Section 5-Economic Appraisal Highlight)

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Section 5: Economic appraisal



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Amended by Ibrahim Rfidah:

Changes are underlined

Made capital costs more realistic by increasing the direct costs attributed to the plant. Pg. 5.18

Increased working capital to 15%. Pg. 5.17 Data is now all to four significant figures throughout the report. Improved presentation by putting all big tables in the appendix.

Increased the number of staff to 106, increasing operating costs. Furthermore the amount of Oxygen used in the

gasification has been increased, so I have increased the operating cost of Oxygen. Pg. 5.19 Updated net profit, payback period, net present value (NPV), discount cash flow rate of return (DCFRR) and rate of

return (ROR). Page 5.23 and 5.24 Made the sensitivity analysis change to represent the new cash flows and NPV’s. Page 5.25 and 5.26 Changed wording, were before I used “me” and “I” now I used “we” and “our”, throughout the report.

Updated conclusion to make sure it reflects the new value of profit calculated. Page 5.28



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Summary

The main purpose of this report is to analyse and evaluate the economic factors involved in designing a chemical plant th

will produce biofuels from biomass. The plant is located in Lancashire and the market for our product is the refineries in th

north of UK. The currency that is used in the report is mainly GBP (£), and in the report the market size, product price ar

estimated using market research. Capital costs of the units and the ancillary equipment were calculated using a mixture o

ChemCad and Lang factors (R.K.SINNOT, 1996). The total capital investment was then calculated, which included further cos

including piping, building and working capital (Table s1). Annual operating costs are calculated using the value calculated fo

the total capital investment (Table s2). Revenue was calculated using current prices for biodiesel and the year on ye

projection, which is outlined in the report. From this a cumulative cash flow, net present value and discounted cash-flo

rate of return were determined for the life time of the plant of 28 years, this indicated whether or not this is a soun

investment (Table S3). A sensitivity analysis was also carried out to measure the effects of changes in raw material cos

utility costs, market price of product, market share and plant production capacity.

Capital costs:

Total Fixed Capital Total Working Capital Total Capital Investment

£50 million £15 million £65 million

Table s1 showing total capital investment

Main Costs:

Normal Operation Costs

Raw material Costs £32.6 million

Utility Costs £ 21.7 million

Direct Costs £ 5.95 million

Fixed Charges £ 4.47 million

Total £ 59.20 million

Table s2 showing the yearly operating costs

Economic Evaluation Over life time of plant:Total Profit Rate of Return NPV DCF Rate of Return

£ 388 million 10 years £ 142.5 million 17.14 %

Table s3 economic evaluation of the plant



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ContentsSection 5: Economic appraisal ................................................................................................................................................ 5

Section 5: Economic appraisal .................................................................................................................................................... 5

5.1 Introduction ...................................................................................................................................................................... 5

5.2.1 Commercial Analysis ...................................................................................................................................................... 5

5.2.1 Biodiesel Market Choice and Size .............................................................................................................................. 5

5.2.2 Future Demand Pattern for Biofuels .......................................................................................................................... 5

5.2.3 Current Market Price .................................................................................................................................................. 5

5.2.4 Competition ............................................................................................................................................................... 5

5.2.5 Future Market Price of Biodiesel ................................................................................................................................ 5

5.2.6 Anticipated Market Share ........................................................................................................................................ 5.1

5.3 Detailed Costing .............................................................................................................................................................. 5.1

5.3.1 Capital Costs ............................................................................................................................................................. 5.1

5.3.2 Operating Cost ......................................................................................................................................................... 5.1

5.4 Economic Evaluation ....................................................................................................................................................... 5.1

5.4.1 Cash Flow for the Plant ............................................................................................................................................ 5.1

5.4.2 Net Present Value .................................................................................................................................................... 5.1

5.4.3 Discount Cash Flow Rate of Return (DCF rate of return) ......................................................................................... 5.1

5.4.4 Sensitivity Analysis ................................................................................................................................................... 5.1

5.5 Conclusion ....................................................................................................................................................................... 5.1

Bibliography .............................................................................................................................................................................. 5.2

Appendix 5 ................................................................................................................................................................................ 5.2

A5.1 Cash flow and NPV are shown in following table. ........................................................................................................ 5.2

A5.2 ................................................................................................................................................................................... 5.2

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Section 5: Economic appraisal

5.1 IntroductionThe purpose of the economic appraisal is to find the viability of the overall process. The evaluation will be carried out on th

entire life of the plant of 20 years. The main currency used in this report is Great British Pounds (£), any other currency use

will be stated. The factors that will be discussed are shown below:

Section 1: Commercial analysis, a discussion about the current market and future market size of the biomass tliquid industry. Also in this section a review of the demand for the product and market price of the product shoul

be discussed. Furthermore in this section competing companies will be discussed, therefore predicting our marke

share and the possible future market conditions.

Section 2: Detailed costs, in this section the business case for the main decisions in the process plant will b

discussed. While the costing will be discussed in more detail, to include criteria like cost of land, environmenta

impact and time taken for construction.

Section 3: Economic evaluation, the cash flow of the plant throughout it life time wi ll be carried out. Total profit anpayback period and rate of return will be determined for the process plant. NPV (net present value), DCFR

(Discounted cash-flow rate of return) will also be calculated; these economic indicators will make it possible to judg

the viability of the overall process.



