Page 318 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

Incremental Savings = ($2000/yr – $1900/yr) = $100/yr
ROROII = 100/1000 = 0.1 or 10% per year
Step 4: Because the result of Step 3 gives an ROROII < 0.15, we reject Option 4 and compare
Option 3 with the option with the next higher capital investment, Option 5.
Incremental Investment = ($9700 – $5000) = $4700
Incremental Savings = ($2400/yr – $1900/yr) = $500/yr
ROROII = 500/4700 = 0.106, or 10.6%.
Step 5: Again, the ROROII from Step 4 is less than 15%, and hence we reject Option 5. Because
Option 3 (Insulation B-2” thick) is the current base case and no more comparisons
remain, we accept Option 3 as the “best option.”

It is important to note that in Example 10.11 Options 4 and 5 are rejected even though they give ROROII
greater that 15% when compared with the do-nothing option (see Example 10.10). The key here is that in
going from Option 3 to either Option 4 or 5 the incremental investment loses money, that is, ROROII <

15%.

Example 10.12

Repeat the comparison of options in Example 10.10 using a nondiscounted incremental payback period of
6.67 years.

The steps are similar to those used in Example 10.11 and are given below without further explanation.
Step 1: (Option 3 – Option 2) IPBP = 2000/500 = 4 years < 6.67 Reject Option 2; Option 3
becomes the base case.
Step 2: (Option 4 – Option 3) IPBP = 1000/10 = 10 years > 6.67 Reject Option 4.
Step 3: (Option 5 – Option 3) IPBP = 4700/500 = 9.4 years > 6.67 Reject Option 5.
Option 3 is the best option.

10.6.2 Discounted Methods for Incremental Analysis

Incremental analyses taking into account the time value of money should always be used when large
capital investments are being considered. Comparisons may be made either by discounting the operating
costs to yield an equivalent capital investment or by amortizing the initial investment to give an equivalent
annual operating cost. Both techniques are considered in the following section, where the effects of

depreciation and taxation are ignored in order to keep the analysis simple. However, it is an easy matter
to take these effects into account.

Capital Cost Methods. The incremental net present value (INPV) for a project is given by

(10.4)

When comparing investment options, a given case option will always be compared with a do-nothing