. Sinnott, 1999).

The cost producing a chemical product including the items below this is divided into two groups. 1. Fixed manufacturing costs: costs that do not vary with production rate. These are the bills that have to be paid whatever the quantity produced. 2. Variable manufacturing costs: costs that are dependent on the amount of product produced.

Table 8.5: Summary of manufacturing costs (R. K. Sinnott, 1999) Description Fixed (FCI) Fixed manufacturing costs 1. Operating labor, OL 2. Maintenance 3. Laboratory costs 4. Supervision 5. Plant overheads 6. Capital charges 7. Insurance 8. Local taxes 9. Royalties Total Variable costs 1. Raw materials 2. Utilities 3. Miscellaneous (waste treatment) Total Total manufacturing expenses, AME General expenses 1. Administration 10% from supervision, operating labor and maintenance 2. Distribution and selling expenses 3. Research and development Total annual general expenses, AGE Cost of Manufacture, COM AME + AGE 5,530,327.16 345,729,108.80 7%FCI 2,132,468.24 10%FCI 3,046,383.20 351,475.72 Fixed manufacturing cost + Variable cost 330,622,678.30 340,198,781.60 materials 10% Maintenance 317,211,634 13,106,406 304,638.32 10%FCI 20%OL 20%OL 50%OL 15%FCI 1%FCI 2%FCI 1%FCI 390,312 3,046,383.20 78,062 78,062 195,156 4,569,574.80 304,638.32 609,276.64 304,638.32 9,576,103.28 Capital Investments Specification Cost (MYR/yr) 30,463,832

8.5

PROFITABILITY ANALYSIS

There are three bases used for the evaluation of profitability which are: a) Time b) Cash c) Interest rate

8.5.1

Depreciation Value

Assumption: i. Use 5 years MACRS ii. Project life of years is 10 years iii. Taxation rate, t = 45% iv. Using two methods which are double declining balance depreciation method, DDB and straight line depreciation value method, SL

The MACRS method requires depreciation of the total FCIL, without regard for the salvage value. Calculations are given below by using a basis MYR 29, 543,625:

For DDB, For SL,

(8.14) (8.15)

k 1 2 3 4 5 6

dk DDB 6092766.33 9748426.128 5849055.677 3509433.406 2105660.044

dk SL

5415792.293 4177896.912 3509433.406 3509433.406 1754716.703

A MACRS method over a short period of time is used which is 5 years for the class life. In general, it is better to depreciation an investment as soon as possible. This is because the more depreciation is in given year, the less taxes paid (R. Turton, 2009).

The MARCS method uses a double declining balance method and switches to a straight line method when straight-line method yields a greater depreciation allowance for that year. The straight line method is applied to the remaining depreciable capital over the remaining time allowed for depreciation. The half-year convention assumes that the equipment is bought midway through the first year for which depreciation is allowed. In the first year, the depreciation is only half of that for a full year. For sixth year, the depreciation is for half-year (R. Turton, 2009). The depreciation schedule for equipment with a 9.5 years class life and 5 year recovery period, using MARCS method is shown in Table 8.7.

Table 8.6: Depreciation Schedule for MARCS Method for Equipment with a 9.5 Year Class Life and a 5-Year Recovery Period Year Depreciation Allowance (% of Capital Investment) 1 2 3 4 5 6 6092766.33 9748426.128 5849055.677 3509433.406 3509433.406 1754716.703

8.5.2

Taxation, Cash Flow and Profit

Taxation has direct impact on the profits realized from building and operating a plant. Tax regulations are complex, and companies have tax accounts and attorneys to ensure compliance and to maximize the benefit from these laws.

For most large corporation, the basic federal taxation rate is 35%. In addition, corporations must also pay state, city, and other local taxes. The overall taxation rate is often in range of 40% to 50% (R. Turton, 2009). Table 8.8 provides the terms and equation used to evaluate the cash flow and the profits produced from a project.

