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Allen D.H. Economic evaluation of projects

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Allen D.H. Economic evaluation of projects
3rd edition. — Institution of Chemical Engineers, 1991. — 194 p. — ISBN 0-85295-266-X
Chemical engineers concerned with research, design or plant operation contribute to proposals which, if they are to be realised, require investment which must be justified. In many cases chemical engineers will make important contributions to this process by providing some of the information used in the economic evaluation of a project, which is actually carried out by someone else. It is thus important that chemical engineers should understand the whole evaluation process in order for them to play their proper part in it. In other cases a chemical engineer may be responsible for making the full case for the proposed investment, or for making the investment decision itself. A knowledge of investment appraisal, and specifically of economic evaluation, is therefore an essential part of a chemical engineer's skills.
Chapters 1-4 of this text are concerned with project cash flow and the factors which contribute to it. Chapters 5-11 describe methods by which the economic viability of projects can be assessed including a detailed example in Chapter 10. The impact of inflation on the procedures of economic evaluation is discussed in Chapter 12.
The second part of this text, Chapters 13-16, describes ways in which the inherent problems of uncertainty and economic risk in the economic evaluation of a project can be tackled. These are sensitivity analysis, the use of subjective probabilities and expected values, decision trees, and economic risk analysis using subjective probability distribu¬tions. In the third part, an overall view of the procedure for the evaluation of an investment project proposal is given in Chapter 17. An alternative approach to investment planning in conditions of major general uncertainty is discussed in Chapter 18. This is followed by some general concluding comments on economic evaluation and invest¬ment decisions in the final Chapter 19. Discount tables, spreadsheet techniques, Basic programs and further useful reading to assist in economic evaluation are provided in Appendices 1-4.
The fact that this little book has been continuously in print since its first edition was produced in 1972, in response to continuing demand, shows that it meets a real need in providing guidance in this field to aspiring and practising chemical engineers. The points made in the prefaces to the previous editions about the importance of a pragmatic approach to the evaluation and justification of new process plant investment are still just as relevant today, and this has been borne in mind in the major revision which has been undertaken for this new edition, for example in the spreadsheet approach which is now adopted for the calculations involved. There has been a natural temptation to expand the text both by going into topics in more detail and by extending the scope of the material, but on the whole this has been resisted as it would have changed the character of the book (and probably its readership) from what has become well established.
Some areas are however now given more attention than previously. These include the taxation framework for economic evaluation which has been brought up to date; the effect of discounting cash flows in different ways from the conventional yearly periods; the difficulties with, and characteristics of, projects with multiple DCF returns; mutually exclusive projects and project portfolios, and policies towards economic risk. More examples and graphical illustrations are now included to illustrate the application of the techniques described, and the alphathon case study has been revised and brought up to date. The spreadsheet techniques used are explained in some detail in an appendix so that they can, if desired, be easily implemented by the reader.
Contents
Introduction to the economic evaluation of investment projects
Project cash flow components of cash flow
Taxation and economic evaluation
Capital Allowances After-Tax Cash Flows Investment Grants
Project Cash Flow And Crude Economic Evaluation
Payback Time
Return on Investment (ROI)
Discounting, The Time Value Of Money And Net Present Value
The Time Value of Money
Project Net Present Value (NPV)
Calculating Project NPVs
Identical Yearly Cash Flows
Continuous and Other Non-Yearly Cash Flows
Non-Yearly and Continuous Discounting
Interpretation Of Project NPV
Graphical Representation of Project NPV Interpretation of Project NPV in Economic Evaluation
Discounted Cash Flow Rate Of Return (DCFR)
The Solution of the DCFR Equation and the Problem of Multiple DCFRs
Project Selection by NPV and DCFR
Selecting a Single Independent Project Mutually Exclusive Projects Incremental Economic Evaluation Selecting Projects Within a Limited Budget
Case Study In Economic Evaluation - The Manufacture Of Alphathon
The Initial Information Development of Cash Flow Data LI plant alternative HI plant alternative Economic Evaluation Analysis
Other Examples Of Economic Evaluation
Cost Minimization in Equipment Selection Economic Evaluation in Terms of Added Value
Inflation And Economic Evaluation
Economic Evaluation Assuming General Inflation
General inflation - case 1
General inflation - case 2
Economic Evaluation with Differential Inflation
Example to illustrate economic evaluation with differential inflation
Uncertainty And Risk In Economic Evaluation -Sensitivity Analysis
Introduction to Uncertainty and Risk Sensitivity Analysis
Quantifying Uncertainty And Its Implications
Subjective Probabilities
Decision Making Under Conditions of Uncertainty and Risk
Taking into account only the most likely situation
Minimizing the maximum possible loss
Giving Weights to Alternative Outcomes
Balancing optimism and pessimism
Averaging through ignorance
Subjective probabilities and expectation
Probability Sensitivity Analysis
Uses of Expectation
Money Utility
Decision Trees
Example to Illustrate Decision Tree Analysis
Economic Risk Analysis In Economic Evaluation
Subjective Probability Distributions
Economic Risk Analysis Using Monte Carlo Simulation
Case Study in Economic Risk Analysis Using Monte Carlo
Simulation - The Manufacture of Alphathon
Interpreting the Results of a Project
Economic Risk Analysis
Systematic Procedure For Making Project Investment Proposals
The Scope of a Project Investment Proposal
Matrix Evaluation - An Aid To Major Investment Planning In Uncertain Times
Concluding Comments On The Economic Evaluation Of Projects
Appendix 1 – Discount Tables
Appendix 2 – Spreadsheet Techniques for Economic Evaluation
Developing Project Cash Flows
Discounted Cash Flow Calculations
NPV
DCFR
Sensitivity Analysis
Economic Risk Analysis
Appendix 3 – Interactive Discounting Programs In Basic
Calculation of NPV
Calculation of DCFR
Appendix 4 – Brief Selected Bibliography For Economic Evaluation
Index
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