Page 296 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

Chapter 10 Profitability Analysis

In this chapter, we will see how to apply the techniques of economic analysis developed in Chapter 9.
These techniques will be used to assess the profitability of projects involving both capital expenditures
and yearly operating costs. We look at a variety of projects ranging from large multimillion-dollar

ventures to much smaller process improvement projects. Several criteria for profitability will be
discussed and applied to the evaluation of process and equipment alternatives. We start with the
profitability criteria for new large projects.

10.1 A Typical Cash Flow Diagram for a New Project

A typical cumulative, after-tax cash flow diagram (CFD) for a new project is illustrated in Figure 10.1. It
is convenient to relate profitability criteria to the cumulative CFD rather than the discrete CFD. The
timing of the different cash flows are explained below.

Figure 10.1 A Typical Cumulative Cash Flow Diagram for the Evaluation of a New Project

In the economic analysis of the project, it is assumed that any new land purchases required are done at the
start of the project, that is, at time zero. After the decision has been made to build a new chemical plant or
expand an existing facility, the construction phase of the project starts. Depending on the size and scope of
the project, this construction may take anywhere from six months to three years to complete. In the
example shown in Figure 10.1, a typical value of two years for the time from project initiation to the start-

up of the plant has been assumed. Over the two-year construction phase, there is a major capital outlay.
This represents the fixed capital expenditures for purchasing and installing the equipment and auxiliary
facilities required to run the plant (see Chapter 7). The distribution of this fixed capital investment is
usually slightly larger toward the beginning of construction, and this is reflected in Figure 10.1. At the end
of the second year, construction is finished and the plant is started. At this point, the additional