investment (EEC) within battery limits (ISBL) plus the plant investment outside
battery limits (OSBL). EEC may be used instead of total fixed investment if clearly
understood and agreed upon that this is the case. ROIs are normally calculated on a
pretax basis; they can also be estimated on a posttax basis, if desired. Royalties and
interest during construction should be included as part of the total plant investment.
A second simple return parameter often used is payout time (or payback time).
This represents the ratio of total fixed or plant investment to operating cash flow.
(This type of payout time will not agree with the payout times calculated on a
discounted cash flow (DCF) basis.)
Typical rules of thumb are that a new smallish project is attractive if a, say, 25 %
pretax ROI can be obtained. If this is coupled with overall depreciation estimated at
10 % (10-year straight-line), the corresponding simple payout time is about 3 years.
Very large, expensive projects may be justified with longer payout times of about
5 or even 7 or more years.
Higher pretax ROIs and shorter payout times are usually required for revamps or
retrofits. Typical 1–2 years maximum payout times are often required for revamp
projects, again depending on their relative magnitude.
Other Parameters
Other common reporting parameters are:
• Discounted cash flow (DCF) rate of return (internal rate of return)
• Required sales price for a given DCF rate of return
• Cash flow payout time
These parameters are associated with the use of discounting over a time series of
cash flows.
Cash Flow Analysis
The previous section examined the economic summary prepared at one particular
point in time, usually a “typical” production year. In this section, we examine the
economic analysis extended over an extended period of operation, usually 10 or
20 years.
The basis for the analysis is identical to what has been said before, so there is no
need to repeat it here. All that needs to be discussed is the discounting effect
over time.
A cash flow analysis is a net present value analysis. If we assume an initial
outflow or investment at time zero, the total of the net present values of all future
cash flows must exceed the initial investment for the project to be attractive.
Obviously, the result will be highly dependent on the rate of discounting used to
bring future cash flows to time zero. What rate of discounting should be used? We
should use a rate of discounting equivalent to the money market rate, namely, the
rate of return that we would obtain if we were to grant a loan to others. On this basis,
then, the appropriate rate of discounting is equivalent to the long-term interest rate
that we would be charged for any debt incurred in connection with the construction
Petroleum Refinery Planning and Economics
757
battery limits (OSBL). EEC may be used instead of total fixed investment if clearly
understood and agreed upon that this is the case. ROIs are normally calculated on a
pretax basis; they can also be estimated on a posttax basis, if desired. Royalties and
interest during construction should be included as part of the total plant investment.
A second simple return parameter often used is payout time (or payback time).
This represents the ratio of total fixed or plant investment to operating cash flow.
(This type of payout time will not agree with the payout times calculated on a
discounted cash flow (DCF) basis.)
Typical rules of thumb are that a new smallish project is attractive if a, say, 25 %
pretax ROI can be obtained. If this is coupled with overall depreciation estimated at
10 % (10-year straight-line), the corresponding simple payout time is about 3 years.
Very large, expensive projects may be justified with longer payout times of about
5 or even 7 or more years.
Higher pretax ROIs and shorter payout times are usually required for revamps or
retrofits. Typical 1–2 years maximum payout times are often required for revamp
projects, again depending on their relative magnitude.
Other Parameters
Other common reporting parameters are:
• Discounted cash flow (DCF) rate of return (internal rate of return)
• Required sales price for a given DCF rate of return
• Cash flow payout time
These parameters are associated with the use of discounting over a time series of
cash flows.
Cash Flow Analysis
The previous section examined the economic summary prepared at one particular
point in time, usually a “typical” production year. In this section, we examine the
economic analysis extended over an extended period of operation, usually 10 or
20 years.
The basis for the analysis is identical to what has been said before, so there is no
need to repeat it here. All that needs to be discussed is the discounting effect
over time.
A cash flow analysis is a net present value analysis. If we assume an initial
outflow or investment at time zero, the total of the net present values of all future
cash flows must exceed the initial investment for the project to be attractive.
Obviously, the result will be highly dependent on the rate of discounting used to
bring future cash flows to time zero. What rate of discounting should be used? We
should use a rate of discounting equivalent to the money market rate, namely, the
rate of return that we would obtain if we were to grant a loan to others. On this basis,
then, the appropriate rate of discounting is equivalent to the long-term interest rate
that we would be charged for any debt incurred in connection with the construction
Petroleum Refinery Planning and Economics
757