Table 8.8: The terms and equation used to evaluate the cash flow and the profits produced from a project Description Expenses= Manufacturing costs + Depreciation Income tax= (Revenue Expenses)(Tax rate) After tax(net profit)= Revenue Expenses Income tax After tax Cash Flow = Net Profit + Depreciation Variables: t = Tax rate COMd = Cost of Manufacturing Excluding Depreciation d = Depreciation: depends upon method use R = Revenue from sales = (R - COMd d)(1- t)+d (8.19) = (R - COMd d)(t) = (R - COMd d)(1- t) (8.17) (8.18) Formula = COMd + d Equation (8.16)

8.5.3

Nondiscounted Profitability Criteria

There are four nondiscounted profitability criteria as follow (R. Turton, 2009):

1. Time criterion

The term used for this criterion is the payback period (PBP), also known by a variety of other names, such as payout period, payoff period, and cash recovery period. The payback period can be defined as follow:

PBP = Time required after start-up to recover the Fixed Capital Investment, FCIL, for the project

2. Cash criterion

The criterion used here is the cumulative cash position (CCP), which is simply the worth of the project at the end of its life. For criteria using cash or monetary value, it is difficult to compare projects with dissimilar fixed capital investment, and sometimes it is more useful to use the cumulative cash ratio (CCR), which is defined as: Sum of All Positive Cash Flows CCR = Sum of All Negative Cash Flows The definition effectively gives the cumulative cash position normalized by the initial investment. From Table 8.10, the value of CCR was calculated which gives 4.25. Projects with cumulative cash ratios greater than 1 are potentially profitable, whereas those with ratios less than unity cannot be profitable. 3. Interest rate criterion (8.20)

The criterion used here is called the rate of return on investment (ROROI) and represents the non discounted rate at which money is made from our fixed capital investment. ROROI also represented the percentage increase or decrease of an investment over a period of time. It gives ideas of how much an investment is growing or declining. The rate of return is given by

ROROI = Average Annual Net Profit Fixed Capital Investment (FCIL)

(8.21)

Table 8.9: Rate of Return calculations (R. Turton, 2009) Description Revenue from sales (IOI Oleochemical Company and Network Timur Sdn. Bhd, September 2011) Revenues from sales COM = 370,424,734.10 345,287,211 Income taxes Net annual profit, ANNP 30% from ANP ANP Income taxes = 25,137,523.08 7,541,256.92 17,596,266.16 25,137,523.08 7,541,256.92 Typical value RM2.10/kg of Glycerine RM4.00/kg of Fatty Acid Total Cost (MYR) 21,000,000 328,424,734 370,424,734.10

Annual net profit, ANP

The rate of return is often calculated for the anticipated best year of the project which is the year in the net cash flow is greatest. It can also be based on the book value of the investment, the investment after allowing for depreciation (R. K. Sinnott, 1999). So, the return rate on investment is 40% over the period of a year by referring to the Figure 8.1. A higher ROR indicates better returns and a negative ROROI indicates losses.

Table 8.10: Nondiscounted After-Tax Cash Flows End of Year (k) 0 1 2 3 4 5 6 7 8 9 10 11 12 9,795,366 3,702,600 21324682.16 14428413.62 6092766.33 9748426.128 5849055.677 3509433.406 3509433.406 1754716.703 30,463,832 30,463,832 30,463,832 24,371,065 14,622,639 8,773,584 5,264,150 1,754,717 0 0 0 0 0 370,424,734 345,729,109 370,424,734 345,729,109 370,424,734 345,729,109 370,424,734 345,729,109 370,424,734 345,729,109 370,424,734 345,729,109 370,424,734 345,729,109 370,424,734 345,729,109 370,424,734 345,729,109 374,127,334 345,729,109 16324338.76 17969385.67 16214668.97 15161838.95 15161838.95 14372216.43 13582593.92 13582593.92 13582593.92 15619023.92 -3,702,600 -21324682.16 -14428413.62 16324338.76 17969385.67 16214668.97 15161838.95 15161838.95 14372216.43 13582593.92 13582593.92 13582593.92 25,414,390 -3,702,600 -25,027,282 -39,455,696 -23,131,357 -5,161,971 11,052,698 26,214,537 41,376,376 55,748,592 69,331,186 82,913,780 96,496,374 121,910,764 Investment dk FCI - dk R COMd (R - COMD -dk)(1-t) + dk Cash Flow Cumulative Cash Flow

Nondiscounted After-Tax Cash Flow

140,000,000 120,000,000
CCR = 4.09

Nondiscounted Cash Flow (MYR)

