W10_Musallam Al-Awaid_ Economic Evaluation Using Net Present Value


 

  1. Problem Definition

The Blog is almost a repetition of week 2 blog. However, here, I used the NPV instead of average increase in production over the four years cycle.

Nowadays, many plants are designed to run for long periods, exceeding 3 years with no turnarounds. In methanol plant, we had 1st turnaround in last April 2014, after 4 years of operation, where we replaced the methanol reactor catalyst.

Before catalyst replacement, we had considered more than a single option. The most feasible option was selected which is replacement. That evaluation is done based on the Net Present Value of each option where the option with highest NPV is selected.

  1. Feasible options Identification

The feasible alternatives are:

  1. Catalyst replacement.
  2. No catalyst replacement
  3. Replacement for the more exhausted catalyst, which was the top layer of the catalyst.
  1. Development of the outcome for the alternative

The outcome of NPV comparison is as following:

  1. Highest NPV option and hence it is most feasible.
  2. Positive NPV option and hence it remains feasible.
  3. Negative NPV option and hence it is not feasible.
  1. Selection of acceptable criteria 

As in most feasibility studies, the alternative with higher NPV and shorter payback period is the preferred option.

  1. Analysis and Comparison of the Alternative.

The plant, anyhow, would be shut-down for regular 4 years turnaround. However, catalyst would stretch the shutdown period with the high possibility to become critical path depending on the option chosen. No catalyst replacement had been excluded as the catalyst vendor confirmed that the catalyst cannot run continuously for the next four years.

The table below shows the comparisons of the three options using NPV.

MARR is considered 8.6% and Methanol Price is 250US$/ Metric Tone

OPTIONS

NO Change

1st Bed Change

All Catalyst Change

Capital Investment/ US$

0

-500000

-8000000

1st year Revenue/US$

4830000

8280000

19923750

1st year Revenue/US$

4830000

8280000

19923750

1st year Revenue/US$

-8280000

-4830000

6813750

1st year Revenue/US$

-8280000

-4830000

6813750

NPV/ US$

-3567603.286

6354933.423

34491284.87

The Net Present Value NPV of full catalyst replacement is highest among all the option. Therefore, it is selected.

  1. Selection of the preferred option

Complete replacement of catalyst is the preferred alternative.

  1. Performance Monitoring and the Post Evaluation of Result.

The new catalyst should be utilized well in the coming 4 year to get it exhausted just in a cycle of 4 year without any design excursions.

References

  1.  “Net Present Value NPV” retrieved on 14th August 2014 from http://www.mathsisfun.com/money/net-present-value.html
  2. Payback Period” retrieved on 14th August 2014 from http://www.financeformulas.net/Payback_Period.html
  3.  “What is a feasibility study” retrieved on 14th August 2014 from http://www.extension.iastate.edu/agdm/wholefarm/html/c5-65.html
  4. Salalah Methanol Process Engineers (2013). “Catalyst Replacement” retrieved from Internal  Reports.
  5. Al-Shehhi (27th June 2014). PMI-Oman 2014, MARR for Exploration and Production project in Oman Retrieved on 14th August 2014 from https://pmioman14.wordpress.com/2014/06/27/w4_alshehhi_marr-for-exploration-production-project-in-oman/#more-991
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One thought on “W10_Musallam Al-Awaid_ Economic Evaluation Using Net Present Value

  1. No problem……… What you might want to do for another blog is run an ERR vs IRR comparison as well?

    It would be well worth your time to learn the difference between the ERR and IRR approach…… Not only are you likely to see it on an exam, but more importantly, knowing the difference may well save your company many thousands if not 10’s of thousands of dollars……

    Let’s see where you can take us by exploring ERR and IRR for your next blog……

    BR,
    Dr. PDG, Jakarta

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