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5.2.1 Commercial Analysis

5.2.1 Biodiesel Market Choice and Size

The market for biofuels is mainly segmented in to two categories that are biodiesel the product that our project is producin

and bioethanol. Biodiesel needs to be blended with conventional diesel for

to be able to be used in most conventional cars; the blend is between 7-30%but blends of biodiesel higher than 7% would invalidate most vehicle

warranties. Larger vehicles and Lorries are able to use higher blends o

biodiesel and they will probably one of the main markets for our product.

comparison of the percentage production between biodiesel and bioethano

is shown in Figure 1 and shows that biodiesel is produced in far greate

quantities than bioethanol; this is mainly due to biodiesel being 20% mor

efficient than bioethanol. Bioethanol is used to combine with petrol, which

currently in oversupply to the EU marke

(http://www.economywatch.com/renewable-energy/bioethanol-v

biodiesel.html)

The combined European market size for bioethanol and biodiesel is current$76 billion and is expected to grow to $247 billion by 2020. The type of biofuels used in this project is second generatio

using wood feedstock rather than first generation, which used food products (vegetable oil). Wood feedstock is le

susceptible to price fluctuations, while on the other hand first generation caused some food prices to soar. Using foo

sources to produce biofuels became very unpopular and was deemed unethical in certain quarters due to the large increas

in some staple foods around the world, which affected some of the poorest countries

The chosen markets for our product are oil refineries are in the north of England. So the biodiesel will be entering th

domestic market (UK). In addition, due to high transportation costs it would be far more rational to produce biodiesel for th

local market, so it will be sold to the nearest market, which is the north of the UK. Furthermore there will be far mor

competition in this market place in Europe due to them having invested far more in this technology. The domestic market fo

biodiesel is growing and is forecasted to continue to grow; the market share of biodiesel in 2005 of biofuels in the UK wa

1.8% of the whole fuel sector, and it is expected to grow to 5% by the end of this year. In 2008, Europe produced 8,73Mega-liter’s (Ml) of biofuels; this was 38% growth on 2007. From table 1 you can see that the UK is lagging behind othe

European countries, so there is a big opportunity for this product in what is a developing market.

Countries Annual Production (Ml/yr)

2006 2007 2008

Germany 2,998 3,255 3,175

France 837 982 2,044

Italy 503 409 670

Belgium 28 187 312

UK 216 169 216Table 1 Yearly production of biodiesel (http://biofuels-platform.ch/en/infos/eu-biodiesel.php)

5.2.2 Future Demand Pattern for Biofuels

While demand for unleaded petrol has remained constant for the past decade the demand for diesel has increased. This

due to people moving toward more efficient cars as the price of fuel increases, this is because diesel cars can do muc

greater mile to the gallon than unleaded petrol. (http://www.angus.gov.uk/ac/documents/sacreport.pdf)

Figure 1 Biofuels production

http://www.biodiesel-expo.co.uk/

http://www.economywatch.com/renewable-energy/bioethanol-vs.-biodiesel.html






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The UK is obligated to take a lead in the use of renewable sources of energy due to international agreements signed by th

UK to reduce their carbon footprint and the projected dependence of the UK on foreign supplies of oil as shown in Figure 2

which shows the dwindling supplies of the UK’s oil and gas production. Dependence on oil from abroad can be ver

dangerous for the British economy, as countries can use it as a bartering tool; this is evident by the Russian disputes wit

parts of mainland Europe last year over the supply of gas. Furthermore the future supply of oil worldwide is also decreasin

causing people to investigate alternative methods of producing the world’s energy demands. So we believe part of th

solution could be the use and growth of biofuels.

Figure 2 Britain’s oil and gas production (The global biodiversity footprint of UK biofuels Consumption, September 2009)

In the 2002 budget report the then Chancellor of the Exchequer issued an incentive on biodiesel by removing 20p of fuel ta

duty per litre for biodiesel until 2010 (The global biodiversity footprint of UK biofuels Consumption, September 2009). Afte

2010 the 20p reduction in fuel tax could be extended, removed or the tax break could be decreased, but this is not yet

certainty. The main reason for this tax break is to make it more viable for the UK to reach the target set to them by the UK

Renewable Transport Fuel’s Obligation (RTFO), as biodiesel becomes more competitive in the market place. This obligatio

requires the UK to ensure that a certain percentage of road fuels in the UK are made from renewable sources of energy. Th

obligation is set at 5% for 2010 for renewable substitutes to fossil fuels and will be 10% by 2020. These targets mak

investment into the biofuels market very attractive as there is a hole in the production of biofuels that we as a project cacover. This obligation also will introduce a levy on oil companies that do not comply with their target of renewable sources

energy the levy will be £0.15 per litr

(http://www.ukpia.com/Portals/0/Repository/UKPIA%20Briefing%20Paper%20RTFO.pdf).This will cause the demand f

biodiesel to increase as more oil companies will blend the biodiesel into their fuels to meet the obligation set to them by th

RTFO.

Therefore in light of the evidence shown there will be continued grown in the biofuels market, as you can see from Figure 3

which shows the projected growth of biofuels in the UK. Currently the UK road transport fuels consumption is approximate

36 million tonnes a year and is projected to increase to 47 million tonnes by 2020. (The global biodiversity footprint of U

biofuels Consumption, September 2009) This means that the UK is obligated to produce 6 million tonnes of biofuels by 2020

by that time our plant will be in the early part of its expected life and we believe this plan can bridge the production gap, an

it will do so economically.

http://www.ukpia.com/Portals/0/Repository/UKPIA%20Briefing%20Paper%20RTFO.pdf

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Pg. 5

Figure 3 future production of biofuels (The global biodiversity footprint of UK biofuels Consumption, September 2009)

5.2.3 Current Market Price

For biodiesel to be economically viablewe believe it needs to be sold at a similar price to that of conventional diesel that

being sold to consumers at the refineries. Current prices of production of diesel are approximately £0.35 a litre, whi

biodiesel is being sold at around £0.45 a liter (http://www.dft.gov.uk/pgr/roads/environment/renewabl

fuels/notesbiodiesel). But due to the tax break this makes biodiesel slightly cheaper and more competitive in the UK.

5.2.4 Competition

5.2.4.1 Alternative Producers of Biodiesel

Competition in the UK from fellow biofuels producers is very limited as it is a relatively new type of technology. There a

currently a few biofuels plants in the UK; these are shown on Table 2:

Company Location Production rate of

biodiesel (tonnes/year)

Initial start up

Argent Energy Motherwell, Scotland 45,000 2005

Argent Energy Ellesmore port 150,000 Planning Stage

North East Biofuels Teesside 250,000 2009

Green Energy Port of Immingham 100,000 2005

ABS biodiesel Bristol 225,000 2008

Table 2 other biodiesel producers in the UK market (http://www.angus.gov.uk/ac/documents/sacreport.pdf)

All the above competition is limited due to only two using similar feedstocks to our project. The Teesside and port o

Immingham plants use palm as a feed stock and they will be the main UK competitors. In addition the competition from

abroad will need to factored in, as if the UK is supplied with imports from Germany (the EU largest biodiesel producer) it wi

add on roughly about 3.5p per litre to the German price for biodiesel, so there will be a need to make sure that the plan

stays competitive against it European competitors. The EU has put a trade embargo on US biodiesel due to it being a lot mo

competitively priced than European biodiesel. (http://www.angus.gov.uk/ac/documents/sacreport.pdf)

http://www.angus.gov.uk/ac/documents/sacreport.pdf




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5.2.4.2 Other Types of Diesel

More conventional diesel from fossil fuels is also the competition to the biodiesel industry. The fuel duty cut on biofuels give

biofuels a competitive advantage on price over conventional fuels as this will reduce the cost of the product to the consume

Similar tax cuts were introduced in Germany; this caused a huge growth in demand for the product. But the main criteria th

will affect the future demand for biodiesel is the cost of a barrel of oil, when the cost of a barrel of oil is higher this will caus

the biofuels industry to thrive as it becomes more competitive. The break-even point for biodiesel is when oil prices are a

$60 a barrel (http://www.biodiesel-expo.co.uk). Currently oil prices are fluctuating at $80 a barrel. Figure 4 below shows th

history prices of oil from 2002-2009, prices increased until 2008 when there was a sharp decline in the cost of a barrel of o

due the worldwide economic slowdown, which caused a decline in demand for oil.

5.2.5 Future Market Price of Biodiesel

The price of a biodiesel is related to the price of a barrel of oil, as it can be used as a substitute. The price of a barrel of o

has been on an upward trend in 2010 as most countries worldwide come out of recession and the demand for oil and energ

increases. The price of a barrel of oil has ranged from $64-$80 a barrel in 2010. This makes it more economically viable fo

biodiesel as the current oil price continues to rise and there are unresolved questions about how long this non-renewab

source of energy (fossil fuels) will last for. Using future contract prices as a basis of predicting future cost

(http://www.nymex.com, March 2010) the future price of crude oil is predicted to rise above $95 a barrel by 2018. I believ

this is a very modest increase in light of the decreasing supply and increasing demand for energy worldwide as developin

countries’ economies continue to grow. So this would suggest that the price of biodiesel would increase, but on the othehand as this technology matures there will be further innovation and competition that could reduce production costs an

consequently reduce the prices of biodiesel sold to distributors.

In our opinion the price of biodiesel will follow the trend of a barrel of oil and increase as the worldwide economy continue

to grow, this is shown by recent increases in the price of biodiesel, as the price of a barrel of oil has increased rapidly, as

October 2009 the price of biodiesel increased by 9% as the price of diesel produced by fossil fuels increased by 8%.

(http://www.hgca.com/content.output/4196/4196/Markets/Market%20News/Biofuel%20and%20Industrial%20News.mspx

Figure 4 the price of a barrel of oil (www.whatmatterswebbolg.com)

Our anticipated price of biodiesel per litre for the total life of the plant is shown in Appendix 2, these take into account th

expected rise in real terms of the price of biodiesel.

http://www.nymex.com/





Pg. 5.1

5.2.5.1 By-Product Future Market Price

The by-products of the process are Naphtha and LPG. Both of these fuels have shown price increases in the past yea

(http://www.whatprice.co.uk/petrol-prices/) and in our opinion price rises will continue. Consequently we have decided t

increase the price of sale of the by-products by 10% every five years.

5.2.6 Anticipated Market Share

The anticipated total production of biodiesel in the UK will be the total production of all the plants in Table 2. This woulmean that production in the UK will be around 770,000 tonnes a year, while our plant is producing approximately 72,00

tonnes a year. So our market share will be:

ℎℎ

=

71,000

770,000100 = 9.22%

This market share is subject to change throughout the life of the plant, the market share will depend if biodiesel productio

increases rapidly over the next two decades. We also believe there is enough demand for our product that there will be n

surplus supply in the UK, as the UK should follow the trend of other European countries that produce far greater amounts o

biodiesel.

5.3 Detailed Costing

5.3.1 Capital Costs

The capital costs are the necessary investment that is needed to purchase and install the land, machinery and equipment fo

a plant to become fully operational. In addition there must be sufficient cash flow so the plant can pay its bills before it star

to sell its products, this is called working capital.

The process route designed has 8 main units they included drying of wood chips, gasification, gas cleaning, water-gas shi

reactor, CO2 removal, Fischer-Tropsch process, hydrocracker and finally product distillation. Furthermore to the initial capit

costs that include installation there are other direct costs that need to be included to find the total capital cost of the plant.

5.3.1.1 Direct Costs

Purchase Equipment and Installation:

To estimate the installed capital costs of each of the units stated above various methods were used including ChemCad an

Lang factors (R.K.SINNOT, 1996). The purchase capital costs of the main and ancillary units are detailed below in Table 3 an

4:

Main Unit Costs:

Process Unit Installed Cost (£)

Drying £155,000.00

Gasification £123,000.00

Quench £177,000.00

Water-gas shift £228,000.00

CO2 absorber £260,000.00



Pg. 5.1

Fischer-Tropsch £400,000.00

Hydrocracker £113,000.00

Distillation £601,000.00

Sum £2.1 million

Table 3 Installed capital costs of main units

Ancillary Unit Costs:

Ancillary unit Quantity Purchase Price (£)

Pump 5 £424,000.00

Reboiler 4 £901,000.00

Condenser 4 £99,000.00

Storage 3 £468,000.00

Stripper 1 £55,000.00

Heat Exchanger 7 £6,327,000.00

Separator 2 £34,900.00

Expander 1 £429,000.00

Flash Vessel 2 £1,053,000.00

Distillation Column 2 £131,000.00

Guard Bed 1 £164,000.00

Valve 1 £460.00

Compressor 2 £1,523,000.00

Sum £11,612,000.00

Table 4 Ancillary unit installed capital cost

Piping Purchase and Installation Cost:

This is the cost of installing all the pipes, valve fittings and items erection of equipment. The piping installation costs take int

consideration the piping of raw materials, intermediate-product, finished product, steam and water. The cost of piping estimated to be 35% of the purchased-equipment cost (Peters and Timmerhaus, 2003).

Controls and Instrumentation

This includes the expenses for auxiliary equipment and materials constitute the major portion of the capital investmen

required for instrumentation. This cost will depend on the amount of control required and is approximately 35% of delivere

purchased-equipment (Peters and Timmerhaus, 2003).

Electrical System

The electrical system consists of costs for lighting, power wiring, transformation, service and instrument and control wiring.

is approximately 25% of the capital cost (Peters and Timmerhaus, 2003).

Building

This takes in to account the costs of buildings in the plant; This includes the cost of plumbing, heating, lighting an

ventilation. This is usually 50% of the capital investment. (Peters and Timmerhaus 2003)Yard Improvements

Yard Improvements accounts for costs for fencing, grading, roads sidewalks and landscaping. This is equivalent to 15% of th

capital investment (Peters and Timmerhaus, 2003).

Service Facilities

These costs are for supplying steam, cooling water and compressed air. In addition it includes waste disposal, fire protectio

and miscellaneous service items. This is usually 45% of the capital cost (Peters and Timmerhaus, 2003).

Land



Pg. 5.1

The land costs for the project depends on the location of the industrial site. But by law the cost of land cannot b

depreciated, therefore it is usually not included in the fixed capital investment. Land is therefore shown as a one-tim

investment at the beginning of the plant construction (Peters and T immerhaus, 2003). The cost of this investment for a piec

of land of around 100 acres in Lancashire is approximately £1,000,000.00. (http://www.uklanddirectory.org.uk/building-lan

plot-sales-lancs.asp).

5.3.1.2 Indirect Costs

Engineering and Supervision

This is the cost of construction design and engineering; this includes internal or licensed software, computer drawings

purchasing, accounting, travel and communications. This is not directly related to equipment, materials or labour, this

approximately 35% of the delivered-equipment cost (Peters and Timmerhaus, 2003).

Legal Expenses

The legal expenses cost a result mainly from land purchases, equipment purchase and construction costs. Other costs includ

proving compliance with the governments environmental and safety requirements. This is usually around 4% of th

delivered-equipment cost (Peters and Timmerhaus, 2003).

Construction Expenses and Period

Another indirect cost is the cost of construction tools and rentals, offices personnel located at the construction sit

construction payroll, travel, living taxes and insurance. These expenses are needed for the construction period required fo

the plant, which will take around 3 years from the initial investment; this includes one year’s design then two years proje

planning and actual construction. This is usually around 10% of the delivered-equipment cost (Peters and Timmerhaus, 2003

Contractor’s Fee

The contractor’s fee is approximately 4% of the delivered-equipment cost (Peters and Timmerhaus, 2003).

Contingencies

This is an amount of money kept in case of any unexpected events and changes that may inevitably increase the cost of th

project. Events can be anything including storms, strikes, price changes, errors in estimation. Contingency factors are usual

around 10% of the delivered-equipment cost (Peters and Timmerhaus, 2003).

Health and Safety

Health and safety is of very big significance when working in a chemical plant, therefore it is necessary to work hard t

prevent any dangers that can be caused to our employees and the local population. There are no accurate ways of estimatin

the cost of health and safety, but controls to monitor each unit have been installed and costing for these controls have bee

estimated. If these controls notice any disturbance in the system there will be procedures in place to wipe out th

disturbance. Plant emergency shutdowns and safety equipment will be required and this will cost around £900,000.0

(http://www.hima-sella.co.uk). A further £100,000.00 will purchase safety equipment and ensure safety procedures are i

place in the plant.

5.3.1.3 Total Capital Investment

The total capital investment is required for plant facilities and manufacturing is called the fixed-capital investment (FCI). It

necessary for the operation of the plant that is a working capital (WC). The sum of the fixed-capital investment and th

working capital is known as the total capital investment (TCI). The FCI is the capital necessary for the installed proces

equipment, which is the sum of direct costs and indirect costs, while the working capital is important as it helps the plan

avoid insolvency; working capital is estimated to be 15% of the total capital investment and working capital is needed for th

following (Peters and Timmerhaus, 2003):

Raw materials and supplies.

Products in stock and semi-finished products in the process of being manufactured.

Money kept for monthly payment of operating expenses, such as salaries.

http://www.hima-sella.co.uk/




Pg. 5.1

Taxes payable.

From Table 6 below shows the total capital cost as being slightly below £50 million in order for the plant to start operation

This investment will be taken out in a loan at an interest rate of %5.25.

Capital Investment £

Direct Costs

Purchased and Installed Equipment £13.67 millionPiping £4.78 million

Instumentation and Controls £4.1 million

Electrical Systems £3.4 million

Building £6.8 million

Health and Safety £1 million

Yard Improvements £2.05 million

Service Facilities £6.2 million

Total Direct Costs £28.3 million

Indirect Cost

Engineering and Supervision £4.1 millionLegal Expenses £0.5 million

Construction Expenses £1.4 million

Contractor's Fee £0.5 million

Contingencies £1.4 million

Total Indirect Costs £7.9 million

Fixed Capital Investment £49.9 million

Working Capital (15% of Fixed Capital) £15 million

Total Capital Investment £65 million

Table 6 Total capital needed

The total capital investment seems relatively reasonable due to the plant in Teesside, which uses a similar feed stock tFlash’s feed but produces larger quantities of fuel, there total investment was £46 millio

(http://www.angus.gov.uk/ac/documents/sacreport.pdf)

5.3.2 Operating Cost

5.3.2.1 Operating Labour

There are three main departments in a plant that is technical, operation and plant’s services. There will be like any compan

at the top there will be a chairman, a director and staff for administration purposes. Each department will also consist of a

executive and engineers. The technical department is mainly used for research and development of the overall plant. Th

operations will oversee that each unit in the plant are running as is required. The plants services will include cleaner

security and canteen staff. Assuming that each shift is 8 hours, so each department will require 3 technical staff each day, th

though does not include holidays and sick leave. This will make the number of staff required to be higher than just three. Th

detail of staff is shown on Table 7 below:

Job role Number of

Staff

£

Chairman 1 £150,000.00



Pg. 5.1

Director 3 £100,000.00

Executive 3 £80,000.00

Secretary 7 £25,000.00

Administration 7 140,000.00

Technical Department

Executive 7 £469,000.00

Engineers 15 £675,000.00

Secretary 5 £125,000.00

Operations Department

Executive 7 £469,000.00

Engineers 25 £1,125,000.00

Secretary 10 £250,000.00

Plant Services

Cleaners 6 £90,000.00

Canteen Staff 5 £75,000.00

Security 5 £75,000.00

Sum 106 £3,848,000.00

Table 7 staff required for the company

The operating cost is the amount required to run the plant on a yearly basis. These costs include raw materials, operatin

labour and miscellaneous costs. There are three types of operating cost they are direct production costs, fixed charges an

plant overhead costs. In this part of the report we will detail the main yearly costs of the project.

5.3.2.2 Raw Material

This is the consumed material during the plants process. These include the following:

Wood

The energy content of wood biomass is between 18GJ per tonne.

Total wood feed = 600,000 tonnes per year, cost of wood = £2.50 per GJ.Total Cost (per year) = 600,000*18*2.50 = £27million per year.

MEA

Total amount of MEA required for CO2 removal assuming loss of 1 tonne/day. The cost of MEA is £1,020 per tonne thus th

annual cost of MEA is £101,000,000.

Catalysts for Fishcer-Tropsch process

The catalyst needed for the Fischer-Tropsch Process is Cobalt (Co), Magnesium Oxide (MgO). There is a recycle for th

catalysts reducing their cost to approximately £62,000 per year.

5.3.2.3 Utilities Cost

For this plant the utility costs are mainly the cost of power, Oxygen and water. The costs of these are supplied by BenthaChemicals.

Power

The total power used in the whole process is 2.97x105MJ/hr. The cost of the utility is 416p/GJ. So the total power costs fo

the whole plant is £9.9 million.

Oxygen

Oxygen is mainly needed for the gasification part of the conversion of liquid from biomass. A large amount is needed causin

a very high cost. 20,000 kg/hr of Oxygen is used, which is 158,400 tonnes a year of Oxygen, this is at a cost of £75 per tonn

so the total cost of Oxygen is £11.88 million.



Pg. 5.1

Water

In this plant water is both needed to cool and heat specific streams up. As heat integration is used water can be heated t

make steam by heating it using a different stream. 50,000 kg/hr of water are used in the plant, which will cost £990 per year

5.3.2.4 Direct Production Costs

Maintenance

This the yearly costs for the maintenance and repairs for the process plant, this is usually between 2 to 20 percent of th

equipment cost. For this plant I will use an approximation of 10% of the equipment cost (Peters and Timmerhaus, 2003).

Operating Supplies

Consumable items such as charts, lubricants, test chemicals, these and similar supplies cannot be considered as raw materia

or maintenance. These are typically 15% of the total cost for maintenance and repairs (Peters and Timmerhaus, 2003).

Laboratory Charges

This is the cost of the controlling operations and product quality control is covered by this cost. This is 10% of operatin

labour (Peters and Timmerhaus, 2003).

Patents and Royalties

To use products and manufacturing processes owned by others it is necessary to pay for patent rights or a royalty based o

the amount of material produced. This is around 2% of the total production costs (Peters and Timmerhaus, 2003).

Waste Disposal

This is the cost of the disposable of the waste products that includes water, ash, and small amounts of H 2S, C02, C0 an

Ammonia. For H2S and C02 we will be using soil injection. Water leaving any reactors can be treated this will cost £0.53 pe

tonne. The total cost of waste disposal is approximately £100,000.00 per year.

