CHAPTER NINE OF A DESIGN PROJECT FOR

DESIGN OF A PLANT FOR THE PRODUCTION OF 240,000 CUBIC METERS OF

LIQUEFIED BIOGAS PER ANNUM FROM AGRO WASTES
PRESENTED TO THE DEPARTMENT OF CHEMICAL ENGINEERING
BY
GROUP G
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE COURSE
CHG 545: CHEMICAL ENGINEERING PROCESS DESIGN II

GROUP MEMBERS & THEIR INDIVIDUAL CONTRIBUTIONS

NAMES MATRIC NUMBER CONTRIBUTION TO CHAPTER SIGNATURE

ADETUNMIBI, PEACE ADEGBOYEGA 170401017 OPEX Analysis and Compilation

EZEOKOYE, IFUNANYA BENEDICTA 170401044 CAPEX Analysis and Compilation

ORIMOLOYE, ARAMIDE DESOLA 170401032 Cash Flow Analysis

KABIAWU, ANJOLAIYA INNOCENT 170401047 Cash Flow and Economic Analysis

DADA, TAIWO OLAMIDE 170401072 CAPEX Analysis

ADEDEJI, ADETILEWA 170401061 CAPEX Analysis

OLUWAFUNMILAYO

AMODU, SULEMAN BABANGIDA 170401075 OPEX Analysis

UDOH, IMMAOBONG ESSIEN 180401505 CAPEX Analysis

NNABUIHE OLISEMEKA VICTOR 180401510 OPEX Analysis

OKUNLOLA, JOSEPH KAYODE 170401048 Cash Flow and Economic Analysis

 CHAPTER NINE
ECONOMIC ANALYSIS AND COSTING

9.1. INTRODUCTION

Chemical plants are designed to make a profit, and an estimate of the investment required and
the cost of production are needed before the profitability of a project can be assessed. Assessing
the economic viability of a project is crucial for several reasons; it provides a picture of the
project's financial health over a certain period, offers an understanding of the project's
investment potential which is beneficial to potential investors and financial stakeholders, and,
most importantly, it informs about the payback period. This is the crucial milestone when the
operations of the plant start generating pure net profit. In this chapter, the operational
expenditure, cash flow and break-even analysis are evaluated. Estimates in United States Dollars
are converted to Nigerian Naira using the rate of 1,553 NGN/USD.

9.2. CAPEX ANALYSIS

Capital Expenditure (CAPEX) refers to the funds used by an organization to acquire, upgrade,
and maintain physical assets such as property, industrial buildings, or equipment. It is a critical
financial metric for assessing the cost involved in establishing and maintaining capital assets.

Purpose of CAPEX Analysis:

● To evaluate the cost-effectiveness and financial feasibility of a project.

● To plan and manage the budget for acquiring and maintaining long-term assets.
● To ensure the project aligns with the strategic goals of the organization.

CAPEX analysis is a crucial aspect of financial planning and decision-making for any capital-
intensive project. It helps organizations allocate resources effectively, manage financial risks,
and ensure that investments align with strategic objectives. In the context of a solar air
conditioning project, CAPEX analysis ensures that the project is financially viable and
sustainable, providing a foundation for successful implementation and long-term benefits.
When more design information is available, the cost of the plant is worked up from the cost of
individual items of process equipment. Costs of single pieces of equipment are also often needed
for minor revamp and debottlenecking projects.

9.2.1 Cost Curves for Purchased Equipment Costs

As there was no access to reliable cost data or estimating software, the correlations provided in
Appendix 1 (Towler et al., can be used for preliminary estimates. The correlations in Appendix
1 are of the form:

Ce = a + bSn

Where:

Ce = purchased equipment cost on a U.S. Gulf Coast basis, Jan. 2010 (CEPCI = 532.9, NF
refinery inflation index = 2281.6)

a, b = cost constants in Appendix 1

S = size parameter, units given in Appendix 1

n = exponent for that type of equipment

9.2.1 ESTIMATING INSTALLED COSTS

Capital cost estimates for chemical process plants are often derived from the estimated purchase
costs of the major equipment items needed for the process, with other costs being calculated as
factors of the equipment cost. The accuracy of such estimates depends on the design stage at
which the estimate is made and the reliability of the available equipment cost data. In the later
stages of project design, when detailed equipment specifications are available and firm quotes
have been obtained from vendors, a Class 3 estimate of the capital cost can be made.

Lang (1948) proposed that the ISBL fixed capital cost of a plant can be
calculated as a function of the total purchased equipment cost using the
equation: C = F(∑Ce), where C represents the total plant ISBL capital cost
(including engineering costs), ∑Ce is the total delivered cost of all major
equipment items (such as reactors, tanks, columns, heat exchangers,
furnaces), and F is an installation factor, later known as a Lang factor. Lang
suggested the following values of F based on 1940s economics: 3.1 for solids
processing plants, 4.74 for fluids processing plants, and 3.63 for mixed
fluids-solids processing plants.

