As a leader in heterogeneous catalysis, XYZ Corporation offers catalysts and process design solutions to power plant exhaust-gas treatment systems, oil refineries, and clean energy initiatives. Environmental considerations are central to the company's research and manufacturing efforts, and by introducing cutting-edge technologies, XYZ promotes more sustainable use of global resources. XYZ has a significant global presence, with approximately 8,600 employees at its headquarters in Riyadh and subsidiaries in Canada, Malaysia, Brazil, Argentina, Russia, the United States, and China. In 2016, the company made $1350 million in revenue. Sales of catalysts and process technology to oil refineries have increased significantly for XYZ over the last ten years. This growth can be attributed in part to a deliberate strategic emphasis on developing catalysts tailored for producing fuel with ultra-low sulfur content (ULSD), which aligns with a global shift towards stricter environmental regulations governing sulfur content XYZ has made its "TK series" catalysts available globally for oil refinery operations. These catalysts are necessary for the production of many refinery products, including fuel oil, asphalt, kerosene, diesel, and gasoline, as well as for the purification of crude oil. They also enable the production of raw materials used to make a wide range of other products. Crude oil can be used to make more than 3,500 different products. Meeting environmental standards necessitates the purification of products such as gasoline and diesel, which remove contaminants like sulfur compounds and nitrogen. The products are combined with hydrogen during this purification process, and they are then run through vessels that have TK catalysts in them. The compounds in the oil and the hydrogen in these vessels undergo chemical reactions that are fueled by the catalysts, yielding the intended results. After extensive research, XYZ successfully developed a superior catalyst called TKnew, which outperformed its predecessor, TK. Light Cycle Oil (LCO), a semi-processed product that is essential for the production of ULSD, is recovered during the catalyst-assisted refining process. 35.0% to 39.2% of the incoming oil volume into the catalyst was the LCO recovery rate that TKnew increased. 150 SAR per barrel are associated with this increase in LCO production. 180

KING FAHD UNIVERSITY OF PETROLEUM & MINERALS Architectural Engineering and Construction Management Department EM510- 232: Advanced Engineering Economics

tons of catalyst are needed by a refinery that runs around the clock, processing 55,000 barrels of oil every day. Replacement of this catalyst is necessary after 3.5 years. XYZ has to set a selling price before it can sell the TK-new catalyst to refiners. Because of the significant development costs, the common method of using a margin for variable manufacturing costs is inapplicable to XYZ. Relying solely on development costs to determine the selling price is also not rational because sunk costs should not influence future decisions. Instead, XYZ can set an upper limit for the selling price by evaluating the product's utility to the customer, also known as Economic Value for the Customer (EVC).

Solve the following Questions:

Part I: Deterministic Question 1 What is the maximum additional cost that the refinery, having previously used TK, should be prepared to cover for TK-new?

Question 2 TK-new required three years and 3.5 million SAR annually to develop. After the establishment of TK-new's pricing, the following sales projections for the next five years are made: Year 1: 600 tons Year 2: 900 tons Year 3: 3,500 tons Year 4: 4,600 tons Year 5: 5,800 tons Over the next five years, TK-new's marketing expenses are expected to be 200,000 SAR annually. Assume a gross margin of 55,000 SAR per ton at the established selling price for TK-new and an annual interest rate of 23% by XYZ. One challenge in determining profitability when introducing a new technology like TKnew, which replaces an existing technology like TK, is the need to make assumptions about the potential outcomes if there had been no development of the new technology.

Based on the case study and the previously mentioned details, if it is assumed that selling TK was not practical in years 1 through 5, what is the payback period for the development of TK-new? Question 3 When promoting TK-new, XYZ is poised to attract new customers who previously used rival products, potentially leading to increased catalyst sales. As TK-new supplants TK, existing customers are expected to switch from TK to TK-new, as described in Question 1. TK-new's contribution will primarily manifest as an increase in gross profit over TK. What additional gross profit on TK-new is required in order for the project to be paid for in three years, assuming that TK-new does not raise sales but instead replaces a similar TK sale that could be reached during the next five years? Part II: Sensitivity Analysis

Question 4 Sensitivity analysis aims to address the impact of estimation errors for different input parameter values. The XYZ company has made the decision to perform a sensitivity analysis in order to inform upper management about the risk behavior on the economic effectiveness of investments, given the potential for uncertainty regarding certain crucial input cash flow parameters. Perform sensitivity analysis of Annual worth for (Investment amount for TK-new development and discount rate), over a range of 100% of the selected input cash flow parameters and plot the one- at-a-time where x = percent deviation from most likely value and y = Annual worth (SAR).

Question 5 Identify the most sensitive parameters for the following: a. Discount rate b. Sales c. Marketing expenses d. The cost of TK-new development

Perform a multiparameter sensitivity analysis for this problem. Draw a diagram to illustrate your answer where x = change in parameter I, and y = change in parameter II. (Hint: one graph for net future worth).