Economic Assessment of APC and RTO Using Option to Expand

Abstract

This paper aims to develop a new economic assessment (EA) method using the option to expand for Advanced Process Control (APC) and Real Time Optimization (RTO). The new EA criteria for investment decision for APC and RTO employ net present value of APC and call option of RTO. Calculation of call option adapts arithmetic measurement method to compute annualized volatility. The new EA applies scenario analysis to take appropriate action. There are four scenarios and their corresponding actions, namely, (1) safe scenario - invest only APC, (2) value-added scenario and (3) risky scenario - invest in APC and RTO, (4) gamble scenario - reject APC. Furthermore, early exercise criterion for RTO investment uses American option method. Applying new EA method to VCM plant demonstrates the effectiveness of the option to expand. The results show that when NPV of APC is negative and the sum of NPV of APC and Call of RTO is positive, APC project is risky scenario. We recommend to invest in APC and RTO. In comparison to conventional NPV and Payback Period (PB) methods, APC is not feasible since NPV is negative and PB is not available due to negative expected profit. In the case study, volatility calculation addresses only one product line in chemical industry which is VCM. Real production comprises of multiple product lines and their volatility is larger than that of one product. With the new EA method, management has comprehensive and flexible tool to assess APC/RTO benefits. Moreover, the new EA provides the timing to invest RTO. Profit margin, expiration period and yield are key parameters that affect early exercise. The new EA is the first method to apply real options to APC and RTO which evaluates the benefit not only APC but also the integrated APC and RTO. The early exercise criterion can facilitate the decision maker to invest in the most beneficial period.