Hand (1958) suggested using different factors for different types of equipment for more accurate
results. Examples of these factors are provided in Table 7.4. Hand also noted that this method
should only be used in the earliest stages of process design and when detailed design information
is unavailable. Both Lang (1948) and Hand (1958) included home office costs but not offsite
costs or contingencies in their installation factors, cautioning against double counting
Engineering, Procurement, and Construction (EPC) costs when using this approach. The relative
costs of materials and labor have changed significantly since these factors were developed, and
the accuracy of the correlation likely never justified using three significant figures for F. Most
practitioners using this method therefore typically use a Lang factor of 3, 4, or 5, depending on
the plant scale (with larger plants using a smaller factor) and type.

The method of design and construction to estimate the cost of a piece of equipment is used. This
approach involves calculating the costs of materials, parts, labor, and the manufacturer's profit.
Professional cost estimators and procurement managers favor this method because it provides an
unbiased estimate of the actual equipment cost. This estimate can then be used in negotiations
with vendors to determine a fair price. This method is also incorporated into commercial cost-
estimating programs such as Aspen Process Economic Analyzer.

To create a detailed estimate, an itemized list of the necessary parts is compiled, understanding
the fabrication steps, and having knowledge of the machinery involved to estimate machine costs
accurately. The amount of labor needed for each step is also determined. The fabrication method
was outlined as a work breakdown structure (WBS) to ensure an accurate labor estimate.
Machine time costs were calculated by taking the annual cost of the machine, including capital
recovery, maintenance, and electric power costs, and dividing these costs by the hours of use to
determine an hourly machine cost. The overall cost was then calculated by summing the
component costs, machine costs, and labor costs, with additional amounts included for
supervision, overhead, and the manufacturer's profit.
9.2.2 MATERIAL FACTORS
The installation factors presented in Appendix 2 and Appendix 3 are for plants constructed from
carbon steel. When more exotic materials are used, a materials factor - fm should also be
considered:

f = purchased cost of item∈exotic material ÷ purchased cost of item∈carbon steel

It is important to note that fm is not simply the ratio of the metal prices, as the equipment
purchased cost includes labor costs, overheads, fabricator’s profit, and other expenses that do not
scale directly with metal price. Equation 9 can then be expanded for each piece of equipment as
follows:

C=∑i=1M Ce,i,CS [(1+fp)fm+ ( fer + fel + fi + fc+fs+fl )] ……………………… 9.2

Equation 9.2 should be used when the purchased equipment cost has been calculated on a carbon
steel basis and the designer is estimating the cost for alloy construction.

C = ∑ Ce,i,A[(1+fp)+(fer+fel+fi+fc+fs+fl)fm]

where:

Ce,i,CS = purchased equipment cost of equipment in carbon steel

Ce,i,A = purchased equipment cost of equipment in alloy

M = total number of pieces of equipment

fp = installation factor for piping

fer = installation factor for equipment erection

fel = installation factor for electrical work

fi= installation factor for instrumentation and process control

fc= installation factor for civil engineering work

fs = installation factor for structures and buildings

fl = installation factor for lagging, insulation, or paint

Failure to properly adjust installation factors for the materials of construction is a common
source of error in the factorial method. Typical values of the materials factor for common
engineering alloys are provided in Appendix 4. A more detailed discussion of the relative cost of
materials and sources of material cost factors is available.

9.2.3. COST ESCALATION

All cost-estimating methods rely on historical data and are essentially forecasts of future costs.
The prices of construction materials and labor costs are subject to inflation, necessitating a
method to update old cost data for use during the design stage and to forecast the future
construction cost of the plant.

The typical method for updating historical cost data involves using published cost indices. These
indices relate present costs to past costs and are based on data for labor, material, and energy
costs published in government statistical reports.

Cost index∈ year A

Cost in year A = Cost ∈ year B ×
Cost index ∈ year B

To obtain the most accurate estimate, each job should be broken down into its components, using
separate indices for labor and materials. However, it is often more convenient to use a composite
index.

9.2.4 LOCATION FACTORS

Most plant and equipment cost data are typically provided on a U.S. Gulf Coast (USGC) or
Northwest Europe (NWE) basis, as these regions have historically been the main centers of the
chemical industry with the most available data. The cost of constructing a plant in other locations
depends on several factors:

- Local fabrication and construction infrastructure

- Local labor availability and costs
- Costs of shipping or transporting equipment to the site
 - Import duties or other local tariffs
- Currency exchange rates, which affect the relative cost of locally purchased items, such as bulk
materials, when converted to a conventional pricing basis like U.S. dollars

These differences are accounted for in cost estimating by using a location factor:

Cost of plant ∈location A = Cost of plant on USGC × LFA

where LFA is the location factor for location A relative to the USGC basis.

