EH2207N

DESIGN PROJECT I (SEPTEMBER 2015)

PRODUCTION OF 50, 000 METRIC TONNES OF TETRAHYDROFURAN PER

YEAR

CHAPTER 2: MARKET ANALYSIS

GROUP MEMBERS

MUHAMMAD FAWWAZ AFIQ BIN MOHD ZAINUDDIN 2013600508

MOHAMAD ALIF BIN MOHD RADZUAN 2013411196
MUHAMMAD KHAIRI BIN TAJURUS 2013233736
MUHAMMAD IDHAM BIN REZALI 2013811872
MOHAMAD HAZRUL BIN TAIB 2013674906
SITI SARAH BINTI AZMI 2013464376

SUPERVISOR:

PUAN NURHASLINA CHE RADZI

FACULTY OF CHEMICAL ENGINEERING

UNIVERSITI TEKNOLOGI MARA

SHAH ALAM
 TABLE OF CONTENTS

CONTENT PAGE
NOMENCLATURE AND ABBREVIATION i
CHAPTER TWO 2.1 INTRODUCTION 1
2.2 THF PLANT PROCESS DESCRIPTION AND FLOW 2
DIAGRAM
2.2.1 Chemistry 2
2.2.2 THF Plant Process Flow Diagram 3
2.2.3 THF Plant Process Description 4
2.3 SUPPLY AND DEMAND OF TETRAHYDROFURAN 5
2.3.1 Supply and Demand of Tetrahydrofuran Worldwide 5
2.3.2 Supply and Demand of Tetrahydrofuran in Asia 7
2.3.3 Supply and Demand of Tetrahydrofuran in India 9
2.3.4 Production Rate 10
2.4 RAW MATERIALS 10
2.4.1 Hydrogen 10
2.4.2 Maleic Anhydride 11
2.5 ESTIMATION OF CAPITAL COST 13
2.5.1 Bare Module Cost 14
2.5.1.1 Bare Module Cost Sample Calculation 15
2.6 ESTIMATION OF MANUFACTURING COST 17
2.6.1 Cost of Operating Labor 18
2.6.2 Utilities Cost 21
2.6.3 Raw Material Cost 22
2.6.3.1 Profit Margin Analysis 23
2.6.4 Waste Treatment Cost 23
2.6.5 Land Cost 23
2.6.6 Calculation of Manufacturing Cost 24
2.7 BREAKEVEN ANALYSIS 24
2.8 PROFITABILITY ANALYSIS 25
2.8.1 Non-Discounted Profitability Criteria 25
2.8.2 Discounted Profitability Criteria 28
2.9 CONCLUSION 31
REFERENCES 32
 NOMENCLATURE AND ABBREVIATIONS

The following abbreviations are used in this Tetrahydrofuran Design Project:

Abbreviation Abbreviation For

THF Tetrahydrofuran
GBL gamma-Butyrolactone
MAH Maleic Anhydride
MA Maleic Acid
LPS Low Pressure Steam
MPS Medium Pressure Steam
FCI Fixed Capital Cost
COM Cost of Manufacturing
CuT Utility Cost
CUL Labor Cost
CWT Waste Treatment Cost
CRW Raw Material Cost
SF Stream Factor
PBP Payback Period
CCR Cumulative Cash Ratio
ROROI Rate of Return of Interest
DPBP Discounted Payback Period
PVR Present Value Ratio
NPV Net Present Value

i
 CHAPTER 2

MARKET ANALYSIS

2.1 INTRODUCTION

The demand of Tetrahydrofuran (THF) is increasing over the years and consume by various
industries over the world. Therefore, in order to design a THF chemical plant, analysis of market
and economic sector must be properly done. The study is also consists of estimation of the lost
and profit of running the industry. It considers the application and end-product, production
conditions, producer and statistical capacity, supply status and forecast market trends, supply
and demand analysis, cost analysis, and import & export of chemical conditions to be. The
purpose of performing market analysis is to determine the attractiveness of market of a product
and to understand its evolving opportunities and threats as they relate to the strengths and
weaknesses of a firm as well.

THF is cyclic ether with two primary industrial uses. The major use is as a monomer in
the production of polytetramethylene ether glycol (PTMEG), a component of cast and
thermoplastic urethane elastomers, polyurethane stretch fibers (spandex) and high-performance
copolyester-polyether elastomers (COPE). A smaller amount of THF is used as a solvent in
polyvinyl chloride (PVC), cements, pharmaceuticals and coatings, in precision magnetic tape
manufacture and as a reaction solvent.

