Page 289 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

additional money is generated when low-value materials and services are converted into high-value
materials and services.

A central concept identified as the time value of money grows out of this principle. This principle is
applied to a wide range of applications, from personal financial management to the analysis of new
chemical plants.

The use of cash flow diagrams to visualize the timing of cash flows and to manage cash flows during a
project was illustrated. A shorthand notation for the many discount factors involved in economic
calculations (factors that account for the time value of money) were introduced to simplify cash flow
calculations. Other items necessary for a comprehensive economic evaluation of a chemical plant were
covered and included depreciation, taxation, and the evaluation of profit and cash flow.

Applications involving these principles and concepts directly relating to chemical plants will be pursued
in Chapter 10.

References

1 . How to Depreciate Property, Publication 946, Department of the Treasury, Internal
Revenue Service, December 2000.

2. Corporations, Property, Publication 542, Department of the Treasury, Internal Revenue
Service, December 2000.

Short Answer Questions

1. What is the difference between simple and compound interest? Provide an example.

What is the difference between the nominal annual interest rate and the effective annual interest rate?
2.
When are these two rates equal?

You work in the summer, and receive three large, equal monthly paychecks in June, July, and August.
You are living at home, so there are no living expenses. You use this money to pay your tuition for the
3. next academic year in September and in January. You also use this money to pay monthly living
expenses during the academic year, which are assumed to be cash flows once per month from
September through May. Illustrate these cash flows on a cash flow diagram.

4. Define the term annuity.

The current value of the Chemical Engineering Plant Cost Index (CEPCI) is 485. If at the same time
5.
next year the value has risen to 525, what will be the average inflation rate for the year?

6. Discuss the differences and similarities between interest, inflation, and the time value of money.