W12_Musallam Al-Awaid_ Economic Evaluation Using IRR


1. Problem Definition

The Blog is almost a repetition of week 2 and 10 blogs. However, here, I used the IRR method as the evaluation method for the catalyst replacement project.

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 here based on the IRR.

  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 IRR comparison is as following:

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

As in most feasibility studies, the alternative with higher IRR 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 IRR.

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
2nd year Revenue/US$ 4830000 8280000 19923750
3rd year Revenue/US$ -8280000 -4830000 6813750
4th year Revenue/US$ -8280000 -4830000 6813750
IRR 30.93% -22.84% 233.64%

The internal rate of return 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. “ Internal Rate of Return” retrieved on 23rd August 2014 from http://www.mathsisfun.com/money/internal-rate-return.html

 

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