Location factors for international locations are highly influenced by currency exchange rates and
therefore fluctuate over time. Various studies and publications, including those by Cran (1976a,
b), Bridgewater (1979), Soloman (1990), and Gerrard (2000), provide location factors for
international locations, illustrating this variability. Gerrard (2000) suggested that due to
globalization, international installation factors are trending closer to 1.0. Within a country,
location factors are somewhat easier to predict. Bridgewater (1979) proposed a simple rule of
thumb: add 10% for every 1,000 miles from the nearest major industrial center.

Table 9.1: Capital Expenditures analysis for the 240,000 cubic metres Biogas production
plant

CAPITAL EXPENDITURES (CAPEX)

1.5
$1 = ₦1,553 Inflation Constant 0 Location Factor $1.02
Flow
rate Cost Un Cost ($) in Cost ($) in
Equipment (kg/s) Size Size Unit a b n ($)/unit its 2010 2024 Cost (₦)
Direct contact
Rotary 44.31 11.00 m2 15,000 10,500 0.9 $105,874.64 1 $105,874.64 $161,988.20 ₦251,567,679.47
Crusher
(Reversible
hammer mill) 37.46 134.86 t/h 68400 730 1 $166,844.88 1 $166,844.88 $255,272.67 ₦396,438,450.92
Conveyor (Cow
dung) 10.00 m 4100 730 1 $11,400.00 1 $11,400.00 $17,442.00 ₦27,087,426.00
Conveyor (Corn
stalk) 10.00 m 4100 730 1 $11,400.00 1 $11,400.00 $17,442.00 ₦27,087,426.00
Pre Mixer 63.15 30.00 L/s 570 1170 0.4 $5,130.73 2 $10,261.46 $15,700.03 ₦24,382,152.56
Mixer 193.71 44.00 L/s 570 1170 0.4 $5,885.78 5 $29,428.90 $45,026.21 ₦69,925,705.33
Pump W1 27.93 27.93 L/s 8000 240 0.9 $12,804.80 1 $12,804.80 $19,591.34 ₦30,425,351.16
Pump W2 27.93 27.93 L/s 8000 240 0.9 $12,804.80 1 $12,804.80 $19,591.34 ₦30,425,351.16
Pump P1 14.26 14.12 L/s 8000 240 0.9 $10,600.34 1 $10,600.34 $16,218.52 ₦25,187,353.93
Pump C1 63.15 57.41 L/s 8000 240 0.9 $17,189.54 1 $17,189.54 $26,300.00 ₦40,843,897.72
Pump PE6 193.71 110 L/s 8000 240 0.9 $24,499.27 2 $48,998.53 $74,967.76 ₦116,424,928.06
Heat Exchanger 193.71 10.00 m2 1600 210 0.95 $3,471.63 1 $3,471.63 $5,311.59 ₦8,248,898.13
Anaerobic $1,240,417.0 $1,897,838.0 ₦2,947,342,473.
Digester Agitator 193.71 75.00 kW 17000 1130 1.05 $122,170.22 10 2 4 24
Scrubber vessel 1,583.36 kg 11600 34 0.85 $29,428.81 1 $29,428.81 $45,026.07 ₦69,925,492.18
Lean Amine
Cooler 70 m2 1600 210 0.95 $13,486.73 1 $13,486.73 $20,634.70 ₦32,045,686.54
Nitrogen
Condenser 1.00 m2 1600 210 0.95 $1,810.00 1 $1,810.00 $2,769.30 ₦4,300,722.90
Exchanger 10.00 m2 1600 210 0.95 $3,471.63 22 $74,785.04 $114,421.12 ₦177,695,995.84
Nitrogen ₦1,382,107,042.
Compressor 3.57 273.47 kW 5840 0.82 $581,672.85 1 $581,672.85 $889,959.46 70
Expansion Valve 25 25.00 kg/s 114.5 1 $2,862.50 1 $2,862.50 $4,379.63 ₦6,801,557.63
Water Ion
Exchange Plant 140.88 507.17 m3/hr 17400 1 0.48 $345,957.01 1 $345,957.01 $529,314.22 ₦822,024,988.66
₦6,238,720,900.
Total Equipment Cost 64
₦19,963,906,882
ISBL Cost (Total Equipment Cost + Installation Costs) = 320% of Total Equipment Cost .05
₦7,985,562,752.
Offsites (OSBL, 40% of ISBL) 82
₦4,990,976,720.
Design and Engineering (25% of ISBL) 51
₦1,996,390,688.
Contingency (10% of ISBL) 20
₦34,936,837,043
Fixed Capital Investment (ISBL + OSBL + Engineering + Contingency) .58
Working Capital (7 weeks’ CCOP - 2 weeks’ RM + 1% of FCI) ₦64,976,817.34
₦35,001,813,860
Total Fixed Investment (Fixed + Working Capital) .92
9.3 OPEX ANALYSIS - PROJECT COSTS AND REVENUES

9.3.1. VARIABLE COSTS OF PRODUCTION

Variable costs of production are expenses that change in proportion to the plant's output or
operation rate. These include:

1. Raw Materials: The cost of materials consumed by the process.

2. Utilities: Costs for fuel in process heaters, steam, cooling water, electricity, raw water,
instrument air, nitrogen, and other services brought in from elsewhere on the site.
3. Consumables: Costs for solvents, acids, bases, inert materials, corrosion inhibitors, additives,
catalysts, and adsorbents that require continuous or frequent replacement.
4. Effluent Disposal: Costs associated with waste management and disposal.
5. Packaging and Shipping: Costs for drums, bags, tankers, freight charges, etc.

Variable costs are largely determined by the choice of feedstock, process chemistry, and plant
location, and can typically be reduced through more efficient design or operation of the plant.
Variable costs are discussed further in Section 8.4.

9.3.2 FIXED COSTS OF PRODUCTION

Fixed production costs are expenses that remain constant regardless of the plant's operation rate
or output. If the plant reduces production, these costs do not decrease. Fixed costs are detailed in
Section 9.3 and include:
1. Operating Labor: Discussed in Section 9.2.
2. Supervision: Typically 25% of operating labor.
3. Direct Salary Overhead: Generally 40% to 60% of operating labor plus supervision, covering
non-salary costs such as employee health insurance and other benefits.
4. Maintenance: Includes both materials and labor, usually estimated at 3% to 5% of ISBL
investment, depending on expected plant reliability. Plants with more moving equipment or
solids handling typically require higher maintenance.
5. Property Taxes and Insurance: Typically 1% to 2% of ISBL fixed capital.
6. Rent of Land and/or Buildings: Usually estimated at 1% to 2% of ISBL plus OSBL
investment. Most projects assume land is rented rather than purchased, though in some cases the
land is bought, and the cost is added to the fixed capital investment and recovered at the end of
the plant life.
7. General Plant Overhead: Covers corporate overhead functions such as human resources, R&D,
IT, finance, etc.
8. Allocated Environmental Charges: Typically 1% of ISBL plus OSBL cost, covering superfund
payments .
9. Running License Fees and Royalty Payments
10. Capital Charges: Include interest payments on any debt or loans used to finance the project
but do not include expected returns on invested equity capital (see Section 9.4).

Fixed costs should always be considered, even in the earliest stages of design, as they
significantly impact project economics. Fixed costs are a major deterrent for building small
plants, as increasing plant size generally does not proportionately increase labor, supervision,
and overhead costs, reducing the fixed cost per unit of product. This, along with economies of
scale in capital investment (see Section 9.1), allows larger plants more pricing flexibility,
potentially driving smaller plants out of business during economic downturns. Fixed costs are not
easily reduced through better design or plant operation, other than improvements that allow safe
operation with a smaller workforce. These costs are more effectively managed at the corporate
level than at the plant level.

9.3.3 REVENUES

Project revenues come from the sales of main products and by-products. The production rate of
the main product is usually specified in the design basis and determined by the marketing
department based on market growth predictions.

[Link] By-product Revenues

Deciding which by-products to recover, purify, and sell is often more challenging than
determining the main product. Some by-products are produced by the main reaction
stoichiometry and are unavoidable unless new chemistry is found. These stoichiometric by-
products must usually be sold at whatever price the market offers, or waste disposal costs will be
high. Examples of stoichiometric by-products are listed in Appendix 4. Other by-products result
from feed impurities or nonselective reactions.

9.3.4 MARGINS AND PROFITS

Margins

The gross margin, defined as the total revenue from products and by-products minus the raw
material costs, is a key financial metric. The formula for calculating the gross margin is:

Gross Margin = Revenues - Raw Material Costs

This concept is particularly useful because raw material costs typically constitute the largest
portion of production costs (usually 80% to 90%). Although raw material and product prices for
commodities can be highly variable and challenging to predict, margins tend to be less volatile if
producers can pass on feedstock price increases to their customers. As such, margins are often
employed in price forecasting.

It's important to note that the gross margin is based on the actual amount of raw materials
consumed and is not merely the difference between product price per ton and feed price per ton,
a common misconception.

Margins can differ significantly across various sectors of the chemical industry. For instance,
margins for bulk petrochemicals and fuels are typically low (less than 10% of revenues) and may
even occasionally be negative. Commodity businesses are generally cyclical, experiencing higher
margins when supply is constrained. Conversely, products that are heavily regulated or protected
by patents can command much higher margins, such as food additives, pharmaceutical products,
and biomedical implants, where margins can exceed 40% and often 80% of revenues.
The variable contribution margin, defined as revenues minus variable production costs, is
another important metric:

Variable Contribution Margin = Revenue - Variable Costs of Production

This metric indicates the profitability of the process excluding fixed costs.

Profits

The cash cost of production (CCOP) is the sum of all fixed and variable production costs:

CCOP = VCOP + FCOP

where:
- VCOP = sum of all variable costs of production minus by-product revenues
- FCOP = sum of all fixed costs of production

The CCOP represents the cost of producing the product, excluding any return on the equity
capital invested. By convention, by-product revenues are credited within the VCOP to facilitate
the calculation of the cost per pound of the main product.