In this chapter, THF supply and demand is discussed by emphasizing the market trend
in one of the country in Asia. Other than that, the market for raw material used in our process is
also discussed.

1
2.2 THF PLANT PROCESS DESCRIPTION AND FLOW DIAGRAM

2.2.1 Chemistry

Tetrahydrofuran is produced by the hydrogenation of Maleic Acid (MA) in the presence of an

acid catalyst. In this THF plant, MA is synthesized first by reacting Maleic Anhydride (MAH) and
water. 100% of the Maleic Anhydride reacts steadily with water to produce MA. The reaction is
as follow:

() ()

The basic THF reactor raw materials are Maleic Acid and Hydrogen. Pd/Re is used as the
catalyst. MA conversion is 100%, where approximately 92.7% of the MA fed to the reactor are
converted to THF and the rest to gamma butyrolactone (GBL). There are 3 reactions occur in
series in the THF reactor. The reactions are,

( ) ( ) ( )

( ) ( ) ( ) ( )

( ) ( ) ( ) ( )

2
2.2.2 THF Plant Process Flow Diagram

Figure 2.1 THF Plant Process Flow Diagram

3
2.2.3 THF Plant Process Description

Process flow diagram for the THF process is shown in Figure x.x. Raw material for this process
is Maleic Anhydride (MAH) and hydrogen. Firstly, fresh MAH feed enters stream 1 and is fed to
R-100, where the MAH reacts with water from stream 2 to give Maleic Acid (MA). MAH is fed to
the THF plant from MAH storage tank located in the process tank yard. R-100 is basically a
vessel where MAH and water is mixed and steadily reacts to form MA. MA stream is vaporized
by E-100, prior to being sent to packed bed reactor, R-101, THF reactor.

Hydrogen, in stream 6, from Hydrogen storage tank is fed to THF plant in excess at
200 bar. The hydrogen stream is fed to a valve, to decrease the pressure to 1020 kPa. The
stream is then fed to E-101 to be heated to 235°C before entering THF reactor, R-101.

The MA and hydrogen stream are fed to THF reactor, R-101. Inside the reactor, the
MA-Hydrogen mixture is reacted in the presence of Pd/Re catalyst. Typical inlet reaction
temperatures are in the range of 235°C - 275°C. As the reaction temperature does not
exceeded 400°C, the material of construction of the reactor is carbon steel. The reactor
operated at 1 MPa. About 92.7% of the MA fed is converted to THF in the reactor (Ruichao
Zhang et al., 2007). The by-product form in this reaction is GBL and water.

Reactor effluent, containing THF, GBL, MA, Hydrogen and water are sent to E-102 for
cooling from 235°C to 40°C. The cooled stream is then fed to V-100 to separate unreacted
hydrogen from the product mixture. The overhead V-100 contains all the unreacted Hydrogen
with a little THF and water carries over. The bottom V-100 contains the product stream free from
Hydrogen.

The bottom stream is then sent to Reactor Column, T-100 where the function is to
separate the THF product from unreacted MA and GBL. The overhead of the Reactor Column
contains about 35.55% THF, 63.47% Water and 0.99% MA. The residue of the Reactor Column,
containing unreacted MA and GBL, are fed back to R-101.

The overhead of Reactor Column containing 33.55% THF, will be purify to

polymerization grade monomer by pressure swing distillation using T-101 and T-102. Pressure
swing distillation is used to break THF/Water azeotrope.

Firstly, the overhead of Reactor Column will enter T-101, Distillation Column. The
column is operated nearly at atmospheric pressure. The overhead of the Distillation Column

4
contains THF/Water azeotrope at 93.3% THF and 6.7% Water. The residue of the column,
containing water and traces of MA are fed to wastewater treatment plant.

The overhead of T-101, will be pumped to the finishing column, T-102, at 833 kPa. The
column is operated at higher pressure to introduce pressure swing which will break the
THF/water azeotrope. The overhead of the column containing THF and water will be recycled
back to T-101. Polymerization grade THF is produced as the bottom product. The product
specification for THF is less than 200 ppm of water. Then, the THF product is sent to the
product tank.

In the THF process, there are two recovery processes, unreacted MA and GBL
recovery and unreacted Hydrogen recovery. Unreacted MA and GBL are recovered from T-100
residue. The mixture will then be pumped back to the reactor for further reaction.

