Page 309 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

“We have little choice but to expand our established product line. If we fail to build these new
production facilities, our competitors are likely to build a new plant in the region to meet the
increasing demand. They could undercut our regional prices, and this would put at risk our market
share and dominant market position in the region.”

Clearly, the high return on investment for Option 1 was associated with a high risk. This is usually the
case. There are often additional business reasons that must be considered prior to making the final
decision. The concern for lost market position is a serious one and weighs heavily in any decision. The
relatively low return on investment of 12% given in this example would probably not be very attractive
had it not been for this concern. It is the job of company management to weigh all of these factors, along
with the rate of return, in order to make the final decision.

In this chapter, we often refer to “internal interest/discount rates” or “internal rates of return.” This deals
with benchmark interest rates that are to be used to make profitability evaluations. There are likely to be
different values that reflect dissimilar conditions of risk—that is, the value for mature technology would
differ from that for unproven technology. For example, the internal rate of return for mature technology
might be set at 12%, whereas that for very new technology might be set at 40%. Using these values the

decision by the VP given above seems more reasonable. The analysis of risk is considered in Section
10.7.

10.5 Evaluation of Equipment Alternatives

Often during the design phases of a project, it will be necessary to evaluate different equipment options.
Each alternative piece of equipment performs the same process function. However, the capital cost,
operating cost, and equipment life may be different for each, and we must determine which is the best
choice using some economic criterion.

Clearly, if there are two pieces of equipment, each with the same expected operating life, that can perform
the desired function with the same operating cost, then common sense tells us that we should choose the
less expensive alternative! When the expected life and operating expenses vary, the selection becomes
more difficult. Techniques available to make the selection are discussed in this section.

10.5.1 Equipment with the Same Expected Operating Lives

When the operating costs and initial investments are different but the equipment lives are the same, then
the choice should be made based on NPV. The choice with the least negative NPV will be the best choice.
Examples 10.6 and 10.7 illustrate evaluation of equipment alternatives.

Example 10.6

In the final design stage of a project, the question has arisen as to whether to use a water-cooled

exchanger or an air-cooled exchanger in the overhead condenser loop of a distillation tower. The
information available on the two pieces of equipment is provided as follows: