Page 317 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

Assume an acceptable internal rate of return for a nondiscounted profitability analysis to be 15% (0.15).
a. For the four types of insulation determine the rate of return on incremental investment (ROROII)
and the incremental payback period (IPBP).
b. Determine the value of the incremental payback period equivalent to the 15% internal rate of
return.

Solution

a. Evaluation of ROROII and IPBP.

b. IPBP = 1/(ROROII) = 1/0.15 = 6.67 yrs

Note that in Part (a) of Example 10.10, the incremental investment and savings are given by the difference
between installing the insulation and doing nothing. All of the investments considered in Example 10.10
satisfied the internal benchmark for investment of 15%, which means that the do-nothing option (Option 1)
can be discarded. However, which of the remaining options is the best can be determined only using
pairwise comparisons.

Example 10.11

Which of the options in Example 10.10 is the best based on the nondiscounted ROROII of 15%?

Step 1: Choose Option 2 as the base case, because it has the lowest capital investment.
Step 2: Evaluate incremental investment and incremental savings in going from the base case to the
case with the next higher capital investment, Option 3.
Incremental Investment = ($5000 – $3000) = $2000
Incremental Savings = ($1900/yr – $1400/yr) = $ 500/yr
ROROII = 500/2000 = 0.4, or 40% per year
Step 3: Because the result of Step 2 gives an ROROII > 15%, we use Option 3 as the base case and
compare it with the option with the next higher capital investment, Option 4.
Incremental Investment = ($6000 – $5000) = $1000