For the hydrogen, as the mixture of hydrogen, water and THF emerges from the
overhead of V-100, it will be cool by refrigerant to -18°C and then be fed to the next flash drum,
V-101. In this flash drum, most of THF and water are collected at the bottom and is fed to T-101
for purification while the overhead contains all the unreacted hydrogen and traces of THF. The
overhead stream is combined with the fresh hydrogen feed which will then be fed to the THF
reactor, R-101.

2.3 SUPPLY AND DEMAND OF TETRAHYDROFURAN

2.3.1 Supply And Demand of Tetrahydrofuran Worldwide

In 2012, about 79% of United State and Western European THF demand was consumed in the
manufacture of PTMEG. The remainder was for other applications and for Western Europe it is
used for the production of tetrahydrothiophen that is a gas odorant (cited). The largest solvent
market for THF is in polyvinyl chloride cements; THF is also used as a reaction solvent in the
production of pharmaceuticals.

5
 Asia
China
U.S
Europe
Japan
Others

Figure 2.2 World Consumption Of THF On 2012

In Asia region, the percentage of THF tetrahydrofuran consumed for PTMEG is even
higher, at 86% to 88%, to contribute the region's rapidly growing market for spandex especially.
With the start-up of new THF and PTMEG plants in China during late 2009 through 2012,
Japanese production of PTMEG exports to China has decreased. THF exports to China,
however, increased to supply the shortfall following Mitsubishi's PTMEG Ningbo start-up in
2009. China tetrahydrofuran production has growing more than 30% per year during 2002 until
2012 even so, the country depends on imports to meet a portion of demand. By 2017, China will
lead other Asia country with nearly 50% of the global THF capacity and 40% of the global
market.

Global THF capacity grew with estimated up 10-15% during 2010-2012, but is expected
to increase by more than 40% by 2017, with a big majority of these proposed additions being
based in China. The two largest global producers of THF that is BASF and Dairen Chemical
Corporation, combined with total of 54% of world capacity as of early 2013. The global market
for THF is estimated to exceed 800 thousand tonnes by the year 2017.

6
2.3.2 Supply And Demand of Tetrahydrofuran in Asia

Asia region represents the largest regional market for THF. Rising at an annual growth
rate between 10% and 12%, the Asia-Pacific THF market is projected to exceed 400 thousand
metric tonnes by 2015. China remains the major growth engine for THF worldwide, both in
terms of demand and production levels. Development of THF market in the country is mainly
attributed to the growing demand for spandex fibers that has develop the establishment of new
PTMEG units

Figure 2.3 THF Demand From Year 2012 to Year 2020 (Prediction)

In China the net import volume of THF is 19,000 tonnes and consumption 140,000
tonnes in 2010. It is mainly used in PTMEG production, and medicine and solvent field. It is
predicted that, by 2015 China's annual output of PTMEG will reach 300,000 tonnes. In addition,
China's THF consumption in solvent and other fields will still increase. It is predicted that, the
consumption will reach 30,000 tonnes by 2015. Therefore, it predicted that, China's THF
demand will exceed 350,000 tonnes by 2015.

In 2003 Asia’s total capacity was 196,300 tonnes or 70.5% of the total world output.
North America was 45,400 tonnes and Europe 29,500 tonnes. By that time the production of
spandex was mainly concentrated in South Korea, China, United States, Japan and Taiwan;
these countries total capacity accounted for 80.51% share of the world market and leading the

7
pack was South Korea with a 27.55% market share followed by China with 22.92% share and
third but little far behind was the United States with a 14.36%.

However, the situation changed quickly. By 2008, China became first leading the pack
with almost 60% share of the total world production. It was followed by South Korea with a
share of 17.1% and the United.State. was a third with 7.7 percent.

world spandex production in 2008

70

60

50

40
percentage

30

20

10

0
production capacity

Figure 2.4 World Spandex Productions in 2008

8
 Table 2.1 World’s Spandex Production Percentage Distribution In 2008

Country Production Capacity (%)

China 59.9

South Korea 17.10

USA 7.7

Singapore 2.9

Brazil 1.8

Turkey 1.8

Japan 1.1

Others 7.7

2.3.3 Supply And Demand of Tetrahydrofuran In India

Asia-Pacific represents the largest regional market for THF, as stated by the new market
research report on THF. Surging at an annual growth rate between 10% and 12%, the Asia-
Pacific THF market is projected to surpass 400 thousand metric tons by 2015. China remains
the major growth engine for THF worldwide, both in terms of demand and production levels.

Development of THF market in the country is mainly, contributed to the growing demand
for spandex fibers that has stimulated the establishment of new PTMEG units. However, as a
result of India clocking the second highest (GDP) growth rate and increased growth in organized
retail segment and branded clothing, Indian spandex usage is growing at 15 percent per year as
compared to world’s expected growth of 7-8 percent per year. Currently Indian direct
consumption of bare spandex is around 6,000 tons per annum, all of which is imported, with 37
percent being consumed by the circular knitting sector, followed by air covered yarns with 27
percent, 19 percent from core spun yarns and the rest by narrow fabrics.

9
2.3.4 Production Rate

As estimated in Chapter 2.2.1, the estimated global market for THF in 2017 is 800,000 tonnes.
As this plant is newly introduced to the market, it is decided that the plant will grab only 6-7% of
the THF market share worldwide. Thus, the production rate for this plant is estimated to be
50,000 tonnes per year.

2.4 RAW MATERIALS

In the production of THF, two raw materials has been used which are maleic anhydride and
hydrogen.

2.4.1 Hydrogen

The research company Freedonia Group predicts that worldwide hydrogen demand will
continue to advance, growing at a 3.4 percent annual pace through 2013.The term “hydrogen
economy” is associated with emerging energy and transportation technologies, but a new report
from Freedonia, World Hydrogen, indicates the growth primarily is being driven by petroleum
refining enterprises that require more hydrogen to produce low-sulfur fuels. Other big factors are
chemical, semiconductor, float glass, metal components and food industries The report predicts
that 475 billion cubic meters will be required in 2013.Although North America currently is the
world’s largest hydrogen consumer, Freedonia research says trends indicate that the Asia -
Pacific region will rise from third to first place in the consumption table. In fact, consumption in
the Asia-Pacific region, according to the report, is growing 300 percent faster than in North
America.

10
 Figure 2.5 World Hydrogen Demand

2.4.2 Maleic Anhydride

Figure 2.5 focuses on the maleic anhydride domestic price trend for the past 3 years between
two places that is Ahmedabad and Mumbai. The price of this raw material is decreasing every
year at rapid rate. This might happen due to the cheaper price of methanol, the raw material
used to produce Maleic Anhydride. Methanol price decreases as the price of crude oil
decreases. Based on the pattern of oil price worldwide, it can be expected that methanol price
to be keep decreasing, thus, cheaper price of Maleic Anhydride in the future.

Global maleic anhydride demand was 2,100.7 kilo tons in 2013 and is expected to reach
3,073.2 kilo tons by 2020, growing at a compound annual growth rate (CAGR) of 5.6% from
2014 to 2020. Asia region is the leading regional market for maleic anhydride for over 50% of
global demand, valued at USD 2,279.8 million, in 2013. The global maleic anhydride market is
highly fragmented with top five companies accounting for less than 30% of the market. Major
participants include:
 Hunstman Corporation,
 Ashland Chemical Co.,
 Sasol-Hunstman,
 Polynt SpA,
 Lanxess AG.

11
Figure 2.6 Maleic Anhydride Price In Ahmedabad and Mumbai for 2013-2015

12
2.5 ESTIMATION OF CAPITAL COST

Capital cost pertains to the cost associated with construction of a new plant or
modifications to an existing chemical manufacturing plant. First, the equipment module costing
technique is used to estimate the cost of all the equipment. The cost calculated using the
equipment module technique is referred as bare module cost. The bar module cost can be
evaluated from

Where

Next, total module cost and grassroots cost are calculated. The term grassroots refers to
a completely new facility in which the construction is started on essentially undeveloped land, a
grass field.

The total module cost can be evaluated from

And the grassroots cost can be evaluated from

13
2.5.1 Bare Module Cost

In the bare module cost calculation, both base and non-base condition are calculated. Bare
module cost is calculated as follow:

( )

The assumptions made for calculating bare module cost are:

1. Surface area for all heat exchangers is assumed to be 100m2.

2. Volume for reactor is assumed to be 50m3.
3. Volume for all towers (distillation column) is assumed to be 100m3.
4. Volume for all vessel and storage tanks is assumed to be 100m3.
5. The pressure for non-base condition for all equipment is assumed to be at the highest
pressure condition in the plant which is at 11 barg.
6. The material for non-base condition is assumed to be carbon steel for all equipment.
7. Fp for base condition is 1 for all equipment.
8. The material for base condition is carbon steel for all equipments.

The limitations are:

1. The volume for reactor, tower, and storage tank is in the range of 1-100m3.
2. The material might varies from carbon steel or stainless steel.
3. Not all same type of equipments, for example heat exchangers, have the same
dimension for all units.
4. All this limitations could give error on the estimated capital cost.

One bare module cost sample calculation for heat exchanger is shown. The bare module costs
for other equipment are calculated in the same manner and are tabulated in Table 2.2.

14
2.5.1.1 Bare Module Cost Sample Calculation

The calculation is for U-Tube heat exchanger.

( )

( ) ( ( ))

( )

For base condition, Fp is equal to 1, CBM is,

( ) ( )

( ) ( ( )( ))

( )

For non-Base condition,

( ) ( ( ))

( ) ( ( )( ))

( )

The CEPCI for year 2001 and year 2011 are 394 and 582 respectively. Thus,

( )

( )

15
Table 2.2 Results of Bare Module Cost Estimation (Base Condition) for THF Plant

Equipment Unit FP FM FBM Cpo(2001)($) CBM°(2001)($/unit) CBM°(2011)($/unit) CBM°( (2011)($)

Pump 6 1 - 2.1 501291.23 11,886.12 17,557.67 105,346.03

Compressor 1 1 1.8 2.8 514474.50 230,355.94 340,271.97 340,271.97

Vessel 5 1 1.6 3.29 23146.60 268,036.79 395,932.52 1,979,662.59

Distillation Column 3 - - 2.7 140023.20 397,322.36 586,907.65 1,760,722.94

Heat Exchanger 11 1 1 3.29 15812.07 138,628.95 204,776.77 2,252,544.49

Reactor 1 - - 4 970860.4 407,069.71 601,306.01 601,306.01

Totals 1,453,299.86 2,146,752.59 7,039,854.02

Table 2.2 Results of Bare Module Cost Estimation (non- Base Condition) for THF Plant

Equipment Unit FP FM FBM Cpo(2001)($) CBM(2001)($/unit) CBM(2011)($/unit) CBM( (2011)($)

Pump 6 1.5831 - 2.1 501291.23 12,125.96 17,911.96 107,471.75

Compressor 1 1.0210 1.8 2.8 514474.50 230,355.94 340,271.97 340,271.97

Vessel 5 1.0191 1.6 3.29 23146.60 337,922.43 499,164.61 2,495,823.03

Distillation Column 3 - - 2.7 140023.20 880,173.21 1,300,154.34 3,900,463.03

Heat Exchanger 11 3.7492 1 3.29 15812.07 140,753.94 207,915.72 2,287,072.97

Reactor 1 - - 4 970860.4 407,069.71 601,306.01 601,306.01

Totals 2 562 511.87 2,008,401.20 2,966,724.61 9,732,408.75

16
 ( ) ( )

( )

( ) ( )

( )

The capital cost estimated to build the plant is $15,004,169.34.

2.6 ESTIMATION OF MANUFACTURING COSTS

The costs associated with the day-to-day operation of THF plant are estimated in this
subchapter. In order to estimate the manufacturing cost, process information provided on the
PFD, an estimate of the fixed capital investment, and an estimate of the number of operators
required to operate the plant are all needed. The total manufacturing cost can be evaluated from

( )

And the cost of manufacture without depreciation, is

( )

Where

Manufacturing costs are expressed in units of dollars per unit time, in contrast to the
capital costs, which are expressed in dollars. Information on a PFD is most often reported in
terms of kg or kmol per hour or per second. In order to calculate the yearly cost of raw materials
or utilities, the fraction of time that the plant is operating in a year must be known. This fraction
is known as stream factor, SF, where

17
 ( )

For this analysis, we assumed that the plant will be running for 339 days per year. Thus, the
stream factor is calculated as follow:

( )

2.6.1 Cost of Operating Labor

The technique used to estimate operating labor requirements is based on data obtained
from five chemical companies and correlated by Alkhayat and Gerrard. According to this
method, the operating labor requirement for chemical processing plants is given by

( )

where NOL is the number of operators per shift, P is the number of processing steps involving
the handling of particulate solids and Nnp is the number of non-particulate processing steps. For
the THF plant, the value of P is zero, and the value of Nnp is given by

18
Table 2.3 Results for the Estimation of Operating Labor Requirements for the THF Plant
Using the Equipment Module Approach

Equipment Type No of Equipment Nnp

Reactor 2 2

Separator 2 2

Heater 6 6

Cooler 5 5

Pump 3 -

Compressor 1 1

Distillation Column 3 3

Storage Tanks 2 -

Total 24 19

*Pumps and storage tanks are not counted in evaluating Nnp

Using the information in Table 2.3, an estimation of the number of operators per shift is made.