Gross profit is calculated as:

Gross Profit = Main Product Revenues - CCOP

It's essential to differentiate gross profit from gross margin, as the former includes all other
variable costs, fixed costs, and by-product revenues, in addition to raw materials.
 In some companies, gross profit is reported on a plant basis, excluding general overhead charges
and selling costs (SG&A charges). The SG&A charges are then deducted from the gross profit to
determine the operating income.

The profit generated by the plant is typically subject to taxation. Different tax codes apply in
various countries and locations, and the taxable income may not equate to the full gross profit.
Taxes are discussed in more detail in Section 9.4. Net profit, or cash flow after tax, is calculated
as:

Net Profit = Gross Profit - Taxes

Net profit represents the amount available as a return on the initial investments. Methods for
evaluating the economic performance of investments are introduced in Chapter 9.

Additionally, the total cost of production (TCOP) can be calculated assuming the plant generates
a specified return on investment by adding an annual capital charge (ACC) to the CCOP:

TCOP = CCOP + ACC

Methods for calculating the annual capital charge are discussed in Section 9.4.

Table 9.2: Operating cost analysis and Cost price estimation for the 240,000 cubic metres Biogas
plant

OPERATING EXPENDITURES (OPEX)

101,856,000.0 kg/ Working hours per

Biogas production 0 year year 7,920 Working Days 330

FIXED OPERATING COSTS

Labour ₦/year ₦/kg biogas

Operators per shift Monthly Salary

position 6.50 Each ₦200,000.00

Number of Shift ₦2,400,000.

Positions 9.00 Yearly Salary Each 00 ₦140,400,000.00 ₦1.38

Supervision and 25% of Operating

Management Labor ₦35,100,000.00 ₦0.34

45% of Labor &

Direct Overhead Supervision ₦78,975,000.00 ₦0.78

Maintenance 5% of ISBL ₦998,195,344.10 ₦9.80

1% of (ISBL +
Land OSBL) ₦279,494,696.35 ₦2.74

1% of (ISBL +
Insurance OSBL) ₦279,494,696.35 ₦2.74

Overhead Expenses

65% of Labour and

Plant Overhead Maintenance ₦740,086,973.67 ₦7.27

2% of Fixed
Tax & Insurance Investment ₦698,736,740.87 ₦6.86

Interest on Debit 6% of Working

Financing Capital ₦3,898,609.04 ₦0.04

Fixed Cost of Production (FCOP) ₦3,254,382,060.38 ₦31.95

RAW MATERIALS AND CONSUMABLES

kg/kg
RAW MATERIALS kg/year biogas ₦/kg ₦/year ₦/kg biogas

Corn Stalk 493668295.2 4.85 ₦150.00 ₦74,050,244,282.63 ₦727.01

236,102,228.1
Cow Dung 5 2.32 ₦200.00 ₦47,220,445,630.60 ₦463.60
 Total Raw Materials 729,770,523.3 ₦121,270,689,913.2
(RM) 7 7.16 3 ₦1,190.61

kg/kg
CONSUMABLES kg/year biogas ₦/kg ₦/year ₦/kg biogas

Hydrogen Peroxide 4,341,600.00 0.04 10 g/l solution ₦2,500.00 ₦10,854,000,000.00 ₦106.56

2 days working
Nitrogen 3,944,000.00 0.04 capacity ($4.33) ₦6,724.49 ₦26,521,388,560.00 ₦260.38

3 days working
Diethanol Amine 40,000,000.00 0.39 capacity ₦2,000.00 ₦80,000,000,000.00 ₦785.42

Total Consumables ₦117,375,388,560.0

(CONS) 48,285,600.00 0.47 0 ₦1,152.37

UTILITIES

unit/
kg
unit/year biogas ₦/unit ₦/year ₦/kg biogas

Cost of running
water treatment
4,016,770,560. plant for process
Water 00 39.44 and cooling ₦0.07 ₦264,150,861.92 ₦2.59

