The evaluation of the present worth of normally distributed cash flows

Abstract

The production output of a chemical manufacturing facility only rarely remains at rated capacity throughout the plant's lifetime. The production life cycle often may be approximated by a segment of the normal distribution curve. A method is developed for computing the present worth of normally distributed cash flows and the discounted cash flow profitability index for facilities with a production life cycle which is approximated by the normal distribution curve. It is shown that the resulting value of the profitability is about the same as that for a plant operating steadily at 70% of rated capacity. Adoption of this simple criterion during early stages of project development results in a more realistic assessment of the long range attractiveness of the project.