AMERICAN JOURNAL OF SCIENTIFIC AND INDUSTRIAL RESEARCH © 2010, Science Huβ, http://www.scihub.org/AJSIR ISSN: 2153-649X doi:10.5251/ajsir.2010.1.2.332.341 Activated carbon production from wastes: profitability index and product cost reduction method Odesola I. F and Daramola, N. O Department of mechanical engineering, University of Ibadan, Ibadan, Nigeria ABSTRACT A previous paper on developing a national capability for the manufacture of activated carbon from agricultural waste by the same authors was considered. In the said paper, the process flow diagram for the manufacture of Granular Activated Carbon from three agricultural wastes namely coconut shell, oil-palm shells and sugarcane bagasse was provided and the plant’s economic analysis done. The objectives of this study were to investigate selling price reducing options and profitability of the investment discussed. In the study, the profitability indexes for the overall plant projects for the three plants were found. The effect of equipment cost reduction on the total productive cost was also examined. For the steam activation of coconut shell, successive reduction by 10% in the overall equipment cost was found reduce the corresponding Product cost geometrically by values ranging from 2.44-1.22% for ten successive reductions. The profitability index was between 0.057 and 4.07% respectively for the 1st to the 11th year. The steam activation of sugarcane bagasse was different, successive reduction by 10% in the overall equipment cost reduce the corresponding Product cost also geometrically by values ranging from 2.85-3.69% (increasing with each reduction) also for 10 successive reductions. The profitability index was between 0.09 and 3.7% respectively for the 1st to the 11th year. And for the phosphoric activation of oil-palm shell, successive reduction by 10% in the overall equipment cost was found reduce the corresponding Product cost geometrically by values ranging from 4.58-2.88% (decreasing with each reduction as in steam activation of coconut shells). The profitability index was between -1.08 and 2.12% respectively for the 1st to the 11th year. In addition, an excel software to simulate the economic analysis previously done and output the key costs after the simulation. Keyword:-Granular Activated carbon, coconut shell, oil-palm shell, sugarcane bagasse, profitability Index, Total product Cost, Total Equipment cost. INTRODUCTION important profitability factor in determining its suitability for investment. Profitability is simply the measure of the amount of profit that can be obtained form a given situation Four methods are generally acceptable for (Holland et al, 1973). The profit goal of a company is profitability evaluation namely: to maximise income above the cost of the capital 1. Rate of return on investment which must be invested to generate the income 2. Discounted cash flow based on full-life (Baasel, 1976). if the goal were to maximize profit, performance then any investment would be accepted which would 3. Net present worth give profit no matter how low the return or how great 4. Capitalised costs the cost. (Peters et al, 1958). 5. Payout period. For a plant like the activated plant developed before, The method used for his study is the rate of return on it is necessary to know how much profit can be investment based on discounted cash flow but with obtained versus the cost involved. This will help the use of continuous interest compounding. The investors in making decision as to where and how choice of this method is based on its taking into best to invest. In a plant like the activated carbon account the time value of money and is based on the plant where the cost are relatively high, the rate of amount on investment that in unreturned at the end return, rather than the total amount of profit is a more of each year during the estimated life of the project (Park, et al, 1973). The rate of return by this method UNIVERSITY OF IBADAN LIBRARY Am. J. Sci. Ind. Res., 2010, 1(2): 332-341 is equivalent to the maximum interest rate at which working capital investment and salvage value based money can be borrowed to finance the project under on interest compounded continuously for n years – condition where the net cash flow to the project over present value of working capital investment. its useful life would be sufficient to pay all