Process Economics Patricia Osseweijer, Department of Biotechnology, Faculty of Applied Sciences Adrie Straathof, Department of Biotechnology, Faculty of Applied Sciences
Is the process profitable? $ Evaluate profitability based on: Margin, or net profit - Pay back time Taxes - Return on Investment OPEX CAPEX - Net Present Value downstream downstream OPEX CAPEX - Internal Rate of Return fermentation fermentation OPEX CAPEX upstream upstream output
Economics Revenues = output x product price $ Margin OPEX: all costs needed for daily functioning Taxes • feedstock/water/auxiliary materials OPEX CAPEX • waste/emissions/energy, when not recycled downstream downstream CAPEX OPEX • employment costs, services, etc fermentation fermentation CAPEX OPEX CAPEX: all costs for facilitating production upstream upstream • buildings/equipment • Non-tangible assets: starting up & patents
Economic potential = key product revenues – key raw materials costs ($/kg product) Allows back of envelope evaluation of process potential
Net Profit Net Profit = Revenues – OPEX – taxes Revenues depend on: - Volumes sold - Product price
I’m interested. When will I have earned my money back? investor
Payback Time (PBT) and Return on Investment (ROI) Minimize Total Investment (CAPEX) Payback Time (in years) = Net Profit (Margin) Inverse Maximize Net Profit Return on Investment (ROI) = 100% Total Investment
Rule of thumb (I) Companies will often be pleased with a payback time of 2-3 years, corresponding to ROI = 33-50%
Net Present Value (NPV) Shall I put my money on the bank, or invest in this biobased process? investor
Annual situation after starting up the plant Chosen output Product price ($/kg ) A certain output/ price relation Revenues ($/a) Annum = year 0 0 Output (kg/a)
Use of revenues Product price To be used to ($/kg) Net Profit ($/a) repay Tax ($/a) investments OPEX ($/a) Cheaper production at larger scale 0 0 Output (kg/a)
Cash flow analysis Money flow ($/a) Annual Cash flow payback Cumulative net profit ($) Investment ($) 0 Investment ($) Year of 1 2 3 4 5 6 7 production Anticipated Pay back Project time end
Cash flow analysis Positive interest once investment + negative interest have been surpassed Money flow ($/a) Annual Cumulative net profit ($) Cash flow 0 Investment ($) Year of 1 2 3 4 5 6 7 production Anticipated Discounted Project Pay back end Negative time interest related to kept in bank
Cash flow analysis Money flow ($/a) Cumulative net profit ($) 0 Investment ($) Year of 1 2 3 4 5 6 7 production Cumulated cash flow = cumulated net profit – investment NPV = positive areas minus negative areas ($) = Cumulated cash flow corrected for interest obtained if no investment had been made
Net Present Value (NPV) NPV in formula: n CF å = NPV k + k 1 (1 i ) = k i - the interest rate (e.g. 0.07 for 7% interest) CF k - the net cash flow in year k n - the project lifetime (e.g. 10 years) investor At NPV = 0, saving at the bank or investing in the bioprocess is equally profitable Higher NPV means a more attractive investment!
Internal Rate of Return (IRR) IRR is the interest rate for which NPV = 0 The IRR must be significantly higher than the interest rate (“discount rate”) at the bank! Riskier project? Investors will demand higher IRR IRR is also referred to as Discounted Cash Flow Rate of Return (DCFR) 16
Rule of thumb (II) Typically IRR must be higher than 15-30%, compared to a bank interest rate (discount rate) of 5-10%.
