The Importance of using Discounted Cash Flow Methodology in Techno-economic Analyses of Energy and Chemical Production Plants

Abstract

This paper demonstrates the correct application of discounted cash flow methodology forevaluating and designing energy and chemical production plants. Such processes usuallycorrespond to capital intensive long-term projects. Simple economic criteria, like theprofit or production cost are insufficient for this type of decision making because they donot take into account the time value of money and underestimate the profitabilities of theevaluated plants. This paper shows that some of those criteria based on the discountedcash flows establish suitable compromises between long-term cash flow generation andprofitability. As several alternative options are usually evaluated in parallel, it is shownhow to rank mutually exclusive alternatives properly and how to select the best optionfrom among them. Two large-scale case studies demonstrate that using discounted cashflow methodology can result in substantially different decisions than non-discountedcriteria, however, these decisions are affected by several input parameters.

Keywords

• Discounted cash flow analysis
• Time value of money
• Net present value
• Profitability
• Process.