Fixed Charges

These are costs that only change slightly with the amount of production and these will be discussed as follows (Peters an

Timmerhaus, 2003).

Interest

This is the interest on the loan which is 5.25% per annum. This loan will cover the whole Investment of the project (Pete

and Timmerhaus, 2003).

Local Taxes

These taxes will include annual property taxes and any other local taxes. This will be 1% of the fixed capital investmen

(Peters and Timmerhaus, 2003).

Insurance

This will insure and protect the facilities against any possible damages and losses. This will cost 1% of the total investmen

costs (Peters and Timmerhaus, 2003).

All the operating costs for the first year are summarised in Table 8 below:

Operating Costs £

Raw Materials

Wood (/GJ) £27,000,000.00

MEA (tonnes/year) £100,000.00

Fischer-Tropsch catalyst £62,000.00

UtilitiesWater (m3/yr) £990.00

Fuel (MJ/yr) £9,800,000.80

Oxygen (tonnes/yr) £11,880,000.00

Direct Costs

Maintenance £1,367,000.00

Operating Supplies £205,000.00

Laboratory Charges £384,800.00



Pg. 5.1

Staff £3,848,000.00

Patents and Royalties £136,700.00

Fixed Charges

Interest £3,408,000.00

Local Taxes £499,000.00

Insurance £499,000.00

Sum (£/year) £59,200,000.00

5.4 Economic Evaluation

In this part of the report, I will find project the financial projections and economic viability of the plant. I will show a cash flo

for the plant and will also complete a sensitivity analysis and financial assessments, which include net present value an

discounted cash flow rate of return.

5.4.1 Cash Flow for the Plant

This is the total amount of money received and spent over the life time of the plant. It will also include the forecast for th

cumulative net cash flow, which is the difference between the earnings and expenditure. These assumptions are made fo

the cash flow:

Design and engineering of the project will take one year where 10% of capital investment will be spent. Th

construction of the project will take place in year two and three construction of the plant will take place, where yea

two 40% of the capital investment will be consumed and the rest will be invested in year 3.

Operation will be at 75% capacity in year 4 and 5, and then will be at 100% capacity for the next 21 years, and the

the plant will be operated at turndown for the last two years.

Cash Flow of Plant

Appendix 2 shows the price of biodiesel used to calculate the yearly cash flow (total revenue-operating cost), and then th

cumulative ash flow year on year was calculated. The graph below (Figure 5) shows the projected cash flow over the life-tim

of the plant:

Figure 5 cash flow of plant over its life time

Expected payback period of the plant = 10 years.

-£100.00

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

0 10 20 30

Project Cash Flow

Cumilitive

Years

Table 8 operating costs

breakdown



Pg. 5.1

Total projected profit = £388 million.

Rate of Return = Profit / (life of Plant * Total Investment) = 0.22 = 22%

5.4.2 Net Present Value

Net present value is the income of the plant and its net future worth. When money is generated at the beginning of a proje

this is seen as more valuable as it can be reinvested to generate a larger return. When NPV is greater than zero this woul

mean the investment would add value and be worthwhile. But on the other hand if NPV is smaller than zero this means th

investment would decrease the value of the firm. The NPV (time value of money) can be calculated using the equation

shown below (R.K.SINNOT, 1999):

t n

n

n

r

NFW NPV

1 )1([1]

The compound interest rate of 5.25% will be used. An example calculation of the NPV in the eleventh year is shown below:

NPV = 18.93 / (1+0.0525)11

= £11.35 million

The cumulative NPV of the whole life time of the plant is £140.4 million; this value is above zero, so it shows this project to b

a very attractive investment. The values for the complete calculation for NPV are shown in Appendix 1.

5.4.3 Discount Cash Flow Rate of Return (DCF rate of return)

This analysis shows at which interest rate the cumulative net present worth will be zero (NPV=0), at this interest rate th

investment will break even. This will show the maximum interest rate the plant can pay and still be able to break even. This

done by using Microsoft Excel and the Goal Seek (uses iterations) function by setting the NPV to zero by manipulating th

interest rate. From this you find the DCF rate of return = 17.15%. With interest rates being at this level being highly unlike

this furthermore illustrates the great opportunity this investment is.

5.4.4 Sensitivity Analysis

The sensitivity analysis is carried out to observe how fluctuations in the following will affect the cumulative cash flow, NP

and DCF rate of return:

Raw material cost

Utilities cost

Market price

Market share

Plant production capacity

The analysis of these fluctuations will show how the plant will be affected financially by changes in the above factors.

5.4.4.1 Raw Material

Prices of raw materials can fluctuate due to the supply and demand of the raw material. Assuming all other factors remai

constant the price change in raw materials (wood, MEA, Fischer-Tropsch catalyst) is varied by +10%, +20%. -10% and -20%

The following results are shown on Table 9:

Raw Material Price Change Cumulative Cash Flow (£000'000) NPV (£000'000) DCF Rate of Return (%)

-20% 485.4 205.6 23.50

Where

NFW = Net cash flow (cash in –cash out),

r = compound interest rate

n = time of cash flow



Pg. 5.1

-10% 427.4 173.9 20.32

+10% 341.1 120.3 14.29

+20% 256.4 75.0 11.65

Table 9 raw materials sensitivity analysis

As you can see from Table 8 as the price of the raw material increases the total profit (cumulative cash flow), NPV decrease

This shows that even if there is a twenty percent increase in price the plant will still be able to make a healthy profit. I

addition the DCF rate of return decreases when the raw material price increases, this is expected but the DCF rate of retur

percent is still relatively high at 11.65%. When the price of raw material increases by 20% the payback period will increase b2 years to 12 years, this is still an encouraging time period for the payback for such a large investment.