[ ( ) ( )]

The number of operators required per shift = 3.26

The number of operators hired for each operator needed in the plant = 4.5

( )( ) ( )

The employees needed for THF plant is tabulated in table 2.4. The monthly salary rate is
obtained from www.payscale.com. The fresh entry rate for all engineers is $400 per month. The
fresh entry rate for other positions is $300 per month and the rate for skilled operator is $200
per month. From the table,

( )

19
Table 2.4 THF Plant Personnel Required and Cost

Quantity Monthly Salary

Position
(USD/month) Annual Salary (USD/year)
Engineering
and technical
Plant Manager 1 1000 12000
Process 1 400 4800
Engineer
Production 1 400 4800
Engineer
QA Engineer 1 400 4800
Environment 1 400 4800
Engineer
Safety and 1 400 4800
Health Officer
Electrical 1 400 4800
Engineer
Mechanical 1 400 4800
Design
Engineer
Operator 15 3000 45000

Account
Accountant 1 400 4800

Human
Resources
HR Officer 1 300 3600
Administration
Office 1 300 3600
Management
Logistic
Warehouse 1 300 3600
Manager
Shipping 1 300 3600
Manager
Commercial 1 300 3600
Manager
Total Labor Cost 113,400

20
2.6.2 Utilities Cost

For estimating the operating costs, it is assume that the capital investment required to
build a facility to supply the utility has already been made. This would be the case when a
grassroots cost has been used for the fixed capital investment. The costs associated with
supplying a given utility are then obtained by calculating the operating costs to generate the
utility. The utilities costs for the utilities used in the THF plant are shown in Table 2.5.

Table 2.5 Utilities Provided by Off-Sites for a Plant with Multiple Process Units

Utility Cost Cost

Electricity 0.11$/kWh

Water 0.13$/m3

The yearly total cost of the utilities used is tabulated in table 2.6.

Table 2.6 Estimation of Utilities Cost for THF Plant

Utilities Usage Total Cost ($/year)

Water 60m3/day 2409

Electricity 5626 kW/day 246,418.80

Other utilities (steam, refrigerant, etc)* 5,500,000

Total 5,748,827.80

* The cost for other utilities (steam, refrigerant, etc) is estimated to be $5,500,000 per year.

The total sum of the cost time the stream factor yield the cost of utility, CUT which is

21
2.6.3 Raw Material Cost

The cost of raw materials can be estimated by using the current price. Lists of the chemicals
used in the THF plant are given in Table 2.7.

Table 2.7 Cost of Chemicals used in THF Plant

Chemical Price ($/kg)

Maleic Anhydride 0.9

Hydrogen 0.37

*Maleic Anhydride price is taken from Global Chemical Price Maleic Anhydride Report
**Hydrogen price is taken from MATRADE

The raw material cost and yearly revenue of the plant are estimated and shown in Table 2.8 and
2.9 respectively

Table 2.8 Estimation of Raw Material Cost for THF Plant

Chemical Flow(kg/y) Price($/kg) Cost ($/year)

Maleic Anhydride 68,326,128.00 0.90 61,493,515.20

Hydrogen 7,078,320.00 0.37 2,618,978.40

Total 64,112,493.60

*The stream factor has already been accounted in the calculation of the flow and volume

Table 2.9 Estimation of Yearly Revenue for THF Plant

Chemical Flow(kg/y) Price($/kg) Revenue ($/year)

Tetrahydrofuran 50,125,896.00 2.05 102,758,086.80

Total 102,758,086.80

*The stream factor has already been accounted in the calculation of the flow and volume

22
The yearly revenue from Tetrahydrofuran sales is $102,758,086.80.

The sum of the raw material is the raw material cost, CRM which is $64,112,493.60.

2.6.3.1 Profit Margin Analysis

Clearly, the accuracy of such predictions will depend on the accuracy of the estimates for the
different costs. When screening alternative processes, it is sometimes useful to evaluate the
difference between the revenue from the sale of products and the cost of raw materials. This
difference is called the profit margin or sometimes just the margin.

∑( ) ∑( )

Since the profit margin is positive but a positive profit margin does not guarantee that the
process will be profitable but does suggest that further investigation may be warranted inrder to
increase the profit.

2.6.4 Waste Treatment Cost

The waste treatment cost, Cwt is assumed to be $500,000 per year.

