UAO, FRANC ERNEST B.

CHE 522
9:30 10:30 MWF P108 DECEMBER 16, 2016

Plant Design and Economics for Chemical Engineers

Chapter 8
Profitability, Alternative Investments,
and Replacements

Problem Set Compilation

1. What total amount of funds before taxed will be available 10 years from now if $10,000
is placed in a savings account earning an interest rate of 6 percent compounded monthly?
How many year will be required for this amount to double at the same interest rate
compounded semi-annually? What is the shortest time in years for the doubling to occur
if continuous compounding is available?
2. A proposed chemical plant will require a fixed-capital investment of $10 million. It is
estimated that the working capital will be 25 percent of the total investment. Annual
depreciation costs are estimated to be 10 percent of the fixed-capital investment. If the
annual profit will be $3 million, determine the percent return on the total investment and
the payout period.
3. An investigation of a proposed investment has been made. The following result has been
presented to management: the payback period is 5 years. Annual depreciation is 10
percent per year of the fixed capital investment; and fixed capital investment is 85
percent of total capital investment. Using this information, determine the rate of return on
investment.
 4. Two pumps are being considered for pumping water from a reservoir. Installed cost and
salvage value for the two pumps are given below:
Pump A Pump B
Installed cost $20,000 $25,000
Salvage value $2,000 $4,000

Pump A has a service life of 4 years. Determine the service life of pump B at which
the two pumps are competitive if the annual effective interest rate is 15 percent.
Competitiveness refers to the requirements that the installed cost of the pumps plus the
amount that must be invested at the time of installation so that sufficient interest will be
earned over the service life (when added to the salvage value) to replace the pumps at the
original cost.
 5. A heat exchanger has been designed, and insulation is being considered for the unit. The
insulation can be obtained in the thicknesses of 0.025, 0.051, 0.076, or 0.102 m. The
following data have been determined for the different insulation thicknesses:
0.025m 0.051m 0.076m 0.102m
kJ/s energy saved 88 102 108 111
Cost for installed insulation $8,000 %10,000 $11,000 $11,500
Annual fixed changes, % of installed cost 10 10 10 10

What thickness of insulation should be used? The value of heat is $1.50/GJ. An

annual after tax return of 15 percent on the fixed-capital investment is required for any
capital utilized in this type of investment. The income tax rate is 35 percent/year. The
exchanger operates for 300days/yr.
 6. A design engineer is evaluating two pumps for handling a corrosive solution. The
information on the pumps is the following:
Pump A Pump B
Installed cost $15,000 $22,000
Service life 2 5

Determine the annual interest rate at which the two pumps are competitive.
Neglect salvage value. See prob. 8-4 for the definition of competitiveness. Which pumps
would you recommend?
 7. A company must purchase one reactor to be used in an overall operation. Four reactors
have been designed, all of which are equally capable of giving the required service. The
following data apply to the four designs:
Design 1 Design 2 Design 3 Design 4
Fixed capital investment $10,000 $12,000 $14,000 $16,000
Sum of after-tax operating and fixed costs per $3000 $2800 $2350 $2100
year (all other costs are constant)

If the company demands a 15 percent return after taxes on any unnecessary

investment, which of the four design should be accepted?
8. In the design of a chemical plant, the following expenditures and revenues are estimated
after the plant has achieved its desired production rate:
Total capital investment: $10,000,000
Working capital: $1,000,000
Annual Sales: $8,000,000/yr
Annual expenditures: $2,000,000/yr
Assuming straight-line depreciation over a 10-year project analysis period, determine
a. The return on the investment after taxes
b. The payback period
9. An existing warehouse is worth $500,000, and the average value of the goods stored in it
is $400,000. The annual insurance rate on the warehouse is 1.1 percent, and the insurance
rate on the stored goods is 0.95 percent. If a proposed sprinkling system is installed in the
warehouse, both insurance rates would be reduced to three-quarters of the original rate.
The installed sprinkler system would cost $20,000, and the additional annual cost of
maintenance, inspection, and taxes would be $300. The required write-off period for the
entire investment in the sprinkler system is 20 years. The capital necessary to make the
investment is available. The operation of the warehouse is now giving an 8 percent return
on the original investment. Give reasons why you would or would not recommend
installing the sprinkler system.
10. A proposed chemical plant has the following projected revenues and operating expenses
in millions of dollars
year Annual revenue Annual operating expenses
(excluding depreciation)
1 7.0 4.0
2 10.0 5.6
3 15.0 6.8
4 20.0 7.8
5 22.5 8.8
6 24.0 9.6
7 25.0 10.0

The fixed-capital investment for the plant is $50 million with a working capital of
$7.5 million. Using MACRS depreciation schedule with a class life of 5 years, determine
a. The annual cash flows
b. The net present worth, using a nominal discount rate of 15 percent
c. The DCFR
 11. A power plant for generating electricity is one part of a plant-design proposal. Two
alternative power plants with the necessary capacity have been suggested. One uses a
boiler and steam turbine while the other uses a gas turbine. The following information
applies to the two proposals:
Boiler and steam Gas turbine
turbine
Initial investment, $ 600,000 400,000
Fuel cost per year, $ 160,000 230,000
Maintenance and repairs per year, $ 12,000 15,000
Insurance and taxes per year, $ 18,000 12,000
Depreciation recovery period, $ 20 10
Salvage value at end of service life, $ 0 0

