Introduction

JinYingLi Co. Ltd. has plans to build a nitric acid plant. The company
is a joint venture between Orica Limited and LinYi LuGuang
Chemical Ltd, whereby Orica Limited is the largest provider of
commercial explosives and blasting systems to the infrastructure
and mining markets while LinYi LuGuang is the largest manufacturer
of nitric acid and nitrate salts in China. The plant is required to have
a capacity of 900 tpd of pure nitric acid. The nitric acid will be of
60wt% aqueous solution. The acid will be supplied to Linyi LuGuang
Ltd.s existing ammonium nitrate plant.
The proposal has specified that the plant will be required to be
within the Shandong Province. Based on the feasibility report, the
plant was advised to be built in Linyi City. The proposed location for
the nitric acid plant is Liugong, 100 Road. This is because the area
has been designated as an economic and technological zone.
The main application of nitric acid is its use in the fertilizer industry.
The fertilizer industry approximately consumes 80% of the nitric
acid produced yearly. It is neutralised to form ammonium nitrate.
Other uses include specialty organic compounds, nylon precursors
and explosives.
The report discusses the capital cost, operating cost and working
capital of the nitric acid plant. It also identifies the net present
value, discounted cash flow and payback period to determine the
profitability of the project.

Capital Cost
The capital cost for the nitric acid plant was estimated using the
exponential method. The plant will process 239 tonnes per day of
ammonia into 900tonnes per day of nitric acid, which will then be
diluted to 1500 tonnes per day of 60% acid solution. JinYingLi Co.
Ltd has specified for the plant to be located within the Shandong
Province. The location chosen for the plant is in Liugong, 100 Road
in Linyi City. It is located near an existing LuGuang Group Co., Ltd
nitric acid processing facility. This area has also already been
designated as an economic and technological development zone.
The reference plant selected is a nitric acid plant by Czech Republicbased fertiliser producer, Lovochemie. Lovochemie invested 1.3 bn
Koruna ($ 88.43 million AUD) in 2001 for a nitric acid plant of the
same capacity. The plant also operates using the single pressure
process technology method.

Ip Qp
=
I R QR

Fp
L
FR

( )( )

Exponential method

Reference (2001)

Proposed (2016)

Q, Capacity (tpd)

900

900

I, Investment ($AUD)

88.43x106

121x106

b
F, Inflation index value
Location Factor

0.6
394.3

533.9
1.01

By taking into account various factors such as plant capacities,

inflation, location and index, a projected cost for building the nitric
acid plant in Shandong Province was estimated. The location factor
was taken from Richardsons International Construction FactorsThe
estimate found that the cost would be $121 million AUD for building
the plant. However, by using the exponential method, 30 to 40%
of magnitude has to be taken into consideration.

Operating Cost
The operating costs were separated into three components:
1. Utilities Costs
2. Manufacturing Costs
3. Non-manufacturing Costs
Based on previous reports and calculations, it was found;
Fixed capital: $121 million AUD
Production of Nitric Acid: 900 TPD

Raw
Materials
Catalyst
Ammonia

Consumptio
n, yr

Uni
t

Unit price

$
(Million)/ye
ar

$/t of Nitric
Acid

45.99x103

unit
s

$40/unit

1.84

5.6

9.09x104

ton
s

1088.06/t
on

98.94

301.2

100.78

306.79

Subtotal

Utilities

Water
Total
Cost

Consumptio
n, yr

Uni
t

Unit price

$
(Million)/ye
ar

$/t of Nitric
Acid

1.904x106

m3

$0.62/m3

1.203

3.66

101.96

310.45

In this production, the water is used for diluting the acid and is used
as steam. For dilution 7.45x105 m3 will be used while 11.59x105 m3
will be turned into steam. The price of water in China is relatively
cheap. A survey by Global Water Intelligence (2011) reported that
the average water price in 25 major Chinese cities was 46 per cubic

meter while the global average is $2.03 per cubic meter. As a result,
the annual cost from the utilities is projected to be $101,960,000
AUD.
Electricity is produced from this process through energy recovery
through steam and tail gas turbines. Therefore, the plant operates
on its own surplus of energy. Hence, it is not considered in the
utilities which reduces the operational costs.