principal This can be written as: and interest accumulated on the outstanding Cash position at time n = (annual constant cash flow principal. (Peters et al, 1958). This maximum interest to project)(ern-1)/1 - fixed capital investment(ern) – rate is known as the discounted cash flow rate of working capital investment(ern) + (terminal fixed return or profitability index. capital investment, working capital investment and Chilton Ng, Wayne Marshall, Ramu M. Rao, Rishipal salvage value)(1/ ern) ..................equation 1 R. Bansode, Jack N. Losso and Ralph J. Portier’s The values of the parameters needed to solve have “Granular Activated Carbons from Agricultural By- already been calculated in the economic analysis of products: Process Description and Estimated Cost of the plants in the previous work. This are excerpted Production” described a process for producing given in the table below: activated carbon from three agricultural process 1. Steam activation of coconut shell: namely; steam activation of sugarcane bagasse, Fixed capital investment N727,080,590.40 steam activation of pecan shells and phosphoric acid Working capital investment activation of pecan shells. N109,062,088.60 Odesola I.F and Daramola O.N developed a national Annual depreciation N72,708,059.04 capability for the manufacture of activation carbon Annual qty. Produced N1,500,000 from three agricultural wastes namely, coconut Profit/unit N40.255 shells, oil-palm shells and sugarcane bagasse. They Total annual profit N60,383,050.24 described the steam activation of coconut shell, steam activation of sugarcane of sugarcane bagasse, and phosphoric activation of oil-palm shells in which 2. Steam activation of sugarcane bagasse they also did the economic analysis of the process. Fixed capital investment N809,906,578.00 Working capital investment N121,485,986.70 METHODS Annual depreciation N80,990,657.80 Assumptions: The assumptions made for the Annual qty. Produced N582,000.00 analysis are as follows: Profit/unit N108.454 I. The project life is taken as the equipment life Total annual profit N62,559,398.56 and is 11 years as given by Peter and 3. Phosphoric acid activation of oil-palm shells Timmerrhaus in their book, Plant Design and Economics for Chemical Engineers for Fixed capital investment N809,906,578.00 chemical processing equipment. Working capital investment N121,485,986.70 II. The annual depreciation used is the one Annual depreciation N80,990,657.80 evaluated in the considered project. Annual qty. Produced N582,000.00 III. The salvage value of the combined plant Profit/unit N108.454 equipment is taken as the 10% of the Total annual profit N62,559,398.56 purchased equipment cost delivered. The table 1, table 3 and table 5 in appendix 1, 2 and 3 respectively contains this computations of this a. Profitability Index parameters with equation 1. Peter and Timmerrhaus in their book used the rate of The profitability index is the r (nominal continuous return on investment based on discounted cash flow interest rate) at which the right-hand-side of equation with the use of continuous interest compounding 1 is zero. To determine this value of r at the end of method to compute the profitability index of a project each year, Microsoft Office Excel 2007 Goal Seek (table 3, page 320). The method was reapplied for function was used. These values are given in table 2, the plant but modified to suit the current situation. In table 4 and table 6 of appendix 1, 2 and 3 the method, the cash position given was modified for respectively. the case of the project as: Graphs of cash position Vs time in years, and that of Cash position at time n = present value of cash flow the profitability index Vs time in years for the three to project – present value of fixed capital investment processes are given in figure 1 and 2, 3 and 4, and 5 + present value of terminal fixed capital investment, and 6 of appendix 1, 2 and 3 respectively. 