Page 337 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

Evaluation of the Risks Associated with Using New Technology. To this point, risks associated with
predicting the items listed in Table 10.1 have been considered. For example, predictions for the
variations associated with the cost of the plant, the cost of manufacturing, and the revenue generated by
the plant were made. Then, by using the M-C technique, the relationship given in Figure 10.15 was
generated. For processes using new technology, additional risks will be present, but these risks may be
impossible to quantify in terms of the parameters given in Table 10.1. One way to take this additional risk
into account is to assign a higher acceptable rate of return for projects using new technology compared
with those using mature technologies. The effect of using a higher discount rate is to move the curve in
Figure 10.15 to the left. This is illustrated in Figure 10.17. From this figure, it is apparent that if an

acceptable rate of return is 15% p.a., then the project is not acceptable, whereas at a rate of 10% p.a. the
project looks quite favorable. It can be argued that using a higher hurdle rate for new processes is
unnecessary, because, for a new project, there will be greater ranges in the predictions of the variables,
and this automatically makes the project using new technology “riskier,” as the effect of broader ranges
for variables is to flatten the NPV-probability curve. However, it may be impossible to estimate the effect
of the new technology on, for example, the cost of manufacturing or the acceptance of a new product in the
market. By specifying a higher acceptable rate of return on the investment for these projects, the
interpretation between projects using new and old technologies is clear and unambiguous.

Figure 10.17 The Effect of Interest (Hurdle) Rate on Monte-Carlo Simulations