Page 306 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

preliminary design work, three projects have emerged as candidates for construction. The minimum
acceptable internal discount (interest) rate, after tax, has been set at 10%. The after-tax cash flow
information for the three projects using a ten-year operating life is as follows (values in $ million).

For this example it is assumed that the cost of land, working capital, and salvage are zero. Furthermore, it
is assumed that the initial investment occurs at time = 0, and the yearly annual cash flows occur at the end
of each of the ten years of plant operation.

Determine the following:
a. The NPV for each project
b. The DCFROR for each project
For Project A we get

The DCFROR is the value of i that results in an NPV = 0.

NPV = 0 = –$60 + ($10)(P/F, i, 1) + ($12)(P/A, i, 9)(P/F, i, 1)

Solving for i yields i = DCFROR = 14.3 %.

Values obtained for NPV and DCFROR are as follows:

Note: Projects A, B, and C are mutually exclusive because we cannot invest in more than one of them, due
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to our cap of $120 × 10 . The analysis that follows is limited to projects of this type. For the case when
projects are not mutually exclusive, the analysis becomes somewhat more involved and is not covered
here.

Although all the projects in Example 10.4 showed a positive NPV and a DCFROR of more than 10%, at