 |  Plant Design and Economics for Chemical Engineers, 5/e Max S. Peters,
University of Colorado
Klaus Timmerhaus,
University of Colorado, Boulder
Ronald E. West,
University of Colorado, Boulder
Profitability, Alternative Investments, and Replacements
Chapter OverviewA
new project, such as constructing and operating a new chemical plant, requires
a commitment of capital funds. The decision to make such a commitment is
based upon many factors. In the private sector of a capitalistic economic
system, earning a rewarding profit is perhaps the most important of these factors. Other
factors weighing into such a decision include availability of capital; market position;
health, safety, and environmental concerns; experience of personnel; and need to diversify.
Such factors, however, are not part of the economic evaluations considered in this
chapter.
The resources required to undertake a project are always limited. Therefore, it follows
that these resources should be used in an appropriate and efficient manner. The
wise investor selects investments that are expected to maximize the return from the
capital that is available.
Aproposed investment must be evaluated for its economic feasibility. When a new
technical project is proposed, a design study must be carried out. The design study produces
specifications from which cost estimates can be made. These cost estimates, in
turn, become the data for evaluating the economic consequences of the project. This
chapter introduces principles and methods for carrying out economic evaluations.
Such economic evaluations provide information that is essential, although not necessarily
sufficient, for making decisions about how to use these limited resources.
Anumber of methods for calculating profitability are employed in economic analyses.
The basis for the most commonly used methods is presented, and the measures are
defined. Considerations involved in using each of the methods are also reviewed.
When decisions are made about committing resources to a project, they are based
upon anticipated future performance of the project as well as on future economic and
other related conditions. Since predicting the future is far from an exact science, there is
always some uncertainty associated with investing. There is, however, a wide range in this uncertainty depending on the type of investment. Government bonds are less risky
than stocks; investing in an established chemical process with a large, unfilled market is
less risky than investing in an unproven process producing a new chemical. On the other
hand, the more risky investments often provide the promise of greater rewards. Making
allowance for risk in economic evaluations is considered in this chapter.
Even in the research and development stages of a new chemical processing concept,
plant designs and economic evaluations can be useful. Such studies will necessarily
be approximate, but can yield useful guidance as to the economic potential of a
project. In addition, these studies can identify those parts of the process where major
cost savings can be expected, and thus where research and development efforts might
be focused.
In the economic evaluation of a particular project, there are always alternative
uses for the resources. For example, the available capital can be invested in another
project or projects, or invested in various financial instruments such as stocks, bonds,
and savings accounts. Since economic evaluation is always performed in the context of
these alternatives, evaluation methods must permit rational comparisons of these
alternatives. Several such methods are discussed in this chapter. Equipment replacement
strategy also is reviewed in the light of these economic evaluation criteria. |
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2003 McGraw-Hill Higher Education