100,000,000 80,000,000 60,000,000 40,000,000 20,000,000 0 0 -20,000,000 -40,000,000 -60,000,000 Time after Project Start (Years)
ROROI = 40% FCIL =MYR 30,463,832 PBP = 4.82 years CCP= MYR 121,910,764

10

12

14

Figure 8.1: Cumulative Cash Flow Diagram for Nondiscounted After-Tax Cash Flows

8.5.4

Discounted Profitability Criteria

The difference between the nondiscounted and discounted criteria is that for the latter it discounts each of the yearly cash flows back to time zero. The discounted cumulative cash flow diagram will be used to evaluate profitability. There have three different types of criteria (R. Turton, 2009):

1. Time criterion

The discounted payback period (DPBP) is similar to the nondiscounted which is

DPBP = Time required, after start-up, to recover the fixed capital investment, FCIL, required for the project, with all cash flows discounted back to time zero.

The project with the shortest discounted payback period is the most desirable.

2. Cash criterion

The discounted cumulative cash position, is known as the net present value (NPV) or net present worth (NPW) of the project, is defined as

NPV = Cumulative discounted cash position at the end of the project

The NPV of a project is influenced by the level of fixed capital investment, and a better criterion for comparison of projects with different investment levels is present value ratio (PVR):

PVR = Present Value of All Positive Cash Flows Present Value of All Positive Cash Flows

A value of unity for a project represents a break-even situation. Values greater than 1 is profitable processes, whereas less than 1 represent unprofitable projects.

Table 8.11: Discounted Cash Flows End of Year (k) 0 1 2 3 4 5 6 7 8 9 10 11 12 Non discounted Cash flow -3,702,600 -21324682.16 -14428413.62 16324338.76 17969385.67 16214668.97 15161838.95 15161838.95 14372216.43 13582593.92 13582593.92 13582593.92 25,414,390 Discounted Cash Flow -3,702,600 -19386074.69 -11924308.77 12264717.33 12273332.2 10068033.71 8558462.818 7780420.743 6704745.035 5760345.731 5236677.937 4760616.306 8097807.945 Cumulative Discounted Cash Flow -3,702,600 -23,088,675 -35,012,983 -22,748,266 -10,474,934 -406,900 8,151,563 15,931,983 22,636,728 28,397,074 33,633,752 38,394,368 46,492,176

Discounted After-Tax Cash Flows

60,000,000 50,000,000 40,000,000 Discounted Cash Flow (MYR) 30,000,000 20,000,000 10,000,000
DPBP = 5 years NPV = MYR 46,492,176

0
0 -10,000,000 -20,000,000 -30,000,000 -40,000,000 Time After Project Start (years) Figure 8.2: Cumulative Cash Flow Diagram for Discounted After- Tax Cash Flows 2 4 6 8 10
PVR = 2.32

12

Discounted land + WC = MYR 8,425,157

Based on the nondiscounted cash flow and discounted cash flow, there are significant effects of discounting the cash flows to account for time value of money. From these results, the following observations can be made.

1. In term of the time basis, the payback period increases as the discount rate increases. From the calculation, it increases from 4.82 to 5 years. 2. In term of cash basis, replacing the cash flow with the discounted cash flow decreases at the end of the project which is dropped from MYR 121,910,764 to 46,492,176. 3. In terms of cash ratios, discounting the cash flows gives a lower ratio which is dropped from 4.09 to 2.32.

As the discount rate increases, all of the discounted profitability criteria will be reduced. 3. Interest Rate Criterion

The discounted cash flow rate of return (DCFROR) is defined to be the interest rate at which all the cash flows must be discounted to get the net present value of the project to be equal to zero (R. Turton, 2009).

DCFROR = Interest or discount rate for which the net present value of the project is equal to zero

If the DCFROR is greater than the internal discount rate, the project is considered to be profitable. Table 8.12 showed the NPVs for several different discount rates were calculated and the results.

Table 8.12: NPV for Glycerine Project as a Function of Discount Rate Interest/Discount rate 0% 10% 15% 20% NPV (MYR) 46,492,176 13329987.94 4,796,091 -967840.5494

The value of the DCFROR is found at NPV equals 0. Interpolating from Table 8.12 gives:

Figure 8.3 provides the cumulative discounted cash flow diagram for several discount factors. It shows the effect of changing discount factors on the profitability and shape of the curves. It also includes curves for the DCFROR with 19.20%. It can be seen that the NPV for the project is zero. If the acceptable rate of return were set at 20%, then the project would not be considered an acceptable investment because it is indicated by negative NPV for I =20%. For project having a short life and small discount factors, the effect of discounting is small, and nondiscounted criteria may be used to give an accurate measure of profitability. Normally, large projects that involved many millions of ringgit of capital investment discounting techniques is always used (R. Turton, 2009).

