Page 296 - Chemical engineering design

271
COSTING AND PROJECT EVALUATION
The inputs are the cash needed to pay for research and development; plant design and
construction; and plant operation. The outputs are goods for sale; and cash returns, are
recycled, to the organisation from the profits earned. The “net cash flow” at any time
is the difference between the earnings and expenditure. A cash-flow diagram, such as
that shown in Figure 6.8, shows the forecast cumulative net cash flow over the life of a
project. The cash flows are based on the best estimates of investment, operating costs,
sales volume and sales price, that can be made for the project. A cash-flow diagram gives
a clear picture of the resources required for a project and the timing of the earnings. The
diagram can be divided into the following characteristic regions:

F

E

Positive Profit

Cumulative cash flow Break - even

A point
D
B G
Debt
Maximum investment
Working
capital
Negative Pay - back time
C

Project life
Time Years
Figure 6.8. Project cash-flow diagram
A B The investment required to design the plant.
B C The heavy flow of capital to build the plant, and provide funds for start-up.
C D The cash-flow curve turns up at C, as the process comes on stream and income is
generated from sales. The net cash flow is now positive but the cumulative amount
remains negative until the investment is paid off, at point D.
Point D is known as the break-even point and the time to reach the break-even point
is called the pay-back time. In a different context, the term “break-even point” is
used for the percentage of plant capacity at which the income equals the cost for
production.