Feeling the Pinch?

Tight budgets can make prioritizing engineering projects difficult. Use the financial pinch technique to allocate funds logically and visually.

Engineers often face the challenge of prioritizing projects while considering tight budgets. We must decide which projects to implement based on tradeoffs between costs and benefits. In particular, for each project, we need to compare investment cost and expected payback period to the available funds and the corresponding maximum allowable payback period for those funds.

In practice, projects are analyzed and prioritized heuristically or with the aid of standard textbook principles of engineering economics. Simple profitability measures that do not account for discounting (i.e., the time value of money), such as payback period (PP) and return on investment (ROI), are often used to assess a single project relative to the profitability benchmarks defined by management. These relatively simple metrics can also be used to prioritize multiple projects. Detailed analyses using methods that account for the time value of money (which are described in many textbooks, such as Refs. 1–3) can be performed as well. For more complex cases, computer-aided decision-making with the help of spreadsheet tools or mathematical models may be employed. However, these conventional techniques do not readily apply to scenarios that entail allocation of funds from different sources to various projects with different levels of expected profitability.

This article describes a systematic method for prioritizing engineering projects that applies the principles of pinch analysis. Financial pinch provides a graphical depiction of projects to be funded relative to financial resources that aids in practical decision-making. A brief example and an industrial case study illustrate the technique.

What is pinch analysis?

Pinch analysis was developed in the 1970s to optimize heat recovery in process plants in order to conserve energy (4). Its popularity grew in the late ’70s and ’80s, as companies sought to improve the energy efficiency of their industrial processes in response to surging oil prices. Today, pinch analysis is an important part of the chemical engineering curriculum (3, 5, 6).

When used for its original intention (in thermal applications), pinch analysis compiles all the hot streams (requiring cooling) and cold streams (requiring heating) into two composite curves. The point at which the temperature difference between the streams is a minimum is called the pinch point. This is the bottleneck in the process where the driving force for heat transfer is smallest and the design is most constrained. Streams below and above the pinch are paired to create an optimized network of heat exchangers (4, 6).

Applying the pinch technique to applications beyond heat transfer is not a new idea. Mass integration was devised based on the similarities between heat and mass transfer. This technique is used to develop mass exchange networks (MENs) for the efficient use of industrial mass separating agents (MSAs), such as solvents and adsorbents (7). Further development of mass integration established a pinch technique for creating material resource conservation networks, and this technique is applied to industrial water reuse/recycle, refinery hydrogen systems, and property integration (8, 9).

All pinch techniques are based on the general principle of identifying quality and quantity metrics for each stream. For example, temperature is the quality metric in thermal pinch analysis; in mass pinch analysis, concentration is analogous to temperature. The quality metric is the driving force for any system. Many pinch analysis variants, including production planning (10), human resource allocation (11), and financial planning (12) applications, use time as the driving force, which defines the direction of flow in the same way that temperature defines direction of heat transfer in thermal pinch analysis. Reference 13 provides a detailed survey of various pinch analysis techniques.

Financial pinch analysis

Assume we need to prioritize a set of projects, each with an investment cost and expected payback period (EPP). The EPP is a common measure of profitability defined as the ratio of investment cost of a project to the incremental savings attributable to the project (2). The financial resources are...