Table 8.13: Discounted Cumulative Cash Flow with Different Discount Rates Discount rate, I = 10% Discount rate, I = 20%

End of Year (k) 0 1 2 3 4 5 6 7 8 9 10 11 12 Discounted cash flow (DCF) -3,702,600 -19386074.69 -11924308.77 12264717.33 12273332.2 10068033.71 8558462.818 7780420.743 6704745.035 5760345.731 5236677.937 4760616.306 8097807.945 fd = 1/(1+i) 1 0.909090909 0.826446281 0.751314801 0.683013455 0.620921323 0.56447393 0.513158118 0.46650738 0.424097618 0.385543289 0.350493899 0.318630818
n

Discounted cash flow DCC =DCFx fd -3702600 -17623704.26 -9854800.639 9214663.657 8382851.034 6251456.812 4831029.142 3992586.068 3127813.041 2442948.905 2018966.038 1668566.973 2580211.167

Cumulative discounted cash flow -3702600 -21326304 -31181105 -21966441 -13583590 -7332133.4 -2501104.3 1491481.81 4619294.86 7062243.76 9081209.8 10749776.8 13329987.9 fd = 1/(1+i) 1 0.83333333 0.69444444 0.5787037 0.48225309 0.40187757 0.33489798 0.27908165 0.23256804 0.1938067 0.16150558 0.13458799 0.11215665
n

Discounted cash flow DCC=DCFx fd -3702600 -16155062.24 -8280769.981 7097637.343 5918852.334 4046116.942 2866211.881 2171372.637 1559309.407 1116393.594 845752.7226 640721.7596 908223.0502

Cumulative discounted cash flow -3702600 -19857662.24 -28138432.22 -21040794.88 -15121942.54 -11075825.6 -8209613.72 -6038241.083 -4478931.676 -3362538.082 -2516785.359 -1876063.6 -967840.5494

Discount rate, I = 19.20%

Discounted cash flow fd = 1/(1+i) 1 0.838926174 0.703797126 0.590433831 0.495330395 0.415545633 0.348612108 0.292459823 0.2453522 0.205832383 0.172678173 0.144864239 0.121530402
n

Cumulative discounted cash flow -3702600 -19966085.48 -28358379.72 -21116875.69 -15037521.2 -10853793.76 -7870209.989 -5594749.519 -3949725.573 -2764059.887 -1859799.906 -1170156.846 -986215.9387

DCC =DCFx fd -3702600 -16263485.48 -8392294.247 7241504.035 6079354.485 4183727.444 2983583.768 2275460.47 1645023.946 1185665.687 904259.9807 689643.0603 183940.9069

Discounted After- Tax Cash Flows

60,000,000 50,000,000 40,000,000 Discounted Cash Flow (MYR)
Discount rate = 0%

30,000,000 20,000,000 10,000,000 0 0 -10,000,000 -20,000,000 -30,000,000 -40,000,000

Discount rate = 19.20% at NPV=0 (DCFROR)
Discount rate = 20% Discount rate = 10%

10

12

14

Time after project start (Years)

Figure 8.3: Discounted Cumulative Cash Flow Diagrams Using Different Discount Rate

REFFERENCES

Aspen Hysis Simulation Basis Guideline AspenTech

http://www.tnb.com.my (March 2009)

IOI Oleochemical Company and Network Timur Sdn. Bhd, September 2011

Malaysian Industrial Development Authority (MIDA), August 2010 R. Sinnott and G. Towler (1999), Chemical Engineering Design, 3rd Edition, Elsevier Ltd R. Sinnott and G. Towler (2009), Chemical Engineering Design, 5th Edition, Elsevier Ltd

R. Turton, R. Ballies, W. B. Whiting and J. A. Shaeiwitz (2009), Analysis, Synthesis and Design of Chemical Processes, 3rd Edition, Pearson Education International Robert H. Perry, Don W. Green and James O. Maloney (1997), 7th Edition, McGraw-Hill Higher Education