BIOREFINERIES: INTEGRATION OF DIFFERENT TECHNOLOGIES - Biomass as a Sustainable Energy Source for the Future - page 485

As depreciation has an immediate impact on the profit (question: why?), govern-
ments have framed fiscal regulations that do not allow, e.g., immediate, complete
depreciation at the start. A default way of depreciating for an economic lifetime of
n years, though more forms exist (see, e.g., (Peters and Timmerhaus, 1991)), is linear
depreciation:

ð I 0 − I d Þ

D j = ð Eq : 15 : 8 Þ

n

One of the indicators of profitability is the payout time ( POT ), alternatively called
payback period ( PBP ), and it is defined as

I 0
CF j

POT = ð Eq 15 9 Þ

: :

Here, it is assumed that the yearly CF is constant; if this is not the case, then an
average value over the years can be assumed. The indicator is a comparatively simple
one and more often applied for small-scale investments.
An alternative, graphical way is to sum all the yearly CFs until reaching 0 (this is
called the CF curve method).
Another indicator for the profitability of a project is the return on investment ( ROI ),
which is

ROI = P j
I

× 100 ð Eq 15 10 Þ

% : :

with a tax rate, t , taken into account in the
profit. Regarding the investment, also the contribution of the working capital is
considered.

The ROI is usually considered “ after tax ”

Example 15.2 ROI and POT of a bioinvestment

An engineer wants to set up a biorefinery project that requires an investment
of 20 M (on-site, working capital neglected). The economic lifetime of the

installation is 10 years. An after-tax CF with a positive value of 2.5 M

€

year −1

€

is ensured.

a. Calculate the depreciation per year using the linear method.
b. What is the (pretax) ROI (taxation is neglected)?
c. Draw a diagram in which you show the cumulative CF and determine the
POT value.

Solution
a. Depreciation is linear; thus, D j =20M year −1 . /(10 year) = 2 M

€

€

b. ROI = (profit before taxes/investment) × 100% = ((2.5 − 2)/20) × 100% = 2.5%.