TBP01x 6.2 Economics of a process design
Hello again, good to see you back!
This unit deals with the economics of a production process and the question whether an
investor would put money into this process. This unit is made together with Dr. Adrie
Straathof, associate professor at our department and international expert in bioprocess
design and production of chemicals from biomass.
Now we turn to the big question: we have a nice new process, but we must find out if it is
profitable.
You have already seen in week 1 that the profitability of a full production process relies on
the revenues, the overall capital expenditure or CAPEX, the overall operational costs or
OPEX and taxes and legislation. We are going to evaluate the profitability and look at the
economic potential. We use standard formulas to help investors to quickly see if a proposal
is worth their investment. The profitability is high if the expected pay back time of an
investment is low, and when the Return on Investment, Net Present Value and Internal Rate
of Return are high. The cash flow analysis is another important factor to evaluate the
solvency of a production unit.
Just a reminder: the revenue is the output in products volume times the product price. OPEX
take all annual costs into account that are necessary for the daily functioning of a production
process and include feedstocks, water, energy, employment costs, insurances, etc. CAPEX
refers to the costs of setting up the facility, the buildings and equipment, but also the non
tangible (one off) assets such as patents and the start up costs of the facility.
A quick way to calculate the overall potential is to take the product revenues and deduct the
raw materials costs. But this does not take into account all the further business costs of the
equipment and processing of the feedstock. It is just a quick check whether the idea has
potential on the basis of feedstock costs.
To calculate more precisely we need the net profit, which is the revenues minus the OPEX
minus the taxes. Remember, the revenues depend on the product price and the volumes
sold.
How will the investor answer this question?...
What counts for investors is the pay back time, the time when their investment is fully paid
off. This should be as short as possible. The inverse of this formula divides net profit or
Margin by the total investment (or CAPEX) and is given as a percentage. It is called the
Return on Investment and, of course, this should be a high figure.
Companies will often be pleased with a payback time of 2 3 years or ROI of 33 50%.
What else is needed to convince the investor?...
He or she wants to know the cash flow over the years and the Net Present Value. When the
plant has started the revenues are set by the product price (which can fluctuate a bit
depending on the market) and the output, in this example we assume the revenues are
constant once the production has started.
From this the OPEX and taxes are deducted which leaves a net profit, which can be used to
pay back the investment. The more you produce, the lower the production costs.
The cash flow can now be predicted. In the first year before the production starts there is
just investment in building the facility. After starting the cumulative net profit is first used to
pay of the investment. The time after the start of the project when this is realiszed is the Pay
Back Time.
However, if the investment was not made, and the money was kept in a bank, the capital
would have given some interest. This is shown here a so called negative interest. After the
start, the revenues come in. First we have to pay back the investment from the net profit, so
again we do not earn money on the capital nor on the revenues and have a  negative
interest . After the cumulative net profit has reached the amount that the full investment
and the amount of the interest not earned are paid back, the facility will accumulate not
only the net profit but also a positive interest on the amount of the net profit.
The cumulated cash flow is the cumulated net profit  investment. The Net Present Value
equals the positive areas minus the negative areas, and this is therefore corrected for the
interest rate an investor would have received if he had put the money on the bank.
The Net Present Value is an important figure for a potential investor. We have now seen that
It depends on the interest rate, the net cash flow in a certain year and the project expected
overall lifetime. With this formula you can calculate the NPV.
When NPV = 0 the investment does not give a higher profit than leaving money at the bank.
If NPV starts increasing, it becomes an attractive investment!
The Internal Rate of Return provides another way of looking at the profitability. Instead of
asking what the NPV is for a prescribed interest rate, we seek a value of the interest rate
which will make the NPV just equal to zero. So a high IRR stands for a high profitability, and
this is what investors will demand  especially for risky projects!
Investors love a high IRR, because it shows that the investment in the biobased process is
much more rewarding than putting the money in the bank!
We now need to calculate. Let s start with the capital costs. To calculate the overall CAPEX
we need the purchase prices of the equipment costs. There are several databases to get
these prices such as the one mentioned in this slide. Equipment cost is dependent on the
size of the process facility.
If you need another size than the reference given, then you can use this formula to calculate
the costs. After you have added all equipment costs you are not yet there!
There are also the costs related to the building and other hardware that is needed to allow
equipment to operate. These are taken into account by the Total Plant Direct Costs. Based
on these direct costs, the Total Plant Indirect costs gives the costs for the engineering and
construction. Together, they form the Total Plant Costs, based on which things like
contractor fees are determined. We use formulas to estimate these costs as shown in this
example, and again we get the prices from the database. The Direct Fixed Capital can be 4 7
times higher than just the equipment costs. To get a good estimate for CAPEX you also need
to add 5 10% for start up costs.
This is an example from Superpro Design calculated for a production process of an enzyme.
You see that the overall Direct Fixed Capital is here almost 89 Million $.
When we wish to estimate the operational costs of our production process we need to know
all costs of all ingoing materials, how many personnel is needed, how much will be spent on
utilities such as energy and water, costs for quality control, packaging and transportation
and marketing and selling. It is best to use the flowsheets from your design, and which was
explained last week, and let Superpro calculate it. But you can also calculate everything in a
spreadsheet.
Do not forget to include costs for royalties, and depreciation of equipment and
maintenance. If you use a spreadsheet you have to find the actual costs of the materials and
utilities at the internet. In this example of enzyme production, the overall OPEX is 100 M
$ per year.
So now you can calculate the CAPEX and OPEX. But to get a good idea about the profitability,
you also need to know your expected income. So you need a product price. For this it is
important to know the market, its size and how many are active on this market. You can
calculate the product price you need to get a good IRR and compare this to the market price.
If your intended product is not on the market, but it is an intermediary product for further
processing, you can estimate its value if process details up to the intermediate are known.
With the OPEX and CAPEX you can now calculate the taxes. Taxes are paid on the gross
profit, and vary per country. Mostly you can deduct special expenses such as loans and take
into account the depreciation of your assets. Superpro Design also includes depreciation of
equipment in its calculation as part of the facility dependent annual operating costs.
Now you can calculate your profitability.
This is the overall profitability analysis of our example. As you can see, we also always take
some start up costs into account (normally 5 10% of Direct fixed capital costs). You can see
that this example for the enzyme production is a valuable idea: the Pay back time is within 2
years!
Finally, and as a last note: when you make a business proposal, it is important to also look
for other external factors, for example policies that provide subsidy for biobased processes
or the influence of CO2 prices on your process versus the old process. You should also get a
feeling for your markets, what is the sensitivity of your feedstock and product price; can you
choose other feedstock alternatives when prices go up related to harvests or other buyers?
Can you collaborate with companies in your neighborhood in using access energy or water
recycling?
Logistics are another important factor: how big is your area from which you get your
feedstock and how reliant is your feedstock supply, also in time?
Getting it from further away may cost much more and also increases your environmental
footprint. How that works you'll see later this week!
I challenge you to think like a PDO investor, good luck!