kWh/ Band A tarrif ₦225.00

kg NGN/KWh
Power kWh/year biogas

Hammer mill (351.96

kW) 2,787,523.20 0.03 ₦627,192,720.00 ₦6.16

Pre-Mixer (2*550 kW) 8,712,000.00 0.09 ₦1,960,200,000.00 ₦19.24

Mixer Agitators - 2 x 594,000.00 0.01 ₦133,650,000.00 ₦1.31

75 kW

Digester Agitator - 3 x
29.68 kW 2,350,656.00 0.02 ₦528,897,600.00 ₦5.19

Compressor N - 175
kW 2,165,882.40 0.02 ₦487,323,540.00 ₦4.78

Regenerator
Condenser - 145.35 kW 1,151,172.00 0.01 ₦259,013,700.00 ₦2.54

Regenerator Reboiler -
299 kW 2,368,080.00 0.02 ₦532,818,000.00 ₦5.23

Pump W1 261,835.20 0.00 ₦58,912,920.00 ₦0.58

Pump W2 261,835.20 0.00 ₦58,912,920.00 ₦0.58

Pump P1 132,897.60 0.00 ₦29,901,960.00 ₦0.29

Pump C1 600,969.60 0.01 ₦135,218,160.00 ₦1.33

Pump PE6 1,802,829.60 0.02 ₦405,636,660.00 ₦3.98

4,036,899,873.
Total Utilities (UTS) 60 39.63 ₦5,481,829,041.92 ₦53.82

Variable Cost of Production (VCOP =

RM – BP + CONS + UTS) ₦29,275,959,611.15 ₦287.42

REVENUE

kg/kg
Key Products kg/year biogas ₦/kg ₦/year ₦/kg biogas

101,856,000.0
Biogas 0 1.00 ₦500.00 ₦50,928,000,000.00 ₦500.00

Total Key Product 101,856,000.0

Revenues (REV) 0 1.00 ₦50,928,000,000.00 ₦500.00
 kg/kg
By-Products kg/year biogas ₦/kg ₦/year ₦/kg biogas

Carbon Dioxide 41,912,640.00 0.41 $1.2 per kg CO2 ₦1,863.60 ₦78,108,395,904.00 ₦766.85

1,367,435,520. As biofertiliser for ₦136,743,552,000.0

Digestate 00 13.43 farmers ₦100.00 0 ₦1,342.52

Total Byproducts and 1,409,348,160. ₦214,851,947,904.0

Wastes (BP) 00 13.84 0 ₦2,109.37

Gross Margin (GM = REV + ₦144,509,257,990.7

BP – RM) 8 ₦1,418.76

₦/year ₦/kg biogas

Variable Cost of Production ₦29,275,959,611.15 ₦287.42

Fixed Cost of Production ₦3,254,382,060.38 ₦31.95

Cash Cost of Production ₦32,530,341,671.53 ₦319.38

Gross Profit ₦18,397,658,328.47 ₦180.62

56.56% 56.56%

9.4 CASH FLOW RATE OF RETURN ANALYSIS

9.4.1 Cash Flows During a Project

In any project, cash flows initially out of the company to cover expenses such as engineering,
equipment procurement, construction, and plant start-up costs. Once the plant is operational,
revenues from product sales begin to flow back into the company. The estimation of project
capital costs is detailed in Chapter 7, while Chapter 8 covers the estimation of revenues and
production costs.
The "net cash flow" at any given time is the difference between earnings and expenditures. A
cash-flow diagram, illustrated in Figure 9.1, depicts the projected cumulative net cash flow over
the project's lifespan. These cash flows are based on the best estimates available for investments,
operating costs, sales volumes, and prices throughout the project. Cash-flow diagrams provide a
clear visualization of the financial resources needed for a project and the timing of earnings.
They typically exhibit the following characteristic regions:

FIG 9.1 Cash-flow Diagram

- A–B: Represents the investment required for designing the plant.
- B–C: Indicates significant capital outflows for constructing the plant, including funds for start-
up and working capital.
- C–D: The cash-flow curve turns upward at point C as production begins and income is
generated from sales. Although the net cash flow becomes positive, the cumulative amount
remains negative until the initial investment is recovered at point D.
Point D marks the break-even point, and the time taken to reach this point is known as the
payback time. (Note: In a different context, "break-even point" also refers to the percentage of
plant capacity at which income equals production costs.)

- D–E: In this phase, cumulative cash flow turns positive, indicating that the project is generating
a return on the investment.
- E–F: Towards the end of the project's life, the rate of cash flow may decline due to increased
operating costs, decreased sales volumes, and lower prices resulting from plant obsolescence,
causing a change in the slope of the curve.

Point F represents the final cumulative net cash flow at the conclusion of the project's life.
Net cash flow is a straightforward and comprehensible concept, forming the foundation for
calculating more intricate profitability metrics.

9.4.2 Cost of Capital

Most companies utilize a mix of debt and equity financing rather than relying solely on one or
the other. The overall cost of capital is determined as a weighted average of the cost of debt and
the cost of equity:

ic=DR ×id +(1 − DR )× ie

where:
ic = cost of capital
DR = debt ratio
id = interest rate on debt
ie = cost of equity

For instance, if a company is financed 55% by debt at 8% interest and 45% by equity expecting a
25% return, the overall cost of capital would be calculated as:
ic=(0.55 × 0.08)+(0.45 ×0.25)=0.1565
Equity, defined as assets minus liabilities (debt), contributes to the return on assets (ROA):

total assets
ROA= ​× 100 %
net annual profit

And the return on equity (ROE) is given by:

ROE=total assets ÷ stockholders ’ equity ​=1 − DR

The cost of capital establishes the interest rate used in economic evaluations of projects. To meet
or exceed this rate ensures the company achieves its targeted return on equity, meeting
stakeholder expectations.

