3171 Concepts

Balance Sheet

financial snapshot of a company at a single point in time (Assets = Liabilities + Stockholders Equity)

Current Assets vs Current Liabilities?

assets convertible to cash within 1 year, debts due within a year

Quick Acid Test Ratio

liquidity metric excluding inventories. Benchmark is > 1.0

Equity ratio

measures financial independence/leverage. Ratio 0.5 is ideal.

Cost Indexes

dimensionless inflation adjusters updating equipment/plant costs across different base years

Bare Module Cost

sum of f.o.b equipment purchase price plus all direct instillation materials/labor and indirect construction/engineering costs

Battery Limits

Physical boundary encompassing the core process manufacturing units; offsite facilities and yard improvements are outside battery limits

Hill Method

capital estimate (± 50%) based on main product capacity, operating pressure, and process blocks.

Lang Factor Method

study estimate (±) 50% multiplying total delivered equipment purchase cost by plant type multipliers

Guthrie method

preliminary estimate (± 20%) using bare module factors and design/pressure/material corrections.

Allocated Utility Capital

Capital charge assessed when connecting to centralized site utilities (steam, cooling water, power)

Cost of Manufacture

Direct operational expenses (raw mats, utilities, operating labor, maintenance, overhead, depreciation)

General Expenses

Corporate level overhead expenses (sales, marketing, R&D)

Direct Wages and Benefits

Operating labor expense based on 2,080 hr/yr operator

Working Capital

Capital required to run day to day operations (inventories, wages, receivables) prior to revenue collection; recovered in full at project end.

Venture Profit

profit generated above an acceptable minimum corporate return

Annualized Cost (C_A)

used to evaluate and select between design alternatives when revenues are absent or identical.

Capitalized Cost (K)

Present worth of purchasing and maintaining an equipment unit in perpetuity across infinite replacement cycles.

MACRS (modified accelerated cost recovery)

tax depreciation method using statutory percentages and a half year convention while ignoring salvage value

Tax Shield/ Tax Savings

The reduction in income taxes resulting from depreciation deductions (t x D)

Discounted Cash Flow (DCF)

Rigorous lifecycle economic analysis accounting for the time value of money and annual operational variations

Net Present Value

Present worth of all project inflows and outflows discounted at the hurdle rate i; project accepted if NPV > 0.

Investors Rate of Return (IRR/DCFRR)

The discount rate where NPV = 0; project accepted if IRR > imin

Income Statement

reports a business’s operational performance, revenue, expenses, and resulting profit or loss from a defined duration

Cash Flow Statement

financial statement that tracks the actual physical movement of cash in and out of a company

Current Ratio

Liquidity metric that measures the ability of a company to meet short term obligations due within one year using liquid assets. Benchmark: 2.0

Return on Assets

Evaluates how efficiently management employs all deployed physical and financial assets to generate operating profits

Return on Equity

Measures the profitability generated per dollar of shareholder investment. U.S norm of 11%

Operating Margin

Reflects core manufacturing and commercial efficiency before interest expenses and taxes

Profit Margin

Represents after tax earnings retained per dollar of sales, providing a safety buffer against product price drops or raw material price spikes

CEPCI - Chemical Engineering Plant Cost Index

standard across the chemical process industries for equipment, construction labor, and plant engineering

M&S - Marshall & Swift Process Industry Index

reflects machinery, equipment installation, and industrial fabrication

NF - Nelson Farrar Refinery Construction Index

Specialized for petroleum refineries and petrochemical construction

ENR - Engineering News Record Construction Index

Tracks base civil engineering materials and common labor

CPI - Consumer Price Index

measures retail consumer goods and general cost of living

Purchase Cost (Cp)

bare purchase price of fabricated equipment loaded onto a transport carrier at the manufacturers facility

Direct Permanent Investment (Cdpi)

the fixed capital directly invested in the active physical plant site

Total Depreciable Capital (Ctdc)

portion of capital assets that suffers physical wear and tear or technological obsolescence over time, allowing its cost to be depreciated for tax deductions

Total Permanent Investment (Ctpi)

land, patent royalties, and plant startup costs are non depreciable fixed assets

Working capital (Cwc)

Liquid operating funds required to run the business day to day before sales cash is collected. non depreciable and fully recovered at the end of plant life.

Total Capital Investment (Ctci)

the total monetary investment required to design, construct, startup, and finance inventory for a chemical venture

Hill method requirements

main product flow rate, operating pressure, basic block flow diagram

Lang method requirements

preliminary PFD, Energy and mass balances, sized major equipment

Guthrie method requirements

complete PFDs, P&IDs, utility requirements, detailed equipment specification sheets

Distillation Column Sizing Boundaries (what is excluded?)

Only covers the fabricated vessel shell and heads. DOES NOT INCLUDE: trays, packing, ladders, platforms, condenser, reflux drum, reflux pumps, recoilers

Total Production Cost (C)

total recurring annual operating expense of a facility:

C = Cost of Manufacture + General Expenses

Profitability measures

1. Approximate (Snapshot) measures: ROI, PBP, VP, C_A

2. Rigorous Measures: (NPV, IRR)

Approximate measures assumptions?

Assume straight line depreciation, uniform production, excludes time value of money and compound interest

Rigorous profitability measures

Multiple year models that incorporate year by year cash flow projections, tax law depreciation schedules (MACRS), inflation, capital expenditure timelines, and the time value of money

Return on Investment

annual percentage interest rate earned by project profits on initial capital outlay. 0.20 is considered good

Payback Period (PBP)

time required for undercounted annual operating cash flows to fully recover depreciable capital (PBP <2-4 yrs good). Ignored revenues and operating life after the payback point and ignores time value of money

Time value of money

The principle that a dollar received today is worth more than a dollar received in the future due to its earning capacity via compound interest

nominal interest rate

stated annual interest rate without taking compounded frequency into account

effective interest rate

the true annual rate earned when compounding occurs m times per year

Ordinary annuity

a series of equal, uniform payments (A) made at the end of consecutive interest periods

Sinking fund

A fund establishes by setting aside periodic deposits (A) earning compound interest to accumulate a specific future target sum (F) by a future maturity dateS

Straight line depreciation

deducts an equal amount each year and accounts for salvage value

MACRS Depreciation

statutory u.s tax schedule that accelerate depreciation into early years, assumes zero salvage value, and uses half year convention

Why is accelerated depreciation (MACRS) preferred?

MACRS concentrates deductions in the earliest years of operations. early tax saving have a higher present value, increasing net present value (NPV). BOTH straight line and MACRS yield the exact same total nominal tax deductions over plant life, however.

Net Present Value

sum of all projected cash inflows and outflows over the entire lifecycle of a plant, discounted to time zero at the hurdle rate (i). Project is economically attractive if NPV > 0.

Investors rate of Return

the exact discount rate (i) that makes the cumulative net present value of all project cash flow equal to zero. Accept project if IRR>i_Min (hurdle rate)

NPV vs IRR

NPV measures absolute magnitude in wealth created, IRR measures the relative efficiency/percentage rate of return on capital. NPV preferred, generate more profit.

Book value

Initial investment - accumulated depreciation. Net dollar value of an asset recorded on a company accounting balance sheet at any given point in its service life. It is the orignal capital cost of the depreciable asset minus the sun of all depreciation charges