Economic decision-making for process investments is typically based on profitability criteria such as the Net Present Value (NPV), or the Return on Investment (ROI) of the project (Towler and Sinnott 2013). All else being equal in terms of other aspects such as environmental or safety performance, the process with the best profitability performance is selected. However, process profitability is greatly impacted by price instabilities in raw materials, energy, and products and the ranking of candidate processes in terms of profitability changes over time. Even if sensitivity analysis of raw material and product prices is performed to determine profitability ranges for a given process, a classical project-by-project profitability analysis based on criteria such as NPV or ROI of the individual processes cannot shed light on profit stability across multiple process investments. As this volatility causes an ongoing risk to process investment performance, several methods have been suggested to quantify this risk. Applying the Modern Portfolio Theory (MPT) permits profitability determination by developing the risk-return profile for a portfolio (Elton et al. 2014). Additionally, MPT can specify the proper investment weightage across a set of plants/processes to hold a financially attractive portfolio. MPT has been applied in several fields including the energy market (Zhang, Zhao, and Xie 2018), oil and gas projects (Costa Lima et al. 2008), wastewater management (Hua et al. 2015), and the food security (Raboy, Linke, and Najdawi 2010). It is also coupled with the Capital Asset Pricing Model (CAPM) to determine the risk-return behavior of financial stocks. To our knowledge, such an approach to select process investment portfolios is yet to be proposed. In this paper, we present such a novel adaptation of the MPT approach to chemical process portfolio selection. The presentation will explain the analysis involved across production processes and present a case study to illustrate the difference portfolio selected based on MPT as compared to those process investments selected based on classical profitability criteria common in chemical engineering project selection (NPV/ROI). The paper will shed light on the development, applicability, and practicality of the presented MPT based method. Based on historical price data for raw materials and products, the case study will demonstrate how portfolios constructed using the MPT approach can outperform those selections based on the classical profitability criteria.
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Zhang, Shuang, Tao Zhao, and Bai Chen Xie. 2018. “What Is the Optimal Power Generation Mix of China? An Empirical Analysis Using Portfolio Theory.†Applied Energy 229(August):522–36.