333 UNIVERSITY OF IBADAN LIBRARY Am. J. Sci. Ind. Res., 2010, 1(2): 332-341 equipment costs were also plotted. Shown in figure 8, Simulation for the cost analysis of the activation 10, and 12 of Appendix 4-6. of each of the materials: The prices of equipments used in the project are based on information from CONCLUSION: In this work, the profitability index of fabricators previous works. The fact that prospective the proposed three projects was found. The rate of investors could explore less expensive equipments of return by this method is equivalent to the maximum similar quality is not overlooked. For example some interest rate at which money can be borrowed to fabricators in Nigeria have proven their excellence in finance the project under condition where the net the fabrication of some of this equipment. Raw cash flow to the project over its useful life would be materials could also be sourced at a cheaper rate sufficient to pay all principal and interest accumulated based on some factors that affects their prices. As a on the outstanding principal. And so the result of the result of this, a simulation of the cost is provided study shows that the maximum interest rate at which (Excel file simulation.xlsm). The simulation was the money can be borrowed to finance the project for written with excel VBA and just prompt a user for profitability for the steam activation of coconut shell is prices of the variables used in the economic analysis 4.7% to be paid at the 11th year, 3.7% for the steam calculation. When prices are entered and the activation of sugarcane bagasse and 2.12% for the simulate button in the form that appears is clicked, phosphoric acid activation of oil-palm shells all to be excel does the calculation and when the escape paid at the end of the useful life of the equipments. button is clicked excel provides for the user in a 11th year as given by Peters, M., and Timmerhaus, K. message box the total capital investment, the For the equipment for chemical and allied processes. manufacturing cost, the total product cost and the selling price/Kg. Appendix i-H For the three processes, reduction in the equipment costs reduces the total product cost with the Equipment cost variation with total productive percentage reduction increasing reducing at cost: The total equipment cost delivered was varied successive reductions for the steam activation of with the total productive cost to investigate the effect coconut shells and the phosphoric activation of oil- of the former on the latter. This was carried out by palm shell but reducing with increasing reductions for reducing the total equipment cost delivered by 10% the steam activation of sugarcane bagasse. successively and simulating to calculate the total product cost. (table 7, 8 and 9, appendix 4-6). The The developed simulation program that allows the resulting product costs were plotted versus the prospective investors enter costs into the calculation equipment costs(figure 7, 9 and 11, appendix 4-6). A excel sheet for calculation is a good tool, in that it bar chart of the percentage reduction in the total makes it possible and easier to even start cost product costs with each 10% percent reduction in savings strategies even before the project begins. APPENDIX 1: STEAM ACTIVATION OF COCONUT SHELL n - 1 0.961 816,597,311 1.0200 61,588,374 72,708,059 -11,119,684 1.040 113,444,909 756,299,396 64,266,679. 2 0.924 785,048,961 2.081 125,651,767 72,708,059 52,943,708 1.082 118,003,860 786,692,403 -66,703,593 3 0.889 754,719,446 3.185 192,289,643 72,708,059 119,581,584 1.126 122,746,019 818,306,797 -66,751,786 4 0.854 725,561,680 4.332 261,605,460 72,708,059 188,897,401 1.171 127,678,749 851,191,663 -64,411,330 5 0.821 697,530,392 5.527 333,706,836 72,708,059 260,998,777 1.218 132,809,708 885,398,056 -59,678,594 6 0.790 670,582,063 6.769 408,705,711 72,708,059 335,997,652 1.267 138,146,862 920,979,082 -52,546,229 7 0.759 644,674,853 8.061 486,718,527 72,708,059 414,010,468 1.318 143,698,497 957,989,985 -43,003,161 8 0.730 619,768,540 9.404 567,866,404 72,708,059 495,158,344 1.371 149,473,234 996,488,226 -31,034,575 9 0.702 595,824,455 10.802 652,275,327 72,708,059 579,567,268 1.426 155,480,036 1,036,533,575 -16,621,888 10 0.674 572,805,424 12.256 740,076,347 72,708,059 667,368,288 1.483 161,728,231 1,078,188,206 257,275 11 0.648 550,675,709 13.769 831,405,781. 72,708,059 758,697,722. 