5.4.4.2 Utility Cost Change

This will study the possible fluctuation in the price of the utility costs, which includes the price of power, Oxygen and wate

As prices of utilities fluctuate up and down the following results were found:

Utility Cost Price Change Cumulative Cash Flow (£000'000) NPV (£000'000) DCF Rate of Return (%)

-20% 471.1 199.8 22.12

-10% 416.7 169.4 19.82

+10% 333.6 113.55 14.84

+20% 283.8 88.63 12.76

Table 10 utility price sensitivity analysis

When the price of utilities increases the total profit, NPV and DCF rate of return decreases. This is shown in Table 10 and

due to the plant becomes less efficient and the total operating costs increase when utility prices go up, but on the upside th

plant will still report healthy earnings if utility prices do increase.

5.4.4.3 Market Price Change

The price of biodiesel is subject to market fluctuation due to many factors, these factors can include increases or decreases

demand or supply of biodiesel and the by-products. Other factors can include geo-political situations that can arise in th

market causing the markets to fluctuate. From the sensitivity analysis the following was found:

Market Price Change Cumulative Cash Flow (£000'000) NPV (£000'000) DCF Rate of Return (%)

-15% 115.2 14.84 6.90

-10% 240.9 79.45 16.15

+10% 534.6 211.5 23.54

+15% 711.7 302.6 26.92

Table 11 market price fluctuation analysis

From Table 11 the price fluctuation shows that even at market price 15% lower than expected the plant is still profitable. Th

break-even point is when the market price of all three products decreases by just below 20%. As the worldwide economy is

the beginning of an economic recovery I believe price drops in the fuel sector to be highly unlikely.

5.4.4.4 Market Share Decrease

If the projected market share of the process plant decreases by 25% from 9.22% to 6.91% the plant could operate at i

turndown level of 75% due to a lower level of demand for its product. This could be due to competition from other plants o

the level of demand for biodiesel is not as high as expected.

Market Share Decrease Cumulative Cash Flow (£000'000) NPV (£000'000) DCF Rate of Return (%)

0.75% turndown 215.44 70.27 13.40

Table 12 market share decrease



Pg. 5.1

From Table 12 at turndown the project still shows healthy projections, this is mainly due to a decrease in the utility and raw

material cost, which is associated with turndown making the plant still economically viable.

5.4.4.5 Production Capacity Change

This will analyse how production capacity changes due to errors in design or the possible shutdown of the plant will affec

the economics of the plant. If this occurs the following affects occur on cash flow, NPV and DCF rate of return:

Production Capacity Change Cumulative Cash Flow (£000'000) NPV (£000'000) DCF Rate of Return (%)

-20% 178.5 55.05 10.25

-10% 218.9 70.57 13.96

10% 460.1 189.2 19.02

20% 510.4 201.1 21.83

Table 13 production of fuel sensitivity analysis

If the production capacity increases by 20%, which from a design perspective is highly unlikely the profit and NPV of the pla

will rocket upwards as shown in Table 13. But on the other hand if the reverse happens and production capacity decreases b

20% the plant will be on much tighter profit margins and the DCF rate of return will be slightly higher than 10%, which is st

highly investable.

5.5 Conclusion

An economic appraisal is one of the key factors when investing in a project. From the calculation shown in the report it evident that this is a sound investment because of an NPV of £142.5 million with a payback period of 10 years. The DCFRR

17.15% which is a highly competitive investment, making it work the risk undertaken.

From the sensitivity analysis that was concluded in the report the plant was very resistant in fluctuation in operating cost

and in fluctuation in the market price of biodiesel. Even at raw material cost increases of 20% the plant was still lookin

healthy financially with a positive value of NPV of £75 million, furthermore if the utility prices increase by 20% the NPV of th

plant is in excess of £280 million.

On the other hand if demand for biodiesel decreases by 25% the plant will operate at turndown of 75% the NPV will be £7

million, In addition DCFRR is above 13%. Therefore the turndown of the plant needs to be considered in order not for th

plant not produce too much biodiesel that it will not be able to sell, this will increase efficiency, as the costs of raw materia

and utilities will decrease, while the plant will still meet the demand for the product. The NPV is still positive until productio

of biodiesel is above 65% of the planned production rates discussed in the economic appraisal. This shows that the plant able to cope with higher costs and lower demand for its produce, while still making money.



Pg. 5.2

Bibliography

1. R. K. Sinnott, 2005, Coulson & Richardson’s Chemical engineering design, Butterworth-Heinemann, Volume 6, page

222-229, 236-244.

2. Max S. Peters, Klaus D. Timmerhaus, Ronald E. West, Plant Design and Economic for Chemical Engineers, McGraw

HILL, 2003, page 232 -257, 258-274, 279-298.