Fixed
Manufacturing
Costs

Assumptions

Process labor (4
workers/shift, 5
shifts)

24hour operation require 5

shifts, plant size requires 4
workers per shift.
20 total process labor
workers
Labor wage $12,200 / year

0.244

0.74

Supervision
labour

20% of process labour

0.049

0.15

Payroll
overheads

35% of process labour

0.085

0.26

Annual
Maintenance

0.5% of fixed capital

($121million)

0.605

1.84

Consumable
Stores

10% of annual maintenance

($0.605million)

0.0605

0.18

Annual
depreciation

Straight line method taking

plant life of 20 years

6.05

18.42

Plant overheads

75% of process labour

(244,000)

0.183

0.56

Annual
Insurance

0.5% of fixed capital

($121million)

0.605

1.84

Annual
property tax

0.5% of fixed capital

($121million)

0.605

1.84

8.487

25.83

Subtotal

$
$/t of
(Million)/year Nitric
Acid

Operating Costs Manufacturing Costs

The method used for calculation is the fixed cost approximation.

Many assumptions were made in determining costs such as
supervision labour, payroll overheads and annual maintenance.
Sinnott & Towler (2013) have provided the percentages typically
associated with the calculations. The operating costs were found to
be $8.487 million AUD or $25.83 per tonne of nitric acid.

Nonmanufacturi
ng costs

Assumptions

$
(Million)/yea
r

Royalties and
license fees

1% of fixed capital
($121million)

1.21

3.68

Corporate
Administration

2% of fixed capital

2.42

7.37

3.63

11.05

Subtotal

$/t of
Nitric
Acid

Operating Costs Non-Manufacturing Costs

Operating Costs

$(Million)/year

Utilities
101.96
Manufacturing Costs
8.487
Nonmanufacturing
3.64
costs
Total
114.087
Summary of Operating Costs

$/t of Nitric
Acid
310.45
25.83
11.05
347.33

Working Capital
Iw=SR+SFP+SMIP+ARAP+Cash
IW = working capital
SR = raw material stocks
SFP = finished product stocks
SMIP = materials in progress inventories
AR = accounts receivable from product sales
AP = accounts payable due to purchase of raw materials, utilities
etc.

Working Capital

Assumption

MM$

Raw Material
Stocks, SR

Products are delivered daily - 1.5 weeks of raw

material stockpile valued at purchase cost

2.907

Finished Product
Stocks, SFP

1.5 weeks of products at selling price

4.274

Materials in
Progress, SMIP

2 weeks of annual production

7.579

Debtors

6 weeks of product at selling price

14.76

Receivables

29.52

Salaries

2 weeks

Creditors

6 weeks of raw materials at purchase cost

0.0009
11.63

Payables

11.63
09

Working Capital

17.89

The information regarding the purchase cost of raw materials such

as ammonia were obtained from Focus Technology Co., Ltd.(2016).
The products are assumed to be delivered daily, hence 1.5 weeks or
raw material stockpile was used in calculation.
Both creditors and debtors were assumed at 6 weeks and data on
the price of nitric acid were also acquired from Focus Technology
Co., Ltd.(2016).

