A plant is producing 10,000 t/y of a product. The overall yield is 70 per cent, on a mass basis (kg of product per kg raw material). The raw material costs £10/t, and the product sells for £35/t. A process modification has been devised that will increase the yield to 75 per cent. The additional investment required is £35,000, and the additional operating costs are negligible. Is the modification worth making?
Question 6.5: A plant is producing 10,000 t/y of a product. The overall yi...
There are two ways of looking at the earnings to be gained from the modification:
1. If the additional production given by the yield increase can be sold at the current price, the earnings on each additional ton of production will equal the sales price less the raw material cost.
2. If the additional production cannot be readily sold, the modification results in a reduction in raw material requirements, rather than increased sales, and the earnings (savings) are from the reduction in annual raw material costs.
The second way gives the lowest figures and is the safest basis for making the evaluation. At 10,000 t/y production
\text { Raw material requirements at } 70 \text { per cent yield }=\frac{10,000}{0.7}=14,286
\text { at } 75 \text { per cent yield }=\frac{10,000}{075}=13,333
savings 953 t/y
\text { Cost savings, at } £ 10 / t,=953 \times 10=£ 9530 \text { per year }
\text { ROR }=\frac{9530}{35,000} \times 100=\underline{\underline{27} \text { per cent }}
Pay-back time (as the annual savings are constant, the pay-back time will be the reciprocal of the ROR)
=\frac{100}{27}=\underline{\underline{3.7} \text { years }}
On these figures the modification would be considered worthwhile.
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