PRODUCT and PROCESS DESIGN LECTURE 07

Warren D. Seider, University of Pennsylvania 1

Profitability Analysis

Warren D. SeiderUniversity of PennsylvaniaPhiladelphia, Pennsylvania

Holger NickischConsultant

Profitability Analysis 2

Approximate Measures of Economic Goodness

TCICtax)-or After(Pretax Earnings Annual (ROI) Investment on Return =

WCTPI C C +

C - S

Cost Production Total

Usually

Assume 330 days of operation –330/365 = 0.9041 = operating factor

Project productionFirst year - 1/2 × 0.9 capacitySecond year - 3/4 × 0.9 capacityThird year - 1.0 × 0.9 capacity

Income Tax = 0.37 × Pretax Earnings

After-tax Earnings = Pretax Earnings – Income Tax = 0.63 × Pretax Earnings

For ROI

PRODUCT and PROCESS DESIGN LECTURE 07

Warren D. Seider, University of Pennsylvania 2

Profitability Analysis 3

Cost Sheet Outline – Table 17.1 (SSL, 2004)

Profitability Analysis 4

Cost Sheet Outline – Table 17.1 (SSL, 2004) – Cont’d.

PRODUCT and PROCESS DESIGN LECTURE 07

Warren D. Seider, University of Pennsylvania 3

Profitability Analysis 5

Working Capital

CWC = cash reserves + inventory + accts. receivable - accts. payable

30 days of raw materials,utilities, operation, maintenance,

.

.

.

7 days of liquid and solid products at sales price

(gases are pipelined)

30 days of products at sales price

30 days offeedstocks

CTCI = CTPI + CWC

Profitability Analysis 6

Approximate Measures – Table 17-4 (SSL, 2004)

Time value of money ignored – straight-line depreciation used

PRODUCT and PROCESS DESIGN LECTURE 07

Warren D. Seider, University of Pennsylvania 4

Profitability Analysis 7

To obtain more accurate assessments of financial goodness, cash flows are computedfor each year of the project.

Plant Construction

Annual cash flow = - f CTDC – CWC - Cland

Operation

Pretax earnings = S – CExcl. dep – D

Income Tax = 0.37 Pretax earnings

After-tax earnings = Pretax earnings –Income tax= 0.63(S – CExcl. dep – D)

Use MACRSdepreciation

Ann. cash flow = After-tax earnings + D - f CTDC – CWC – Cland + …

= 0.63(S – CExcl. Dep) + 0.37D - f CTDC – CWC – Cland + …

Profitability Analysis 8

Modified Accelerated Cost Recovery SystemMACRS Tax Basis Depreciation – Table 17-4 (SSL, 2004)

PRODUCT and PROCESS DESIGN LECTURE 07

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Profitability Analysis 9

Example

15 yr project life

CTDC = $90MM, installed over three years (1997-1999)

CWC = $40MM

At 90% of capacity (3rd yr and later)

S = $150MM/yr (1st yr = $75MM, 2nd yr = $113MM)

CExcl. Dep = $100MM/yr (1st yr = $55MM, 2nd yr = $78MM)

Profitability Analysis 10

PRODUCT and PROCESS DESIGN LECTURE 07

Warren D. Seider, University of Pennsylvania 6

Profitability Analysis 11

Profitability Analysis 12

Profitability Analysis-1.1.xls by Holger NickischSee Section 17.8 (SSL, 2004)

Aligned with specifications and format of Chapters 16and 17 in SSL, 2004.

Extensive Visual BASIC (VBA) programming is used to reduce most common sources of error whensetting up a complicated spreadsheet in EXCEL. Datais entered in dialog boxes and output is formatted on presentable pages. The user need not know VBA.

Login dialog box – enter user name - ‘student’password - ‘engineer’

Start New Analysis or Load Existing Analysis

PRODUCT and PROCESS DESIGN LECTURE 07

Warren D. Seider, University of Pennsylvania 7

Profitability Analysis 13

Monochlorobenzene Separation Process

Profitability Analysis 14

From ASPEN PLUS simulation (file MCB.bkp):

MCB product (S14) – 5,572.1 lb/hr - $0.54/lbFeed stream (S01) – 9,117.1 lb/hr - $0.30/lbBenzene by-product (S11) – 3,132.7 lb/hr - $0.15/lb

High pressure steam - 1365.5 lb/hr - $0.004/lbCooling water - 129,270 lb/hr – $0.000006/lbElectricity - 9.6 kW - $0.04/kWhr

Purchase CostsPurchase Cost Bare Module Factor

Absorber $29,900 4.16Distil. Column 115,600 4.16Heat Exchangers 11,900 3.17Flash & Storage 87,200 4.16Pumps 5,000 3.3

PRODUCT and PROCESS DESIGN LECTURE 07

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Profitability Analysis 15

Working Capital

Inventory

MCB product 4 daysFeed 2 days

Accounts Receivable 30 days

Note: Defaults in spreadsheet are recommended in Chapters 16 and 17 (SSL, 2004)

Solution is provided in Section 17.8

Student Assignment – Exercise 17.21 – Toluene hydrodealkylation process