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OGUNGBENRO Adetola ElijahCHE/2007/083 ADENIRAN Joshua AdewumiCHE/2007/012

ADEREMI Oluwadamilola IdayatCHE/2007/014

NMEROLE Austin ChidiebiereCHE/2007/075

AKINDURO Olumuyiwa GregoryCHE/2007/023

FAMILUSI Funso OluwaseunCHE/2007/055

AJAYI Babajide EzekielCHE/2007/018

NAJIMU Musa OlajideCHE/2007/074


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CHAPTER 10

ECONOMICS

The chapter discusses methods of determining how much it costs

to produce a pound of product and whether the expected profit is

enough to justify building a plant.

The Objectives of this presentation are as follows:

To determine the amount of money that must be invested to

produce the product;

To investigate all the costs that are involved in producing and

selling a chemical;

To consider a number of different ways of evaluating the

profitability of a plant.


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AMOUNT NEEDED FOR INVESTMENT:

CAPITAL

Capital refers to the amount of money that

must be invested if any product is to beproduced. The capital is made up of the

fixed capital needed to construct the plant

and the working capital needed to operate

it.

The fixed capital is the cost of building

and equipping the plant and all its

peripheral buildings and operations.

The working capital is made up of all

items not included in the fixed capital e.g.

accounts payable, raw materials inventory,

work in progress, and product and by-

product inventories.


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COST OF PRODUCING A CHEMICAL

A chemical plant has every type of cost associated with the

operation of a car and many more. The major categories are raw

materials, conversion costs, depreciation, sales, research, taxes andinsurance, and general administration costs. A method for

determining the magnitude of each of these is hereby presented.


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Raw Material Costs

These are the costs delivered to the plant of all the various

chemicals that are used in producing the products.

The prices of the raw materials can be obtained from themanufacturer, and the amount of each chemical required is given by

the unit ratio material balance.

Conversion Costs

The conversion costs are those that occur between the time the rawmaterials enter the plant and the time the product leaves, and that are

a direct result of processing. These consist of labor, utilities, supplies,

maintenance, waste treatment charges, royalties, and packaging.

DepreciationDepreciation is the means by which the capital cost involved in

constructing the plant is prorated over its prospective life. A rough

estimate is 9% of the cost of constructing the plant.


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Research Costs

Research expenses are those associated with the administration and

running of research projects. Research expenses average 3-4% of sales for

the chemical industry. For the large pharmaceutical companies this is

nearly 10%.

Taxes and Insurance

This category includes property and franchise taxes and all insurance

costs. They depend on the value of the physical plant. They may beassumed to be between 2 and 3% of the cost of building the plant.

General Administrative Costs

These are the overhead costs that it takes to operate a company. The item

consists of all the administrative costs that cannot be assigned to a given

project. It includes the expenses and salaries of the president, board of

directors, treasurer, division managers, long-range planners and

accountants. These costs average about 4% of the total sales.


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EVALUATING PROFITABILITY OF A CHEMICAL PLANT:

MEASURES AND ECONOMIC INDICATORS

Measures

Return on Investment (R.O.I.)

The return on investment is the expected profit divided by the total

capital invested. This is the percentage return that an investor may expectto eventually earn on his money.

Payout Time

The payout time or payback period is the number of years from the time

of startup it would take to recover all expenses involved in a project if all

the pretax profits were used for this purpose.


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Net Present Value (NPV) - A Good Profitability Measure

The net present value of a project is what is obtained when the sum of

the present values of all expenditures is subtracted from the sum of the present

values of all incomes. This places all costs and incomes on a comparable basis.

Whenever the net present value (NPV) is positive this means the project

will yield more money i.e. the plant appears to be a winner. If the net present

value is negative the project should be dropped.


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Indicators

Time Value of Money

When comparing projects having different time durations, discrepancies in

results is often encountered because the economic indicator(s) used fail totake into account the timing of payments and receipts and the magnitude of

the profits. To resolve these problems a different economic indicator which

emphasizes time value of money needs to be developed. Such indicators

include Compound Interest, Present Value, Annuity etc.

PROPER INTEREST RATES

The key to the discounted cash flow methods is the determination of a

proper interest rate. For this, two factors must be known. One is: how much

does it cost to obtain money? The second is: what is a reasonable amount ofprofit to expect from a plant? The first depends on the source of money.

This can be corporation earnings, the sale of stock, the issuance of bonds,

the selling of assets, or borrowing from some outside source. The second

depends on economic conditions.


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CASE STUDY:

ECONOMIC EVALUATION FOR A150,000,000 LB/YR POLYSTYRENE

PLANT USING THE SUSPENSION

PROCESS.


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