The depreciation is added here because it is not really a cost to the project. It is a
“book” cost only and is used specifically for tax calculation. The cash flow item for
the last year of the economic life must now include the “terminal investment item.”
This item is the sum of the salvage or net scrap value of the plant (scrap value less
cost of dismantling), the estimated value of the land, and the working capital
initially used as part of the “associated costs.”
Thus, the final cash flow item will be the sum of profit after tax, plus depreciation, plus terminal investment.
With the net cash flow in place, the second part of the calculation, which is the
determination of the return on investment based on the present worth concept for
the project, can be carried out.
Calculating the Cumulative Present Worth
This is an iterative calculation using three or more values as the discounting
percentage. The result of the cumulative values of the present worth at the end of
the economic life from these calculations is plotted against the discount percentages
used for each case. The discount value when the cumulative present worth is zero is
the return on investment for the project.
For each value of the discount percentages selected, first calculate the discount
factor for each year of the economic life starting at year 0 where the discount factor
is always 1.0. Then divide the discount factor for year 0 which is 1.0 by (1.0 + d)
where d = discount percent divided by 100. Do the same for each successive
year. Thus, if the discount percent selected is 10 %, then the discount factor for
year 0 = 1.0, for year 1 = 1/1.1 = 0.909, for year 2 = 0.909/1.1 = 0.826, for
year 3 = 0.826/1.1 = 0.751, and so on until the last year.
The present worth value for each year is then calculated as the net cash flow
value for that year multiplied by the discount factor for that year. Remember that
the cash flow value for year 0 is always negative. Next determine the cumulative
present worth value by adding the value for each successive year to the value of
the year before. Starting with that value for year 0 which is negative, add that
value for year 1 which is positive to give a positive or negative cumulative value
for year 1. Continue by adding the present worth value for year 2 to the
cumulative value for year 1 to give the cumulative value for year 2 and so on
through the last year. The cumulative value of the present worth for the last year
in each of the discount percentages selected is plotted linearly against the
discount percentage. This cumulative value can either be positive or negative.
Indeed, to be meaningful, the discount percentages selected must be such that the
calculated present worth values for the last economic years be a mixture of
negative and positive values. In this way, the resulting curve plotted must pass
through zero.
The following example calculation is based on scheme 1 in Item 8.2. Similar
calculations may also be carried out on one or more of the other schemes that were
screened to confirm their comparative profitability. In this case, it is important to
Petroleum Refinery Planning and Economics
733
“book” cost only and is used specifically for tax calculation. The cash flow item for
the last year of the economic life must now include the “terminal investment item.”
This item is the sum of the salvage or net scrap value of the plant (scrap value less
cost of dismantling), the estimated value of the land, and the working capital
initially used as part of the “associated costs.”
Thus, the final cash flow item will be the sum of profit after tax, plus depreciation, plus terminal investment.
With the net cash flow in place, the second part of the calculation, which is the
determination of the return on investment based on the present worth concept for
the project, can be carried out.
Calculating the Cumulative Present Worth
This is an iterative calculation using three or more values as the discounting
percentage. The result of the cumulative values of the present worth at the end of
the economic life from these calculations is plotted against the discount percentages
used for each case. The discount value when the cumulative present worth is zero is
the return on investment for the project.
For each value of the discount percentages selected, first calculate the discount
factor for each year of the economic life starting at year 0 where the discount factor
is always 1.0. Then divide the discount factor for year 0 which is 1.0 by (1.0 + d)
where d = discount percent divided by 100. Do the same for each successive
year. Thus, if the discount percent selected is 10 %, then the discount factor for
year 0 = 1.0, for year 1 = 1/1.1 = 0.909, for year 2 = 0.909/1.1 = 0.826, for
year 3 = 0.826/1.1 = 0.751, and so on until the last year.
The present worth value for each year is then calculated as the net cash flow
value for that year multiplied by the discount factor for that year. Remember that
the cash flow value for year 0 is always negative. Next determine the cumulative
present worth value by adding the value for each successive year to the value of
the year before. Starting with that value for year 0 which is negative, add that
value for year 1 which is positive to give a positive or negative cumulative value
for year 1. Continue by adding the present worth value for year 2 to the
cumulative value for year 1 to give the cumulative value for year 2 and so on
through the last year. The cumulative value of the present worth for the last year
in each of the discount percentages selected is plotted linearly against the
discount percentage. This cumulative value can either be positive or negative.
Indeed, to be meaningful, the discount percentages selected must be such that the
calculated present worth values for the last economic years be a mixture of
negative and positive values. In this way, the resulting curve plotted must pass
through zero.
The following example calculation is based on scheme 1 in Item 8.2. Similar
calculations may also be carried out on one or more of the other schemes that were
screened to confirm their comparative profitability. In this case, it is important to
Petroleum Refinery Planning and Economics
733