Chapter 9 - Economic evaluation of projects

Abstract

Because the purpose of building a chemical plant is usually to make money, the designer must build an economic model of the project that can be used for optimization and to determine whether the project is an attractive investment. Cash flows during a project include the initial capital investment, the working capital required to operate the plant, and the revenues and operating costs during operation. A brief introduction to corporate accounting and finance is given. Financial statements, balance sheets, income statement, cash flow statement, and methods companies use to finance projects such as debt and equity financing are described. The role of debt and equity in determining cost of capital is explained. Taxes and tax allowances such as depreciation are described. Economic analysis terms, including gross margin, gross profit, net profit, present value, net present value (NPV), payback time, return on assets, return on investment (ROI), and discounted cash flow rate of return (DCFROR), are explained. Sensitivity analysis and contingency cost estimation are introduced. The role of nonfinancial factors such as regulatory and strategic considerations in project selection is discussed.