Page 259 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

In almost all cases, the economic analysis of processes will be made from the point of view of the
company as the investor in a project. The project may be the construction of a new plant or a modification
to an existing plant.

Consider the decisions involved in the investment in a new plant (the project) from the point of view of
the company. The company must invest the money to build the plant before any income resulting from
production can begin. Once the plant has been built and is operational, it is expected to operate for many
years. During this time, the plant produces a profit and the company receives income from its investment.
It is necessary to be able to determine whether this future income is sufficiently attractive to make the
investment worthwhile.

The time value of money refers to a concept that is fundamental to evaluating an investment. This is
illustrated in Example 9.3.

Example 9.3

You estimate that in two years’ time you will need $1150 in order to replace the linoleum in your kitchen.
Consider two choices.
1. Wait two years to take action.
2. Invest $1000 now (assume that interest is offered by the bank at the same rate as given in
Example 9.1).
What would you do (explain your answer)?

Solution

Consider investing the $1000 today because it will provide $1150 in two years. The key is that the dollar
I have today is worth 15% more than a dollar I will have in two years’ time.

From Example 9.3, we conclude that today’s dollar is worth more than tomorrow’s dollar because it can
be invested to earn more dollars. This must not be confused with inflation, which erodes purchasing
power and is discussed in Section 9.6.

Money today is worth more than money in the future.

In the upcoming sections, it will be found that when comparing capital investments made at different
times, the timing of each investment must be considered.

9.2 Different Types of Interest

Two types of interest are used when calculating the future value of an investment. They are referred to as
simple and compound interest. Simple interest calculations are rarely used today. Unless specifically
noted, all interest calculations will be carried out using compound interest methods.