1.543 168,227,518 1,121,516,789 19,629,123 Table 1: Cash Position calculation table 334 U 1/enr N g capita investment and salvage value IVbased on interest compounded cEontinuously for each year (enr R -1/r) S Present value of cash flow to I project(NOT T INCLUDING DEPRECIATION) Y OF DEPRECIATION I Present value of B cash flow to project(INCLUDIN A G DEPRECIATION) DA enr N L present value working-capital I investment BRA present value of fixed capital R investment Y cash position at time t Am. J. Sci. Ind. Res., 2010, 1(2): 332-341 YEAR OF PAYMENT PROFIITABILITY INDEX 1 0.00057 2 0.0189 3 0.0255 4 0.0291 5 0.0316 6 0.0336 7 0.0353 8 0.0368 9 0.0381 10 0.0394 1 0.0407 Table 2: PROFITABILITY INDEX/YEAR Appendix 1: continued Fig 2: Graph of profitability Index Vs Time Fig 1: Graph of cash position Vs Time, for r=0.0394 Appendix 1: continued 335 UNIVERSITY OF IBADAN LIBRARY Am. J. Sci. Ind. Res., 2010, 1(2): 332-341 APPENDIX 2: STEAM ACTIVATION OF SUGARCANE BAGASSE 1 0.965 917,789,574 1.018 63,700,840 80,990,657 -17,289,817 1.037 125,945,987 839,639,915 -65,086,145 2 0.930 885,288,800 2.074 129,740,269 80,990,657 48,749,612 1.0747 130,569,723 870,464,825 -66,996,136 3 0.898 853,938,944 3.168 198,204,142 80,990,657 117,213,484 1.114 135,363,207 902,421,381 -66,632,159 4 0.866 823,699,249 4.303 269,181,465 80,990,657 188,190,807 1.155 140,332,669 935,551,127 -63,993,740 5 0.835 794,530,402 5.479 342,764,511 80,990,657 261,773,853 1.198 145,484,570 969,897,135 -59,077,450 6 0.806 766,394,483 6.699 419,048,942 80,990,657 338,058,284 1.241 150,825,608 1,005,504,056 -51,876,896 7 0.777 739,254,913 7.963 498,133,932 80,990,657 417,143,274 1.287 156,362,727 1,042,418,179 -42,382,718 8 0.750 713,076,410 9.273 580,122,294 80,990,657 499,131,637 1.334 162,103,124 1,080,687,497 -30,582,574 9 0.723 687,824,940 10.632 665,120,619 80,990,657 584,129,961 1.383 168,054,264 1,120,361,760 -16,461,121 10 0.697 663,467,676 12.040 753,239,406 80,990,657 672,248,748 1.434 174,223,881 1,161,492,546 -3 11 0.673 639,972,952 13.501 844,593,216 80,990,657 763,602,558 1.487 180,619,999 1,204,133,329 18,822,182 Table 3: Cash position calculation table for the steam activation of sugarcane bagasse N, YEAR PROFITABILITY INDEX 1 0.089 2 1.8 3 2.34 4 2.7 5 2.9 6 3.1 7 3.2 8 3.4 9 3.5 10 3.6 11 3.7 Table 4: Profitability Index per year for the steam Figure 3: Graph of cash position Vs Time activation of sugarcane bagasse Appendix 2: continued Appendix 2:: continued 336 n U 1/enr NI present value of fixed capital V investment,working capita investment and salvage value based on interest E compounded continuously for each year RS (enr-1/r) ITY Present value of cash flow to project(NOT INCLUDING DEPRECIATION) OF DEPRECIATION IBA Present value of cash flow to D project(INCLUDING DEPRECIATION) A enr N LIB present value working-capital investment RApreseRnt value of fixed capital investment Y cash position at time t Am. J. Sci. Ind. Res., 2010, 1(2): 332-341 Fig 4: Profitability Index Vs Time APPENDIX 3: PHOSPHORIC ACTIVATION OF OIL-PALM SHELLS 1 0.980 1,124,402,974 1.010 49,586,830 97,705,605 -48,118,774 1.020854 149,614,807.06 997,432,047.04 -70,762,654.64 2 0.980 1,101,433,160 2.0419 100,207,564 97,705,605 2,501,959 1.042144 152,734,945.74 1,018,232,971.58 -67,032,797.54 3 0.940 1,078,932,585 3.095 151,884,379 97,705,605 54,178,774 1.063877 155,920,153.28 1,039,467,688.55 -62,276,482.36 4 0.921 1,056,891,661 4.170 204,638,262 97,705,605 106,932,657 1.086064 159,171,786.67 1,061,145,244.46 -56,492,712.41 5 0.902 1,035,300,999 5.267 258,493,143 97,705,605 160,787,537 1.108713 162,491,231.17 1,083,274,874.47 -49,677,568.38 6 0.884 1,014,151,401 6.387 313,470,074 97,705,605 215,764,469 1.131835 165,879,900.95 1,105,866,006.36 -41,830,036.69 7 0.866 993,433,857 7.531 369,594,811 97,705,605 271,889,206 1.155439 169,339,239.68 1,128,928,264.51 -32,944,440.63 8 0.848 973,139,540 8.699 426,888,479 97,705,605 329,182,873 1.179535 172,870,721.10 1,152,471,474.02 -23,019,781.05 9 0.831 953,259,804 9.89 485,378,734 97,705,605 387,673,128 1.204133 176,475,849.73 1,176,505,664.87 -12,048,581.17 10 0.814 933,786,181 11.11 545,086,773 97,705,605 447,381,168 1.229245 180,156,161.43 1,201,041,076.21 -29,887.56 11 0.797 914,710,374 12.35 606,042,238 97,705,605 508,336,633 1.25488 183,913,224.11 1,226,088,160.75 13,045,622.41 337 n U 1/enr NIV present value of fixed capital investment,working capita investment and salvage value based on interest E compounded continuously for each year RS (enr-1/r) ITYPresent value of cash flow to project(NOT INCLUDING DEPRECIATION) O DEPRECIATION F I Present value of cash floBw to project(INCLUDING DEPRECIATION) AD enr AN L present value working-capital investment IBRA present value of fixed capital investment RY cash position at time t Am. 