9.4.3 TAXES AND DEPRECIATION

Taxation significantly impacts project cash flows. Understanding tax laws and allowances, such
as depreciation, is crucial for economic evaluations. Tax specialists, either employed or
consulted by companies, navigate the complexities of tax law changes, though engineers
generally assess projects on an after-tax basis. Corporate taxes vary; in the US, the top marginal
federal income tax rate is 35%, applicable to incomes exceeding $18,333,333. State and local
taxes may also apply.

In Canada, corporations adhere to the Canadian Income Tax Act. Taxable income, calculated as
gross profit minus tax allowances, is subject to tax rates. Depreciation, a common tax allowance,
reduces taxable income, thereby increasing after-tax cash flow:

CF=P×(1 −tr )+ D × tr

where:
CF = after-tax cash flow
P = gross profit
D = sum of tax allowances
tr = tax rate

Tax payments in some countries are based on the previous year's income. In the US, corporate
taxes follow a calendar year and are due by March 15 of the following year, influencing financial
calculations but manageable in spreadsheet applications

[Link] Depreciation Charges

Depreciation charges play a crucial role in tax incentives for investments, allowing businesses to
deduct the cost of their capital investments over time, thereby reducing taxable income and
improving cash flow. Here’s an overview of how depreciation works and its implications for
economic evaluations:

Depreciation Basics:
Depreciation is a noncash expense reported on financial statements, representing the decrease in
value of fixed assets due to wear and tear, obsolescence, or deterioration from use.

Straight-Line Depreciation:
Definition: This method spreads the depreciable value evenly over the asset's useful life.
- Formula: The annual depreciation charge Di for year i is calculated as Di ​=nCd ​​ where (Cd)
is the depreciable value and n is the number of years of depreciation.
Book Value Calculation: After m years of depreciation, the book value Bm is
Bm ​=C −∑ i=1 m ​Di ​.
Usage: Straight-line depreciation is commonly used for assets like software, patents, and other
tangible property with defined lifespans. It is required for certain assets under the U.S. tax code.

Modified Accelerated Cost Recovery System (MACRS)

Definition: A tax depreciation method used in the U.S. for most tangible depreciable property.
Features: MACRS allows accelerated depreciation over a shorter period, front-loading
depreciation expenses to provide larger tax deductions early in the asset's life.
 -Benefit: This method is advantageous for reducing taxable income more rapidly compared to
straight-line depreciation.
Impact on Cash Flow and Taxes:

- Taxable Income Calculation: Taxable income is derived by subtracting tax allowances,

including depreciation, from gross profit. The formula
CF=P⋅(1 −tr)+ D ⋅tr demonstrates how depreciation reduces taxes paid and increases cash
flow.
Book Value vs. Salvage Value: The book value of an asset (initial cost minus accumulated
depreciation) does not reflect market value but is crucial for tax purposes. Salvage value, if any,
affects the depreciable base.

International Considerations:
Global Differences: Depreciation methods vary internationally, and understanding these
differences is essential for global projects.
- Tax Law Complexity: Tax laws change regularly and differ between countries, influencing
depreciation strategies and economic evaluations.

Table 9.3: Table showing Cash flow analysis for the Biogas Production plant
Capital Cost Basis 2024
Owner's Name Group G Year
Units Englis Metri
Plant Location Lagos, Nigeria h c
Case Production of 240,000 cu.m per annum LBG On
Description from Agro Waste (Corn stalk and Cow Dung) Stream 7,920 hr/yr 330 day/yr

REVENUES AND
PRODUCTION COSTS CAPITAL COSTS CONSTRUCTION SCHEDULE

₦ ₦ Ye
Billion/yr Billion ar % FC % WC % FCOP % VCOP

Main product 50.93 ISBL Capital Cost 19.96 1 30.00% 0.00% 0.00% 0.00%
revenue
Byproduct revenue 214.85 OSBL Capital Cost 7.99 2 70.00% 0.00% 0.00% 0.00%

Raw materials cost 121.27 Engineering Costs 4.99 3 0.00% 100.00% 100.00% 50.00%

Utilities cost 5.48 Contingency 2.00 4 0.00% 0.00% 100.00% 100.00%

Total Fixed Capital

Consumables cost 117.38 Cost 34.94 5 0.00% 0.00% 100.00% 100.00%

VCOP 29.28 6 0.00% 0.00% 100.00% 100.00%

Salary and
overheads 0.25 Working Capital 0.06 7+ 0.00% 0.00% 100.00% 100.00%

Maintenance 1.00

Land 0.28

Insurance 0.28

Plant overhead 1.44

Interest 0.00

FCOP 3.25

ECONOMIC
ASSUMPTIONS
Cost of equity 25.00%
Cost of debt 5.00%
Cost of capital 15.00%