All other costs are the same for either type of power plant. A 12 percent return is
required on any investment. If one of these power plants must be accepted, which one
should be recommended?
12. The facilities of an existing chemical company must be increased if the company is to
continue in operation. There are two alternatives. One of the alternatives is to expand the
present plant. If this is done, the expansion would cost $130,000. Additional labor costs
would be $150,000 per year, while additibnal costs for overhead, depreciation, taxes, and
insurance would be $60,000 per year.
A second alternative requires construction and operation of new facilities at a location
about 50 miles from the present plant. This alternative is attractive because cheaper labor
is available at this location. The new facilities would cost $200,000. Labor costs would
be $120,000 per year. Overhead costs would be $70,000 per year. Annual insurance and
taxes would amount to 2 percent of the initial cost. All other costs except depreciation
would be the same at each location. If the minimum return on any acceptable investment
is 9 percent, determine the minimum service life allowable for the facilities at the distant
location for this alternative to meet the required incremental return. The salvage value
should be assumed to be zero, and straight-line depreciation accounting may be used.
13. A chemical company is considering replacing a batch-wise reactor with a modernized
continuous reactor. The old unit cost $40,000 when new 5 years ago, and depreciation
has been charged on a straight-line basis using an estimated service life of 15 years and
final salvage value of $1000. It is now estimated that the unit has a remaining service life
of 10 years and a final salvage value of $1000.
The new unit would cost $70,000 and would result in an increase of $5000 in the
gross annual income. It would permit a labor saving of $7000 per year. Additional costs
for taxes and insurance would be $1000 per year. The service life is estimated to be 12
years with a final salvage value of $1000. All costs other than those for labor, insurance,
taxes, and depreciation may be assumed to be the same for both units. The old unit can
now be sold for $5000. If the minimum required return on any investment is 15 percent,
should the replacement be made?
14. A project is being considered that requires $1,000,000 for fixed-capital investment and
$100,000 for working capital. The fixed capital is depreciated on a straight-line basis to a
book value of zero at the end of the fifth year. The annual revenue in those 5 years is
$500,000. The total product cost not including depreciation is $100,000 annually. The
discount rate is 10 percent, and the income taxation rate is 35 percent. Develop a
spreadsheet that shows the annual cash flow, the discounted cash flow, and the net
present worth for each year. Treat the investments as occurring in a lump sum at zero
time. The revenues and expenses occur continuously and utilize continuous
compounding.
Now assume an inflation rate of 5 percent on both the revenues and the expenses.
Again develop another spreadsheet that shows the annual cash flow, the discounted cash
flow, and the net present worth for each year.
15. The owner of a small antifreeze plant has a small canning unit which cost him $5000
when he purchased it 10 years ago. The unit has completely depreciated, but the owner
estimates that it will still give him good service for 5 more years. At the end of 5 years
the unit will be worth a junk value of $100. The owner now has an opportunity to buy a
more efficient canning unit for $6000 having an estimated service life of 10 years and
zero salvage or junk value. This new unit would reduce annual labor and maintenance
costs by $1000 and increase annual expenses for taxes and insurance by $100. All other
expenses except depreciation would be unchanged. If the old canning unit can be sold for
$600, what replacement return on his capital investment will the owner receive if he
decides to make the replacement?
 16. An engineer in charge of the design of a plant must choose either a batch or a continuous
system. The batch system offers a lower initial outlay but, owing to higher labor
requirements, exhibits a higher operating cost. The cash flows relevant to this problem
have been estimated as follows:
Year Discounted Net present
0 1-10 (after taxes) cash flow rate worth at 10%
of return
Batch system -$20,000 $5600/yr 25% $14,400
Continuous -$30,000 $7650/yr 22% $17,000
system

Check the values given for the discounted-cash-flow rate of return and net present
worth. If the company requires a minimum rate of return of 10 percent, which system
should be chosen?
17. An oil company is offered a lease of a group of oil wells on which the primary reserves
are close to exhaustion. The major condition of the purchase is that the oil company must
agree to undertake a water-flood project at the end of five years to make possible
secondary recovery. No immediate payment by the oil company is required. The relevant
cash flows have been estimated as follows:
year Discounted Net present
0 1-4 5 6-20 cash flow rate worth at
of return 10%
0 $50,000 -$650,000 $100,000 ? $242,000

Continuous, constant cash flows were used except for the expenditure that occurs
in one sum at the end of year 5. Continuous discounting at 10 percent per year was used
for all cash flows. Check the net present worth value. Should the lease-and-flood
arrangement be accepted? How should this proposal be presented to the company board
of directors who understand and make it a policy to evaluate by discounted-cash-flow
rate of return?
18. A process with a depreciable capital investment of $100 million is to be constructed over
a 3-year period. At start-up, $20 million of working capital is required. The plant is
expected to operate for 10 years. At full capacity expected for the third and subsequent
years of operation, the sales revenues are projected to be $150 million per year, and the
total operating expenses excluding depreciation, are projected to be $100 million per
year. During the first and second years of operation, the sales revenues are anticipated to
be 50 and 75 percent of the sales revenues projected in the third and subsequent years,
respectively. The operating expenses during the first and second years will be the same as
in the third and subsequent years. Assume that the income tax rate is 35 percent. Using
the third year as a basis, determine:
a. The return on the investment after taxes
b. The payback period.
19. Assuming that the construction of the plant in prob. 8-18 requires investments of $20
million during the first year, $30 million in the second year, and $50 million during the
third year, evaluate the annual net present worth and the total net present worth of the
project. Assume that the construction costs are continuous throughout the 3 years of
construction. Use continuous, constant cash flows and continuous discounting.