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Res., 2010, 1(2): 332-341 Table 5: cash position calculation table for the phosphoric activation of oil-palm shell YEAR OF PAYMENT REQUIRED INTEREST 1 -1.08546 2 0.555 3 1.12 4 1.41 5 1.61 6 1.74 7 1.84 8 1.93 9 1.999 Figure 5: Graph of Cash position Vs Time 10 2.064 11 2.122 Table 6: profitability Index per year table Fig 6: Graph of Profitability Index Vs Time APPENDIX 4: STEAM ACTIVATION OF COCONUT SHELLS Reduction in Total product Equipment cost Total product cost cost Percentage reduction in total product cost for 10% successive reduction In equipment costs 1.33E+08 603,830,502.00 1.19E+08 589,121,837.75 14,708,664.25 2.44 1.07E+08 575,884,039.57 13,237,798.18 2.25 9.67E+07 563,970,021.21 11,914,018.36 2.07 8.71E+07 553,247,404.69 10,722,616.52 1.90 7.84E+07 543,597,049.82 9,650,354.87 1.74 7.05E+07 534,911,703.44 8,685,346.38 1.60 6.35E+07 527,094,943.00 7,816,760.44 1.46 5.71E+07 520,059,834.30 7,035,108.70 1.33 5.14E+07 513,728,236.47 6,331,597.83 1.22 338 UNIVERSITY OF IBADAN LIBRARY Am. J. Sci. Ind. Res., 2010, 1(2): 332-341 Table 7: Table showing % reduction in the total productive cost for each successive 10% reduction in equipment cost % reductio n in the total producti ve cost for each i Fig 8: Bar chart showing % reduction in total product cost for 10% cost in equipment costs Equipment costs, Fig 7: the graph of Total productive costs Vs equipment cost Appendix 4 cotinued APPENDIX 5: STEAM ACTIVATION OF SUGARCANE BAGASSE Percentage reduction in total product cost for 10% successive reduction In Equipment cost Total product cost Reduction in Total product cost equipment costs 2.01E+08 631203554.5 0 1.81E+08 613224862 17978692.45 2.85 1.61E+08 595246169.6 17978692.44 2.93 1.41E+08 577267477.1 17978692.45 3.02 1.21E+08 559288784.7 17978692.44 3.11 1.00E+08 541310092.2 17978692.45 3.21 8.04E+07 523331399.8 17978692.45 3.32 6.03E+07 505352707.3 17978692.44 3.44 4.02E+07 487374014.9 17978692.45 3.56 2.01E+07 469395322.5 17978692.44 3.69 Table 8: Table showing % reduction in the total productive cost for each successive 10% reduction in equipment cost 339 UNIVERSITY OF IBADAN LIBRARY Am. 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Res., 2010, 1(2): 332-341 % reduction APPENDIX 5; CONTINUED in the total productiv e cost for each successiv e 10% reduction in equipme nt cost Equipment costs, Fig 9: the graph of Total productive costs Vs equipment cost Fig 10: Bar chart showing % reduction in total product cost for 10% cost in equipment costs APPENDIX 6: PHOSPHORIC ACID ACTIVATION OF SUGARCANE BAGASSE Percentage reduction for 10% reduction In Equipment cost Total product cost Reduction in product cost equipment costs 242,373,500.00 473,969,728.00 218,136,150.00 452,280,572.44 21,689,155.56 4.58 196,322,535.00 432,760,331.85 19,520,240.59 4.32 176,690,181.50 415,192,025.84 17,568,306.01 4.06 159,021,163.40 399,380,639.96 15,811,385.88 3.81 143,119,047.10 385,150,392.65 14,230,247.31 3.56 128,807,142.40 372,343,170.05 12,807,222.60 3.33 115,926,428.20 360,816,669.74 11,526,500.31 3.10 104,333,785.40 350,442,819.44 10,373,850.30 2.88 93,900,406.86 341,106,354.19 9,336,465.25 2.66 340 UNIVERSITY OF IBADAN LIBRARY Am. J. Sci. Ind. Res., 2010, 1(2): 332-341 Table 9: Table showing % reduction in the total productive cost for each successive 10% reduction in equipment cost Fig 12: Bar chart showing % reduction in total product cost for 10% cost in equipment costs REFERENCES Baasel, W. D., “Preliminary Chemical Engineering Plant Design.” Americal Elsevier, New York, 1976. agricultural by-products. Bioresource Technol. 69, 45- 51. Fig 11: the graph of Total productive costs Vs equipment cost Holland, F. A., F. A watson, and J. K. Wikilson, Engineering Economics for Chemical Engineers,, Chem Engr. APPENDIX 6: CONTINUED (1973). Odesola, I.F. and Daramola N.( 2009). Developing a local capability for the manufacture of activated carbon from agricultural waste. Pacific Journal of Science and Technology, U.S.A, Vol. 10, No.2. Park, W. R., “ Cost Engineering Analysis: a Guide to the Economic evaluation of engineering projects,” j. Willey and sons, New York, 1973. Peters, M., and Timmerhaus, K., 1958. Plant Design and Economics for Chemical Engineers. McGraw-Hill, Inc., New York. 341 UNIVERSITY OF IBADAN LIBRARY