Engineering economics for process design

Introduction 13 Part 1 Economic Concepts 1. ECONOMIC CONCEPTS IN ENGINEERING PROJECT DESIGN 21 1.1 Outline of a Pre-feasibility study 24 1.2 Requirements for an engineering design 28 1.3 Mineral project evaluation 30 1.3.1 Stages of a mineral development project 30 1.3.2 Stages of reporting 31 1.3.3 Organization of a project team 33 1.3.4 Project Evaluation Procedures 34 2. TIME VALUE OF MONEY 37 2.1 Introduction 37 2.2 Interest, future value, present value 38 2.2.1 Simple interest 39 2.2.2 Compound interest, future value and present value 40 2.2.3 Interest rate compounded on different time base 42 2.2.4 Continuously compounded interest rate 43 2.2.5 Effect of inflation 44 2.3 Annuity 44 2.3.1 Future value of an annuity 47 2.3.2 Equal payment series of a one-off payment 52 2.4 Capitalized cost 52 2.5 Gradient series 52 3. DEPRECIATION 57 3.1 Introduction 57 3.2 Methods of depreciation 58 3.2.1 Straight-line method 59 3.2.2 Declining-balance method 60 3.2.3 Sums-of-year digits method 60 3.2.4 Sinking fund method 61 4. TAXATION 63 4.1 Introduction 63 4.2 Taxation issues 63 4.2.1 Tax deduction 63 4.2.2 Carry-forward losses 64 4.2.3 Depreciation allowance 64 Part 2 Cost Estimation and Economic Analysis 5. COST ESTIMATE 71 5.1 Introduction 71 5.2 Estimation of capital expenditure 72 5.2.1 Types of capital cost estimates 76 5.2.2 Methods of estimation 78 5.3 Estimation of total product cost 83 6. RANKING OF PROJECTS 85 6.1 Introduction 85 6.2 Procedures to prepare profit/loss statement and discounted cash flow statement 85 6.2.1 Operating profit/loss statement 85 6.2.2 Operating cash flow statement 86 6.2.3 Discounted cash flow statement (for project evaluation) 86 6.2.4 Discount rate 90 6.3 Ranking methods 91 6.3.1 Payback period 91 6.3.2 Net present value 92 6.3.3 Internal rate of return 93 6.4 Effect of inflation 95 7. UNCERTAINTY AND RISK ANALYSIS 97 7.1 Introduction 97 7.2 Basic probability theory 97 7.2.1 Expected net present value 100 7.2.2 How to measure risk 101 7.3 Methods of assessing risk 105 7.3.1 Scenario analysis. 105 7.3.2 Sensitivity analysis 106 7.3.3 Monte Carlo simulation 107 8. EVALUATION OF ALTERNATIVES 113 8.1 Introduction 113 8.2 Ranking techniques 114 8.2.1 Incremental analysis 114 8.2.2 Linear programming for ranking 115 8.3 Ranking alternatives having different lives 117 8.4 Equipment replacement 120 8.4.1 Cash flow for equipment operation and replacement 121 8.4.2 Constantly increasing maintenance cost 123 8.4.3 Effect of interest rate 125 8.4.4 Replacement analysis based on economic life of equipment 127 Part 3 Business Financial Management 9. PROCESS ECONOMICS 131 9.1 Introduction 131 9.2 Capital investment and operating cash flows 131 9.3 Return of an investment 134 9.4 Factors affecting investment and production costs 135 10. FINANCING OF PROJECTS 137 10.1 Introduction 137 10.2 Term loans 138 10.2.1 Financing with term loans 138 10.2.2 Repayments of term loans 139 10.3 Bonds 139 10.4 Shares 144 10.5 Conditional sale contracts 145 10.6 Leasing 146 10.7 financial analysis of leasing as borrowing to buy 148 10.8 Marginal cost of capital 149 11. COST-VOLUME-PROFIT ANALYSIS 151 11.1 Introduction 151 11.2 Cost-volume-profit analysis 151 11.3 Optimum production rate 155 12. COST AND ASSET ACCOUNTING 157 12.1 Introduction 157 12.2 Asset accounting 159 12.2.1 Balance sheet or statement 159 12.2.2 Recording of entries and changes for balance sheet 162 12.3 Preparation of statement of cash flows 163 13. WORKING CAPITAL MANAGEMENT 167 13.1 Introduction 167 13.2 Conflicting role of capital management 168 13.2.1 Management strategies 168 13.2.2 Determining of re-order point 169 13.2.3 Determining of economic order quantity 170 Part 4 Case Studies 14. ECONOMIC ANALYSIS OF A ZERO DISCHARGE WATER TREATMENT PLANT 175 Executive summary 175 14.1 Economic Analysis Introduction 178 14.2 Equipment Cost Estimation 178 14.2.1 Equipment list 180 14.2.2 Summary of Equipment Cost 181 14.3 Total Capita…

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