3. The global biodiversity footprint of UK biofuels Consumption, Join Nature Conversation Committee, September 200

4. http://www.hgca.com/content.output/4196/4196/Markets/Market%20News/Biofuel%20and%20Industrial%20Nes.mspx (7

thMarch, 2010)

5. http://www.uklanddirectory.org.uk/building-land-plot-sales-lancs.asp(7th

March, 2010)

6. http://www.hima-sella.co.uk(7th

March, 2010)

7. http://www.angus.gov.uk/ac/documents/sacreport.pdf (8th

March, 2010)

8. http://www.hgca.com/content.output/4196/4196/Markets/Market%20News/Biofuel%20and%20Industrial%20Ne

s.mspx (8th

March, 2010)

9. http://www.dft.gov.uk/pgr/roads/environment/renewable-fuels/notesbiodiesel(8th

March, 2010)

10. www.whatmatterswebbolg.com (9th

March, 2010)

11. http://www.economywatch.com/renewable-energy/bioethanol-vs.-biodiesel.html(9th

March, 2010)

12. http://biofuels-platform.ch/en/infos/eu-biodiesel.php(9th

March, 2010)

13. http://www.r-e-a.net/document-library/articles/0912PTFuelOilNewsPages%2022-23.pdf (9th March, 2010)14. http://www.biodiesel-expo.co.uk/download/1%20Deloitte%20Bio%20Diesel4.pdf (9

thMarch, 2010)

http://www.hgca.com/content.output/4196/4196/Markets/Market%20News/Biofuel%20and%20Industrial%20News.mspx


http://www.uklanddirectory.org.uk/building-land-plot-sales-lancs.asp





http://www.dft.gov.uk/pgr/roads/environment/renewable-fuels/notesbiodiesel

http://www.whatmatterswebbolg.com/


http://biofuels-platform.ch/en/infos/eu-biodiesel.php

http://www.r-e-a.net/document-library/articles/0912PTFuelOilNewsPages%2022-23.pdf

http://www.biodiesel-expo.co.uk/download/1%20Deloitte%20Bio%20Diesel4.pdf

http://www.biodiesel-expo.co.uk/download/1%20Deloitte%20Bio%20Diesel4.pdf

http://www.r-e-a.net/document-library/articles/0912PTFuelOilNewsPages%2022-23.pdf

http://biofuels-platform.ch/en/infos/eu-biodiesel.php


http://www.whatmatterswebbolg.com/

http://www.dft.gov.uk/pgr/roads/environment/renewable-fuels/notesbiodiesel





http://www.uklanddirectory.org.uk/building-land-plot-sales-lancs.asp





Pg. 5.2

Appendix 5

A5.1 Cash flow and NPV are shown in following table.

Year Price Per Tonne(£) Net Cash Flow (£000'000) Cumulative Cash Flow NPV Cumulativ

1 600 -£4.99 -£4.99 -£4.99 -£4

2 686 -£19.98 -£24.97 -£18.98 -£23

3 699 -£24.97 -£49.94 -£22.54 -£46

4 724 -£9.23 -£59.17 -£7.92 -£54

5 736 -£8.56 -£67.74 -£6.98 -£61

6 761 £11.54 -£56.19 £8.94 -£52

7 779 £12.88 -£43.31 £9.48 -£43

8 792 £13.78 -£29.53 £9.63 -£33

9 804 £14.67 -£14.87 £9.74 -£23

10 823 £16.01 £1.14 £10.10 -£13

11 841 £18.93 £20.07 £11.35 -£212 860 £20.27 £40.34 £11.55 £9

13 872 £21.16 £61.51 £

1

1

.

4

5

£

14 872 £21.16 £82.67 £

1

0

.

8

8

£

15 841 £18.93 £101.60 £

9

.

2

5

£

16 810 £18.45 £120.05 £

8

.

5

6

£

17 823 £19.34 £139.40 £

8

.

5

3

£

18 835 £20.24 £159.63 £ £



Pg. 5.2

8

.

4

8

19 847 £21.13 £180.76 £

8

.

41

£

20 860 £22.02 £202.78 £

8

.

3

3

£

21 872 £24.83 £227.61 £

8

.

9

3

£

22 884 £25.73 £253.34 £

8

.

7

8

£

23 897 £26.62 £279.96 £

8

.

6

4

£

24 909 £27.51 £307.47 £8

.

4

8

£

25 928 £28.85 £336.32 £

8

.

4

5

£

26 946 £32.30 £368.62 £

8

.

9

9

£

27 946 £9.43 £378.05 £

2

.

4

£



Pg. 5.2

9

28 952 £9.76 £387.81 £

2

.

4

5

£

When setting the cumulative NPV from £140.47 million to zero the DCF rate of return is 17.15%.

A5.2

Yea

r

Barrel of Oil

($)

Barrel of Oil

(£)

Price Per litre

(£/litre)

Price of

Biodiesel

(£/litre)

1 $66.00 43.56 0.32 0.4

2 $80.00 52.80 0.39 0.5

3 $82.00 54.12 0.40 0.5

4 $86.00 56.76 0.42 0.5

5 $88.00 58.08 0.43 0.5

6 $92.00 60.72 0.45 0.6

7 $95.00 62.70 0.46 0.6

8 $97.00 64.02 0.47 0.6

9 $99.00 65.34 0.48 0.6

10 $102.00 67.32 0.49 0.6

11 $105.00 69.30 0.51 0.6

12 $108.00 71.28 0.52 0.6

13 $110.00 72.60 0.53 0.6

14 $110.00 72.60 0.53 0.6

15 $105.00 69.30 0.51 0.6

16 $100.00 66.00 0.48 0.6

17 $102.00 67.32 0.49 0.6

18 $104.00 68.64 0.50 0.6

19 $106.00 69.96 0.51 0.6

20 $108.00 71.28 0.52 0.6

21 $110.00 72.60 0.53 0.6

22 $112.00 73.92 0.54 0.6

23 $114.00 75.24 0.55 0.7

24 $116.00 76.56 0.56 0.7

25 $119.00 78.54 0.58 0.7



Pg 5 2

26 $122.00 80.52 0.59 0.7

27 $122.00 80.52 0.59 0.7

28 $123.00 81.18 0.60 0.7

Documents

Section 5-Economic Appraisal Highlight)