2.6.5 Land Cost

THF land size is assumed to be 8 acres. The cost of land at India is obtained at $383 per m2.
The total cost for land is,

23
2.6.6 Calculation of Manufacturing Cost

As all the costs needed to calculate the manufacturing cost are known, the manufacturing cost
is evaluated.

( ) ( )
( )

And the cost of manufacture without depreciation, is

( ) ( )
( )

2.7 BREAKEVEN ANALYSIS

Break even analysis determine how much the plant needs to produce per year, to cover the cost
of doing business, COMd. The cost to runs the plant is $89,051,065.99 yearly. Each unit of
product gives the revenue of $2050 per tonne of THF. The breakeven point is the point when
sales is equal to the cost to run the plant yearly, where no loss or profit is gain. Calculating the
sale gives us,

Thus, the plant needs to have total sales of 44,171.46 tonnes per year to breakeven. To
recheck, calculate the profit for the production of 44,171.46 tonnes.

The profit for the production of 44,171.46 tonnes is equal to the COMd, $89,051,065.99. This
proves that the break even analysis is correct. As this project aim to produce 50,000 tonnes per
year, this analysis indicates that this project is profitable.

24
2.8 PROFITABILITY ANALYSIS

In this subchapter, the basic profitability analysis for projects involving large expenditures is
covered. The concept of non-discounted and discounted are introduced. It is assumed that any
new land purchases required are done at the start of the project, that is, at time zero. After the
decision has been made to build a new chemical plant or expand an existing facility, the
construction phase of the project starts.

Three bases are used for the evaluation of profitability which is time, cash and interest rate. For
each of these bases, discounted or nondiscounted techniques may be considered.

2.8.1 Non-Discounted Profitability Criteria

Nondiscounted profitability criteria for time criterion is :

 Payback Period (PBP),

 Cumulative Cash Ratio (CCR)

 interest rate which is rate of return on investment (ROROI)

( )

The discrete and cumulative nondiscounted cash flows for each year are given in Table 2.10.
Using this data, the cumulative cash flow diagram is drawn, as shown in Figure 2.6.

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Table 2.10 Non-discounted After-Tax Cash Flow (All Number in $10

End of year (R- COM- dk)×(1- Cumulative

Investment dk FCIL - dk R COMd Cash Flow
(k) t)+ dk Cash Flow
0 (12.37) 15.00 (12.37) (12.37)
1 (7.50) 15.00 (7.50) (19.87)
2 (9.00) 15.00 (9.00) (28.87)
3 3.00 12.00 102.76 90.55 8.99 8.99 (19.88)
4 4.80 7.20 102.76 90.55 9.62 9.62 (10.26)
5 2.88 4.32 102.76 90.55 8.94 8.94 (1.32)
6 1.73 2.59 102.76 90.55 8.54 8.54 7.22
7 1.73 8.64 102.76 90.55 8.54 8.54 15.76
8 0.86 0.00 102.76 90.55 8.24 8.24 24.00
9 0.00 102.76 90.55 7.93 7.93 31.93
10 0.00 102.76 90.55 7.93 7.93 39.86
11 0.00 102.76 90.55 7.93 7.93 47.79
12 13.87 0.00 102.76 90.55 16.95 16.95 64.74
Taxation Rate = 35%

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 Non-Discounted Cumulative Cash Flow Diagram
$80.00

$60.00
nonDiscounted Cash Flow ($millions)

$40.00

$20.00

$0.00
0 2 4 6 8 10 12 14

-$20.00

-$40.00
End of Year

Figure 2.7 Non-discounted After-Tax Cash Flow (All Number in $106)

The break even analysis or payback period for this project calculated at the point when
the cumulative cash flow is equal to the land and working capital value. This is because,
land and working capital is salvaged at the end of the project. Thus, they are not
accounted for in the calculation of breakeven analysis. The cost of land and working
capital for non-discounted is,

Based on Table 2.10, the cumulative cash flow of -$13.87 is between year 3 and year 4.
Thus, the breakeven or payback period (PBP) for non-discounted profitability criteria is,

[( ) ( )]

The payback period for this project is at 3.63 years after the project started or nearly 2
years after the plant starts to operate. The cumulative cash ratio for this project is,

(
) ( )

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This project yield CCR of 3.24. CCR higher than unity (1) shows that the project is
potentially profitable.

