Department of Chemical Engineering SRM University

CH0401 Process Engineering Economics

Lecture 1

Balasubramanian S

Balasubramanian S Department of Chemical Engineering 2

Process Engineering Economics

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Introduction – Time Value of Money

Equivalence

Equations for economic studies

Amortization

Depreciation and Depletion

Balasubramanian S Department of Chemical Engineering 3

Process Engineering Economics

1

2

3

4

5

Introduction – Time Value of Money

Equivalence

Equations for economic studies

Amortization

Depreciation and Depletion

Balasubramanian S Department of Chemical Engineering 4

Process Engineering Economics – Introduction

Basic terminologies to start with

Terminology Meaning

Time value of money The capacity of money to enlarge itself with the

passage of time is referred as the time value of money

Capital The money that earns interest is termed as the Capital

Principal Principal refers to the original amount or remaining unpaid amount of a loan

Interest

The money earned by the original sum of money. Interest is the cost of money borrowed or the earnings of the money loaned. The expression “Money is worth 10 percent”, means that a given sum of money can be invested to earn interest at 12 percent per annum.

Balasubramanian S Department of Chemical Engineering 5

Process Engineering Economics – Introduction

Basic terminologies to start with

Terminology Meaning

Interest period Interest period is the time period for which the

interest is calculated usually it is annually, quarterly or monthly but it can be of any desired time interval.

Interest rate

The time rate at which a sum of money earns interest is referred to as interest rate and it is usually expressed in percentage form. In other words, the interest rate is the rate of interest earned during a given period of time to the sum that earned this interest during that period.

Investment

The productive use of money to earn interest is called an investment. The money that earns interest is termed “capital”.

Balasubramanian S Department of Chemical Engineering 6

Process Engineering Economics – Introduction

Basic terminologies to start with

Terminology Meaning

Payment

The term payment will be used to denote any exchange of money, regardless of whether the business firm under consideration has received the stipulated sum of money or expended it. Payments may be of two types they are: 1. receipts – for money that enters the firm 2. disbursement or expenditure – for money that leaves the firm.

Balasubramanian S Department of Chemical Engineering 7

Process Engineering Economics – Introduction

Basic terminologies to start with

Terminology Meaning

Cash flow diagram

The set of payments (receipt or disbursement) and a diagram depicts these payments is known as the cash flow diagram. In the figure given below time is plotted on a horizontal axis, and payments are represented by vertical lines, the amount of each payment is recorded directly above or below the horizontal axis representing it.

Time  line    

Disbursement    

Reciepts  

3  2   4   5  1   6  

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Process Engineering Economics – Introduction

Cash Flow Diagram – Example

An illustration, assume that a project has the following cash flow: a disbursement of $

20,000 now, a receipt of $5000 three years hence, a receipt of $12,000 five years hence,

and a receipt of $ 14,000 eight years hence. Show the cash flow diagram, where the unit

of time is one year

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Balasubramanian S Department of Chemical Engineering 9

Process Engineering Economics – Introduction In

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Simple Interest

Compound Interest

Nominal Interest

Effective Interest

Interest that is computed only on the original sum and not on accrued interest.

The interest earned on accumulated, reinvested interest as well as principal amount.

The annual interest rate without considering the effect of any compounding.

The annual interest rate taking into account the effect of any compounding during the year.

Balasubramanian S Department of Chemical Engineering 10

Process Engineering Economics – References

•  Herbert E. Schweyer. (1955) Process Engineering Economics, Mc Graw Hill •  Max S. Peters, Kaus D. Timmerhaus, Ronald E. West. (2004) Plant

Design and Economics for Chemical Engineers, 5th Ed., Mc Graw Hill

•  Max Kurtz. (1920) Engineering Economics for Professional Engineers’ Examinations, 3rd Ed., Mc Graw Hill

•  Frederic C. Jelen, James H. Black. (1985) Cost and Optimization Engineering, International Student edition, Mc Graw Hill