Page 44 - Chemical process engineering design and economics

30 Chapter 2

5. estimating the production cost
6. forecasting the product sales price
7. estimating the return on investment

The main objective here is to determine the production cost of a chemical. Esti-
mating the product-sales price and the return on investment is beyond the scope of
this discussion. There are several texts, such as Valle-Riestra [20], Peters and
Timmerhaus [4], and Holland and Wilkinson [38], that discuss methods of evalu-
ating profitability and other aspects of process economics.
The difficulty in a process evaluation is not the computations, but the vari-
ability in the terminology that appears in the literature, which is a result of differ-
ences in company practice. Another difficulty is that in many cases the basis of
the economic data reported in the literature is not clear as to what is included in the
data. When economic data are not clearly defined, our only recourse is to compare
data from several sources or to assume the worst case. Baasel [37] discusses the
pitfalls of economic data.

CORPORATE CASH FLOW

The management of an organization needs estimates of the production cost and the
capital required for a proposed process. Their responsibility is to raise the capital
to construct the plant and to evaluate the process to maximize its profitability. Fig-
ure 2.1 depicts schematically the cash flow in an organization where the manage-
ment of a firm is considered a bank, acquiring and dispensing funds. Corporate
management acquires capital for various projects from profits earned by several
existing divisions of the company, sale of bonds and stock, borrowed funds from
banks and other organizations, income from licensing processes to other firms,
various services to other firms, and return on investments obtained from other
organizations. On the other hand, they dispense funds for payments of loans, pur-
chase of stock, dividend payments, investments in other organizations, funds for a
new plant, plant expansion, and improvements made on existing operations.
Corporate management provides funds, obtained from sales of products and
return on investments for existing operations, such as a division of the corporation.
Working capital is the funds required to keep a plant in operation. It flows in and
out of an existing operation, as shown in Figure 2.2, and it is usually assumed to
be completely recoverable at the end of a project without loss. Figure 2.2 shows
that working capital is divided into two main categories, current liabilities and
current assets. Current liabilities consist of bank loans and accounts payable
(money owed to vendors for various purchases).

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