Page 299 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

The definition effectively gives the cumulative cash position normalized by the initial investment. Projects
with cumulative cash ratios greater than 1 are potentially profitable, whereas those with ratios less than
unity cannot be profitable.

Interest Rate Criterion. The criterion used here is called the rate of return on investment (ROROI)
and represents the nondiscounted rate at which money is made from our fixed capital investment. The
definition is given as

The annual net profit in this definition is an average over the life of the plant after start-up.

The use of fixed capital investment, FCI , in the calculations for payback period and rate of return on
L
investment given above seems reasonable, because this is the capital that must be recovered by project
revenue. Many alternative definitions for these terms can be found, and the reader will find that total
capital investment (FCI + WC + Land) is often used instead of fixed capital investment. When the plant
L
has a salvage value (S), the fixed capital investment minus the salvage value (FCI – S) could be used
L
instead of FCI . However, because the salvage value is usually very small, we prefer to use FCI alone.
L
L
Example 10.1 is a comprehensive profitability analysis calculation using nondiscounted criteria.

Example 10.1

A new chemical plant is going to be built and will require the following capital investments (all figures
are in $ million):
Cost of land, L = $10.0
Total fixed capital investment, FCI = $150.0
L
Fixed capital investment during year 1 = $90.0
Fixed capital investment during year 2 = $60.0
Plant start-up at end of year 2
Working capital = $30.0 at end of year 2

The sales revenues and costs of manufacturing are given below:
Yearly sales revenue (after start-up), R = $75.0 per year
Cost of manufacturing excluding depreciation allowance (after start-up), COM = $30.0 per year
d
Taxation rate, t = 45%

Salvage value of plant, S = $10.0
Depreciation: Use 5-year MACRS.
Assume a project life of 10 years.

Calculate each nondiscounted profitability criterion given in this section for this plant.

The discrete and cumulative nondiscounted cash flows for each year are given in Table E10.1. Using this
data, the cumulative cash flow diagram is drawn, as shown in Figure E10.1.