.The rate of return on investment for this project is,

( )
( )

This project yield 52.41% rate of return of interest. It means that for every $1 million of
investment, the investor get $524,100 of profit. Lastly, from the table and figure, an the
end of the project life, the project has cumulative cash position (CPP) of $64.74 million.

2.8.2 Discounted Profitability Criteria

The main difference between the nondiscounted and discounted criteria is that for the
latter,a discount each of the yearly cash flows back to time zero is made. The resulting
discounted cumulative cash flow diagram is then used to evaluate profitability. The three
different types of criteria are:

 Time Criterion : The discounted payback period (DPBP)

DPBP =Time required, after start-up, to recover the fixed capital investment, FCIL,
required for the project, with all cash flows discounted back to time zero

 Cash Criterion : The net present value (NPV) or net present worth (NPW),

NPV of a project is greatly influenced by the level of fixed capital investment, and a
better criterion for comparison of projects with different investment levels may be the
present value ratio (PVR).

 Interest Rate Criterion : The discounted cash flow rate of return (DCFROR)

DCFROR = Interest or discount rate for which the net present value of the project is
equal to zero.

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Table 2.11 Discounted After-Tax Cash Flow (All Number in $106)

End of Year Non-Discounted Cash Discounted Cash Discounted

Flow ($) Flow ($) Cumulative Cash
Flow ($)
0 (12.37) (12.37) (12.37)
1 (7.50) (6.82) (19.19)
2 (9.00) (7.44) (26.63)
3 9.92 6.75 (19.87)
4 10.55 6.57 (13.30)
5 9.88 5.55 (7.75)
6 9.47 4.82 (2.93)
7 9.47 4.38 1.45
8 9.17 3.84 5.30
9 8.87 3.36 8.66
10 8.87 3.06 11.72
11 8.87 2.78 14.50
12 17.88 5.40 19.90
Interest Rate =10%

29
 Discounted Cumulative Cash Flow Diagram
$30.00

$20.00
Discounted Cash Flow ($millions)

$10.00

$0.00
0 2 4 6 8 10 12 14

-$10.00

-$20.00

-$30.00
Time After Project Start (years)

Figure 2.8 Discounted After-Tax Cash Flow (All Number in $106)

The discounted break even or discounted payback period for this project calculated at
the point when the cumulative cash flow is equal to the land and working capital value.
This is because, land and working capital is salvaged at the end of the project. Thus,
they are not accounted for in the calculation of breakeven analysis. The cost of land and
working capital for discounted analysis is,

Based on Table 2.11, the cumulative cash flow of -$11.46 is between year 4 and year 5.
Thus, the breakeven or discounted payback period (DPBP) for discounted profitability
criteria is,

[( ) ( )]

The DPBP for discounted analysis is at 4.33 years after the project start up or nearly 3
years after the plant start to operate. The present value ratio of this project is,

30
 (
) ( )

This project yield PVR of 1.747. PVR value higher than unity (1) indicates that this
project is profitable. At the end of this project, the NPV of the project is $19.90 million.

2.9 CONCLUSION

Supply and demand of THF product worldwide is reviewed. The demand of THF,
especially in Asia is increasing due to the growth of its use as derivate of PolyTHF and
Spandex. The production rate for this project is obtained by implementing the forecast
method and it has been decided that the plant will produce 50,000 tonnes of THF per
year. As this plant is newly introduced to the market, it is decided that the plant will grab
only 6-7% of the THF market share worldwide. The price for the raw materials is
obtained from reliable sources, MATRADE and Maleic Anhydride report from Global
Chemical Price.

Economic analysis is performed to study the feasibility of this project. As been

estimated in Chapter 2.4, the fix capital cost for this project is $15 million. The cost of
manufacturing is estimated to be $90.55 million per year. The expected price of THF is
$2.05 per kg which is estimated to give revenue of $102.76 million per year. Next,
breakeven analysis is performed to evaluate the production rate at breakeven point. After
evaluation, the production rate at breakeven point is at 44,171.46 tonnes. The economic
analysis is then further investigated by performing the profitability analysis for this
project.

Based on the discounted profitability analysis, the payback period or break even
time for this project is 4.33 years after the project started or nearly 2 years after the plant
operated. In addition, the present value ratio for this project is calculated to be 1.74.
Present value ratio greater than 1 indicates that this project is profitable. It is also
analyzed that the project is worth $19.90 million at the end of the year. Thus, it can be
concluded that this project is potentially profitable.

31
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Global Chemical Price,. (2015). Maleic Anhydride Report. Ahmedabad: Jay Infochem
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