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

Journal of Sustainable Development of Energy, Water and Environment Systems
Volume 5, Issue 2, pp 163-176
Zorka Novak Pintarič , Zdravko Kravanja
Faculty of Chemistry and Chemical Engineering, University of Maribor, Smetanova 17, Maribor

This paper demonstrates the correct application of discounted cash flow methodology for
evaluating and designing energy and chemical production plants. Such processes usually
correspond to capital intensive long-term projects. Simple economic criteria, like the
profit or production cost are insufficient for this type of decision making because they do
not take into account the time value of money and underestimate the profitabilities of the
evaluated plants. This paper shows that some of those criteria based on the discounted
cash flows establish suitable compromises between long-term cash flow generation and
profitability. As several alternative options are usually evaluated in parallel, it is shown
how to rank mutually exclusive alternatives properly and how to select the best option
from among them. Two large-scale case studies demonstrate that using discounted cash
flow methodology can result in substantially different decisions than non-discounted
criteria, however, these decisions are affected by several input parameters.

Keywords: Discounted cash flow analysis, Time value of money, Net present value, Profitability, Process.

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