Yea
r

Atc

As

Afe

Ave

Ate

Aci

Ad

Ait

Anci

$72.56

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$48.37

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$124.8
1

$6.07

$81.56

$87.63

$37.18

$6.05

$7.78

$29.40

$0.00

$140.4
$6.07
1

$91.75 $97.82 $42.59 $6.05

$9.14

$33.46

$0.00

$156.0
1

$10.49

$37.51

$0.00

$156.0
$6.07
1

$101.9
5

$0.00

$156.0
1

$0.00

$156.0
$6.07
1

$0.00

$156.0
1

10

$0.00

$156.0
$6.07
1

11

$0.00

$156.0
1

12

$0.00

$156.0
$6.07
1

13

$0.00

$156.0
1

14

$0.00

$156.0
$6.07
1

15

$0.00

$156.0
1

16

$0.00

$6.07

$6.07

$6.07

$6.07

$6.07

$6.07

$156.0
$6.07
1

$108.0
1

$48.00

$6.05

$101.9 $108.0
$48.00 $6.05
5
1

$10.49 $37.51

$101.9
5

$10.49

$108.0
1

$48.00

$6.05

$37.51

$101.9 $108.0
$48.00 $6.05
5
1

$10.49 $37.51

$101.9
5

$10.49

$108.0
1

$48.00

$6.05

$37.51

$101.9 $108.0
$48.00 $6.05
5
1

$10.49 $37.51

$101.9
5

$10.49

$108.0
1

$48.00

$6.05

$37.51

$101.9 $108.0
$48.00 $6.05
5
1

$10.49 $37.51

$101.9
5

$10.49

$108.0
1

$48.00

$6.05

$37.51

$101.9 $108.0
$48.00 $6.05
5
1

$10.49 $37.51

$101.9
5

$10.49

$108.0
1

$48.00

$6.05

$101.9 $108.0
$48.00 $6.05
5
1

$37.51

$10.49 $37.51

17

$0.00

$156.0
1

18

$0.00

$156.0
$6.07
1

19

$0.00

$156.0
1

20

$0.00

$156.0
$6.07
1

21

$0.00

$156.0
1

$6.07

$6.07

$6.07

$156.0
1.79E+
$6.07
1
01
Table XX: Cash Flow of Project
22

$101.9
5

$108.0
1

$48.00

$6.05

$101.9 $108.0
$48.00 $6.05
5
1
$101.9
5

$108.0
1

$48.00

$6.05

$101.9 $108.0
$48.00 $6.05
5
1
$101.9
5

$108.0
1

$48.00

$6.05

$101.9 $108.0
$48.00 $6.05
5
1

Atc= Annual Fixed Capital

As= Annual sales income
Afe = Annual fixed expense
Ave = Annual variable expense
Ate = Annual total expense
Aci= Annual cash income
Ad= Annual depreciation
Ait= Annual income tax paid
Anci = Annual net cash income
Acf= Annual cash flow
Cum.Acf = Cumulative annual cash flow
Fixed capital = $121 million AUD
Working Capital = $17.89 million AUD
Operating Life = 20 years
Construction = 2 years
Production capacity = 328500 tonnes per year
Operating costs = $114.087 per year
Selling Price Product = $474.93 AUD
Tax rate = 0.25
1st Year Production = 80%
2nd Year Production = 90%
3rd and Subsequent Years = 100%

$10.49

$37.51

$10.49 $37.51
$10.49

$37.51

$10.49 $37.51
$10.49

$37.51

$10.49 $37.51

Payback Period
700
600
500
400
Cummulative Cash Flow, ($MM AUD)

300
200
100
0
-100
-200
Project Life, (Years)

Figure X: Cash Flow Diagram

ROI= 22.86% excluding depreciation

Payback Period = 5.5years
The figure shows that at approximatel 5 and a half years, all
investments made into this project have been recovered (excluding
working capital). After this time duration, the project will begin
acquiring profit. If the project is carried out upto its expected
lifespan of 20 years, a total profit of $ 635 million may be obtained.
The return of investment for this project is expected to be 22.86%.
This is significantly higher than other safer investments such as
stock markets and banks where the ROI averages around 15%.

Cumulative Cash Flow Diagram

100
50

Cumulative Discount Cash Flow,

($ milions)

0
-50
-100
-150
Year

Discount 10%

Discount 15%

Figure: Cumulative Cash Flow Diagram

DCFR
90
80
70
60
NPV, ($ millions)

50

Series 1

40

Linear (Series 1)

30
20
10
0

10

15

20

Loan Rate, (%)

Figure: Discounted Cash Flow Return

IRR = 18.014%
In determining the payback period and ROI, the discount rates were not
taken into account. The cumulative cash flow diagram in figure XX shows
the cash flow with a discount rate of 10% and 15%. At both discount rates,
the NPV shows a net positive value with a substantial profit margin. This
project gives and expected IRR value of 18.014%. This indicates that at a
discount rate of 18.014% the project will break even. This also means that
this is the maximum loan interest rate that would make keep the project
profitable. This IRR value is considered high which deems this project
feasible.

Conclusion
The capital cost for this project was determined by using the exponential
method. The reference plant was built in Czech Republic in 2001. The
reference plant has the same capacity as this project. The capital was
calculated to be $121 million AUD. As this method uses many
assumptions, 30 to 40% of error should be taken into consideration.
The operating costs were estimated to be $114.87 million AUD per year or
$310.45 AUD per tonne of nitric acid produced. This project uses high
amounts of water. As the price of water is in China is cheap compared to
other countries, the cost of utilities are reduced. The working capital was
found to be $17.89 million AUD and is assumed to be fully recoverable at
the end of plant life.
At approximately 5 and a half years, the invesments made in the project
will be recoverable. After 20 years of operation, the profit is expected to
be $635 million AUD. This does not take into account discount rates. The
return of investments is also expected to be high at 22.86% without
depreciation. Moreover, the IRR value was found to be 18.014%. This
project will yield a profit at any interest rate lower than this value.
Therefore, this project can be deemed a good investment, as the IRR value
is high.
To increase the accuracy of this project, the assumptions used in
calculation should be minimised and the information should be made clear
with relevant stakeholders.

References

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