Profitability Analysis-II

Chapter 23
ChEN 4253
Terry A. Ring
 Measures of Profitability
• Return on Investment (ROI)
– ROI=annual earnings/capital investment
– ROI > cost of capital (commercial interest rate, i)
• Payback period (PBP)
• Annualized Cost (CA)
• Venture profit (VP)
• Investor’s Rate of Return (IRR) Same

• Discounted Cash Flow Rate of Return (DCFR)

• Hard work to get this all together

Definitions of Profitability Measures
 How to determine ROI
• Sales revenue minus Costs
– Cost of feedstocks
– Cost of Utilities
– Cost of Labor and Maintenance
– Cost of Overhead
– Cost of Taxes and Insurance
– Cost of Depreciation
– Cost of sales force, R&D, Admin.,
Management Incentives
 Utilities
• Steam
• Electricity
• Cooling Water
• Process Water
– Boiler Water
– Feed Stock water/Steam
• Refrigeration
• Fuels
– Natural Gas
– Fuel Oil
– Coal
• Waste Treatment
– Stack Gas Cleanup
– Waste Water Treatment
• Land fill cost for solid waste
Costs
 Depreciation
• Straight-line Depreciation
– Equipment Lifetime – Plant = 12 yr
– Constant % each year so that plant is totally
written off at end of life time
• 8% of Total Depreciable Capital, CTDC

– What would be the depreciation % for 20 yr

lifetime?
• Other types of depreciation
– Accelerated Cost Recovery System (ARCS)
– Modified Accelerated Cost Recovery System (MARCS) for Taxes
– Declining-Balance Method (DB)
– Double Declining-Balance Method (DDB)
– Others
 More On Depreciation
• Declining Balance Method (no salvage value)
– d= range from 1/n to 2/n, typically use 1.5/n
• Double Declining Balance Method (no salvage
value)
– d=2/n
• Depreciation amount for year t, Dt=B*d*(1-d)t-1
• Book Value after year t, BVt-1 =B(1-d)t-1
– B=basis = CTDC
– n= service life
– t=year
 More On Depreciation
• ACRS – Federal Tax Law 1982 – 1986
• MACRS - Federal Tax Law in 1987

Accelerated
Cost Recovery
System
 More on Depletion (of natural
resource)
• Cost Depletion = Units
recovered this
year*Unit value
– Unit Value =
Cost to acquire
resource/estimate of
recoverable units
• Percentage Depletion
 Taxes
• Property Taxes
– Based upon the value of the property
• Used in Cost of Manufacturing
• Severance Tax = 12.5% of extracted mineral’s
net value
• State Taxes
– Very between states, UT = 6.2%
• Federal Income Tax for Business
– Typically taken to be 34% of gross earnings
 Total Production Cost, C
• Cost of Manufacturing minus general
expenses

• C=COM-General Expenses

• General Expenses
– Selling expenses, R&D, Admin. (top
management), Management Incentive
Package
 Cost of Manufacturing (COM)
• Direct manufacturing costs
– Feedstocks, Utilities, labor related to
operations, maintenance
• Operating overhead

• Fixed costs
– Property Tax, Insurance, Depreciation
 Pre-tax (Gross) Earnings
• Gross Earnings = Sales (S) – Total Productin Cost (C)

• Net Earnings(Profit) = (1-t) Gross Earnings

– Tax (t) = State (UT=6.2%) + Federal taxes (34%)
 Working Capital, CWC
Typically 15 % CTCI
More Accurate Working Capital Calculation
CWC=Cash Reserves+Inventory+accounts receivable-
accounts payable

• Cash reserves - 30 days of raw materials, utilities,

operations, Maintenance, operating overhead, property
taxes, insurance and depreciation 8.33% of COM
• Inventories = 7 days of products at sales prices
• Accounts receivable - 30 days at sales price 8.33% of
annual sales
• Accounts payable – 30 days of feedstocks at purchase
price, 8.33% of annual feed stock costs
Table 23.1 Components of Total Capital Investment, CTCI. Modified from Sieder, et. al.,
2004.
Category Symbol and Definition
Total Bare-module Cost for Fabricated CFE= sum of costs for all fabricated
Equipment equipment
Total Bare-module Cost for Process CPM= sum of costs for all process
Machinery machinery
Total Bare-module Cost for Spares Cspares= sum of costs for all spares
Total Bare-module Cost for Storage and Cstorage= sum of costs for all tanks
Surge Tanks
Total Cost for Initial Catalyst Charges Ccatalyst= sum of costs for all catalysts
Total Bare Module Investment (TBM) CTBM= CFE+ CPM + Cspares + Cstorage+ Ccatalyst
Cost of Site Preparation Csite= 10-20% of CTBM
Cost of Service Facilities Cserv=20% of CTBM
Allocated Costs for Utility Plants and Calloc= sum of costs listed below (T22.12)
Related Facilities Capital Cost
Steam $820(S/(lb/hr))0.81
Electricity $2.6e6(S/MW)0.83
Cooling Water $1,000(S/gpm)0.68
Process Water $1,500(S/gpm)0.96
Refrigeration $11,000(S/ton)0.77
Liquid Waste Disposal $3.00/1,000 gpy
gpy=gallons/yr
Total Direct Permanent Investment (DPI) CDPI=CTBM+Csite+Cserv+Calloc
Cost for Contingencies and Contractor Ccont=18% of CDPI
Fees
Total Depreciable Capital (TDC) CTDC=CDPI+Ccont
Cost of Land Cland=2% of CTDC
Cost of Royalties for Intellectual Croyal=1-5% of Sales (S)
Property or 2% of CTDC+3% of Sales (S)
Cost of Plant Startup Cstartup=2-10% of CTDC
Total Permanent Investment (TPI) CTPI= FISF(CTDC+Cland+Croyal+Cstartup)
Working Capital CWC=0.0833*COM+0.0192*S
+0.0833*S+0.0833*Cfeedstocks
Total Capital Investment (TCI) CTCI = CTPI+CWC
Notes: FISF is Investment Site Factor see Table 22.13, a factor of 1.15 was used for Utah
and 1.25 used for Alaska
Definitions of Profitability Measures
 Selling Price for Given ROI
• For a new product without an established market
• Sale price may very
– High Sales price
• Assume ROI say 40% (This is a home run!!)
• Back calculate the sales price.
– Low Sales price
• Set VP to Zero
• Back calculate the sales price
• (this is the same as ROI calc above when or imin is
20%)
 ROI is not good enough for cash
poor companies
• They use annual Cash flow
• Years of Plant construction
CF = -fCTDC-CWC-Cland
• Years of Plant Operation
CF = (1-t)(S-C)+D
• Depreciation D=fCTDC
• f= fraction of TDC which is depreciated that
year
 Using Excel for Profitability
Analysis
• User name “student”
• Password “engineer”

• Steps to get ready

• Get Chemical Prices
• Get Cost of Utilities
• Run Aspen/ProMax
– Production Rates (kg/y)
– Utilities used (kg/y)
• Determine installed cost of equipment
• Only then are you ready to use this spread sheet