Estimating costs: Capital (I) Purchase Equipment Cost (PEC) = What you pay ‘in the store’ Estimate costs of equipment using databases: http://matche.com/equipcost/EquipmentIndex.html ( ) i equipment costs size reference equipment costs = reference size i is often ~0.6 (dependent on volume/area ratio of equipment) But that is not all! 18
Estimating costs: Capital (II) Additional investments are needed before the equipment is ready for use! Total Plant Direct Costs Total Plant Indirect Costs Total Plant Cost (TPDC) (TPIC) (TPC =TPDC+TPIC) Engineering 0.25 x TPDC Contractor fee 0.05 x TPC Process piping 0.35 x PEC Construction 0.35 x TPDC Contingency 0.10 x TPC Instrumentation 0.40 x PEC ..etc ..etc Insulation 0.03 x PEC Buildings 1.00 x PEC ..etc The Direct Fixed Capital (DFC) includes all of the above, and can be 4-7 times higher than cost of bare equipment. Then add another 5-10% start-up costs to get CAPEX. 19
Example DFC calculation (SuperProDesign) A. TOTAL PLANT DIRECT COST (TPDC) (physical cost) $ 1. Equipment Purchase Cost (PC) from slide 18 12 728 000 2. Installation (summed over all units, incl. unlisted) Equipment-dependent 4 645 000 factor x costs per equipment 3. Process Piping (0.35 x PC) 4 455 000 4. Instrumentation (0.40 x PC) 5 091 000 5. Insulation (0.03 x PC) 382 000 6. Electrical (0.10 x PC) 1 273 000 7. Buildings (1.00 x PC) 12 728 000 8. Yard Improvement (0.15 x PC) 1 091 000 9. Auxiliary Facilities (0.40 x PC) 5 091 000 TPDC = 48 300 000 B. TOTAL PLANT INDIRECT COST (TPIC) 10. Engineering (0.25 x TPDC) 12 075 000 11. Construction (0.35 x TPDC) 16 905 000 TPIC = 28 980 000 C. TOTAL PLANT COST (TPDC + TPIC) TPC = 77 281 000 12. Contractor’s fee (0.05 x TPC) 3 864 000 13. Contingency (0.10 x TPC) 7 728 000 D. DIRECT FIXED CAPITAL (DFC) TPC + 12 + 13 DFC = 88 873 000
Example Operating Costs (OPEX) (SuperProDesign) Cost Item $/Year Default calculation Raw Materials 17 168 000 From flowsheet Labor-Dependent 8 937 000 From flowsheet Equipment (facility)- 16 571 000 - Dependent Laboratory/QC/QA 1 490 000 15% of labor-dependent costs Consumables 55 397 000 From flowsheet Waste Treatment/Disposal 419 000 From flowsheet Utilities 412 000 From flowsheet Transportation 0 0 Miscellaneous 0 0 Advertising and Selling 0 0 Running Royalties 0 0 Failed Product Disposal 0 0 TOTAL AOC (= OPEX) 100 395 000 100%
How to set a product price? Know the size and fragmentation of your market! Calculate the product price that would generate the required IRR If the product is an intermediate in an existing process: Design this base-case process in addition to your proposed alternative
Taxes and depreciation Taxes are paid from gross profit (revenues – OPEX) Depreciation of equipment and other assets is part of the annual costs (OPEX) and therefore lower the profit and taxes SuperProDesign subtracts depreciation from the profit before tax calculation and adds it again after tax calculation. The subtraction is hidden (part of the facility-dependent annual operating costs) 23
Profitability analysis (SuperProDesign) A. DIRECT FIXED CAPITAL From Slide 20 88 873 000 $ B. WORKING CAPITAL Relevant part of OPEX for 1 month 2 456 000 $ C. STARTUP COST 0.10 x A 8 887 000 $ D. UP-FRONT R&D 0 $ E. UP-FRONT ROYALTIES 0 $ F. TOTAL INVESTMENT A+B+C+D+E 100 216 000 $ G. INVESTMENT CHARGED TO THIS PROJECT (CAPEX) 100 216 000 $ H. REVENUE STREAM FLOWRATES From flowsheet 19.138 kg product /year I. REVENUE PRICE External data 9577.70 $/kg product J. REVENUES H x I 183 293 000 $/year K. ANNUAL OPERATING COST (OPEX) From Slide 21 100 395 000 $/year L1. PRODUCTION (UNIT) COST K/H 5477.26 $/kg product L2. SELLING/PROCESSING PRICE 10 000 $/kg product M. GROSS PROFIT J - K 82 899 000 $/year N. TAXES 40% of M 33 160 000 $/year O. NET PROFIT M-N+Depreciation 58 182 000 $/year GROSS MARGIN M/J *100% 45.23 % J RETURN ON INVESTMENT (ROI) O/F *100% 58.068 % PAYBACK TIME F/O 1.72 years
Economics in a broader spectrum Issues in economic impact assessment: • Effect of policies (subsidies; CO2 price) • Effect of markets, new usage of resources • Effect of alternatives • Effect of time scales for investment and learning effects • Effect of context: logistics! • Effect of collaboration in the chain
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Cash flow analysis Money flow ($/a ) Annual Cash flow Cumulative net profit ($) Interest on Negative Cash flow interest 0 Year of 1 2 3 4 5 6 because 7 In- investment production Positive vest- could have interest Anticipated ment been kept in Pay back once Project the bank ($) time investment end + negative interest have been surpassed
Cash flow analysis Money flow ($/a ) Cumulative net profit ($) 0 Year of 1 2 3 4 5 6 7 In- production vest- ment Cumulated cash flow = cumulated net profit – investment ($) NPV = both positive areas minus both negative areas ($) = Cumulated cash flow corrected for interest obtained if no investment had been made
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