Inflation rate 33.95%

Tax rate 30.00%

Depreciation method 3.49

Depreciation
period 15 years

Debt ratio 0.50

k 0.02
 Max IRR 59.63%
Start year 3.00
Plant Life 18.00 years

CASH FLOW ANALYSIS

All figures in ₦
Billion unless
indicated
Project Reven Gross Deprecia Taxable Tax PV of
year CAPEX ue CCOP Profit tion Income Paid Cash Flow CF CCF
1 10.48 0.00 0.00 0.00 0.00 0.00 0.00 -10.48 -9.11 -9.11
2 24.46 0.00 0.00 0.00 0.00 0.00 0.00 -24.46 -18.49 -27.61
3 0.06 25.46 17.89 7.57 3.49 4.08 0.00 7.51 4.94 -22.67
4 0.00 50.93 32.53 18.40 3.49 14.90 1.22 17.17 9.82 -12.85
5 0.00 50.93 32.53 18.40 3.49 14.90 4.47 13.93 6.92 -5.93
6 0.00 50.93 32.53 18.40 3.49 14.90 4.47 13.93 6.02 0.09
7 0.00 50.93 32.53 18.40 3.49 14.90 4.47 13.93 5.24 5.33
8 0.00 50.93 32.53 18.40 3.49 14.90 4.47 13.93 4.55 9.88
9 0.00 50.93 32.53 18.40 3.49 14.90 4.47 13.93 3.96 13.84
10 0.00 50.93 32.53 18.40 3.49 14.90 4.47 13.93 3.44 17.28
11 0.00 50.93 32.53 18.40 3.49 14.90 4.47 13.93 2.99 20.28
12 0.00 50.93 32.53 18.40 3.49 14.90 4.47 13.93 2.60 22.88
13 0.00 50.93 32.53 18.40 0.00 18.40 4.47 13.93 2.26 25.14
14 0.00 50.93 32.53 18.40 0.00 18.40 5.52 12.88 1.82 26.96
15 0.00 50.93 32.53 18.40 0.00 18.40 5.52 12.88 1.58 28.55
16 0.00 50.93 32.53 18.40 0.00 18.40 5.52 12.88 1.38 29.92
17 0.00 50.93 32.53 18.40 0.00 18.40 5.52 12.88 1.20 31.12
18 0.00 50.93 32.53 18.40 0.00 18.40 5.52 12.88 1.04 32.16
19 0.00 50.93 32.53 18.40 0.00 18.40 5.52 12.88 0.90 33.06
20 -0.06 50.93 32.53 18.40 0.00 18.40 5.52 12.94 0.79 33.86
ECONOMIC ANALYSIS

₦
Average cash flow 13.69 Billion/yr CCF 10 years 17.28 ₦ Billion IRR 10 years 29.7%
Simple pay-back
period 2.56 years 15 years 28.55 ₦ Billion 15 years 32.8%
Return on 30.97
investment (10 yrs) % 20 years 33.86 ₦ Billion 20 years 33.3%
Return on 36.84 CCF
investment (15 yrs) % to yr 1 -9.11 ₦ Billion Breakeven 5.98 years

Cost of Equity: This is simply the return that a company requires to decide if an investment
meets capital return requirements. The cost of equity required to meet the expectations of the
market are substantially higher than the interest rate owed on debt because of the riskier nature
of equity finance. For most corporations in the United States at the time of writing, the
average cost of equity is in the range of 25% to 30%.

Cost of Debt: This is the effective interest rate or total amount of interest a company owes on
any liabilities such as loans and bonds.

Cost of Capital: The overall cost of capital is the weighted average of the cost of debt and the
cost of equity. Mathematically;

ic = (DR x id) + ((1 – DR) x ie)

Where,

ic = cost of capital

DR = debt ratio

id = interest rate due on debt

ie = cost of equity
Debt Ratio: This is a financial ratio that measures the extent of a company’s leverage. It is a
ratio of total debt to total assets.

DR = Total debts / Total assets

A debt of 1 or 100% means the company has more debts or liabilities than assets.

Depreciation Method: Depreciation accounts for reduction in an asset’s value over time. It is
a process of deducting the cost of an asset over its useful life. There are four methods for
calculating depreciation which are; straight-line, declining balance, units of production and
sum of years digit (SYD). The depreciation method selected for this asset is the straight-line
method.

Depreciation Period: This is the number of years over which the cost of an asset is spread for
accounting purposes. It reflects the expected useful life of the asset. The useful life in this
project was calculated using the following formula:

1 S 0 (1−t )
n∗¿ ln [ ]
k C 0 (1−t)+(i m− j) I F +(i− j)I w

Where: n* = economic life, k is a constant, C0=Cash Cost of Production, S0=Revenue, t=tax

rate, j=economic inflation rate, i=IRR, im=maximum IRR, IF=Fixed Investment, IW=Working
Capital

Tax Rate: it is the percentage at which the income of a corporation is taxed. In Nigeria, a 30%
tax rate applies to large companies (companies with an annual turnover of NGN 100 million or
more).
Plant life = Depreciation period + Operation start year = 18 years
 REFERENCES

Towler, G., & Sinnott, R. (2013). Chemical Engineering Design: Principles, Practice and
Economics of Plant and Process Design (2nd ed.). Elsevier.