Page 301 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

account the time value of money that is necessary for a thorough measure of profitability. The effects of
the time value of money on profitability are considered in the next section.

10.2.2 Discounted Profitability Criteria

The main difference between the nondiscounted and discounted criteria is that for the latter we discount
each of the yearly cash flows back to time zero. The resulting discounted cumulative cash flow diagram is
then used to evaluate profitability. The three different types of criteria are:

Time Criterion. The discounted payback period (DPBP) is defined in a manner similar to the
nondiscounted version given above.

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

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

Cash Criterion. The discounted cumulative cash position, more commonly 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

Again, the NPV of a project is greatly influenced by the level of fixed capital investment, and a better

criterion for comparison of projects with different investment levels may be the present value ratio
(PVR):

A present value ratio of unity for a project represents a break-even situation. Values greater than unity
indicate profitable processes, whereas those less than unity represent unprofitable projects. Example 10.2

continues Example 10.1 using discounted profitability criteria.

Example 10.2

For the project described in Example 10.1, determine the following discounted profitability criteria:
a. Discounted payback period (DPBP)
b. Net present value (NPV)
c. Present value ratio (PVR)

Assume a discount rate of 0.1 (10% p.a.).

The procedure used is similar to the one used for the nondiscounted evaluation shown in Example 10.1.
The discounted cash flows replace actual cash flows. For the discounted case, we must first discount all
the cash flows in Table E10.1 back to the beginning of the project (time = 0). We do this simply by