Page 305 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

Each method described above used to gauge the profitability of a project has advantages and
disadvantages. For projects having a short life and small discount factors, the effect of discounting is
small, and nondiscounted criteria may be used to give an accurate measure of profitability. However, it is
fair to say that for large projects involving many millions of dollars of capital investment, discounting
techniques should always be used.

Because all the above techniques are commonly used in practice, you must be familiar with and be able to
use each technique.

10.3 Comparing Several Large Projects: Incremental Economic Analysis

In this section, we compare and select among investment alternatives. When comparing project
investments, the DCFROR tells us how efficiently we are using our money. The higher the DCFROR, the
more attractive the individual investment. However, when comparing investment alternatives, it may be
better to choose a project that does not have the highest DCFROR. The rationale for comparing projects
and choosing the most attractive alternative is discussed in this section.

In order to make a valid decision regarding alternative investments (projects), it is necessary to know a
baseline rate of return that must be attained in order for an investment to be attractive. A company that is
considering whether to invest in a new project always has the option to reject all alternatives offered and
invest the cash (or resources) elsewhere. The baseline or benchmark investment rate is related to these
alternative investment opportunities, such as investing in the stock market. Incremental economic analysis

is illustrated in Examples 10.4 and 10.5.

Example 10.4

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Our company is seeking to invest approximately $120 × 10 in new projects. After extensive research and