CHE4161 - Engineers in Society

Engineers in Society

Capital investment Practice Class - Solutions

1. What is capital?

Possible Solution
Deferred consumption of wealth in the expectation of greater wealth or well-being in the
future.

It can be in the form of savings and the owner gets to decide where the savings should be
spent. These savings can be tuned into investment, which can be used to promote the
production of other goods and obtaining an income or profit in the future. (instead of being
used solely for the purposes of immediate enjoyment!)

or something similar!

2. Provide a general division and subdivisions/components of capital investment for the process
industries. Explain the purpose of each and their uses.

Possible Solution
Generally, capital can be divided into: Fixed Capital and Working capital. Capital for land
needs to be considered as well, typically within Fixes capital. Fixed capital can then be
subdivided into: Inside Battery limits (IBL) and Outside Battery Limits (OBL). Each of these
categories will have costs associated to Manufacturing (Direct costs) and
Non-manufacturing (Indirect costs). Sometimes, the latter are used as a subdivision instead
of IBL and OBL capital cost. Fixed capital investment refers to all capital required to build a
processing plant. Working capital refers to all the capital required to start-up the operation
before getting any earning.
Fixed capital comprises:
● Process equipment items
● Piping
● Site preparation, drainage, grading, roads, access ways
● Instrumentation
● Foundations and structures for equipment items
● Installation of equipment on prepared foundations (mainly labour)
● Specialised buildings e.g. control rooms, dedicated to certain equipment
● Electrics
● Painting and insulation
● Overhead charges for design, procurement, construction, commissioning, project
management
● Any capital required for technology purchase
● Storage and handling facilities for raw materials and finished products
● Utilities generation plant (e.g. steam boilers, cooling towers, compressed air, effluent
treatment facilities)

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● Buildings providing services such as laboratories, workshops, stores, offices, cafeteria,

medical facilities
Working capital comprises:
● Inventories of raw materials, finished products, materials in progress
● Balance between accounts receivable (debtors) and accounts payable (creditors)
● Cash

3. A 0.75 million gallon per day (MGD) induced draft packed tower for air-stripping
trihalomethanes from drinking water costs $58890. Estimate the cost of a 2-MGD tower if
the exponent in the cost-capacity equation is 0.58. Comment on assumptions and limitations.

Possible Solution:
Using the equation:

𝑛
𝐼𝑝
𝐼𝑟
= ( )
𝑄𝑝
𝑄𝑟

With p, r and n referring to the projected, the reference and the variable exponent in
the cost-capacity equation respectively.
We are asked to project the cost of a 2-MGD tower, the cost, I , for the reference tower is
𝐼𝑟 = $58890 hence the projected tower cost is
𝐼𝑝 0.58
58890
= ( )2
0.75
≈$104200

We did not account for materials and the difference in prices due to the change of money
value with time.

4. A plant to produce Acetic acid 9000 ton/yr required a fixed-capital investment of $8 million
in the year 2000. What will be the cost of a similar plant to produce 15000 ton/yr of acetic
acid in 2002?

Possible Solution:
From Peters, Timmerhaus & West (2003) Plant Design and Economics for Chemical
Engineers, 5th ed., the following values can be obtained in Table 6-2 for plant cost index and
Table 6-11 for cost-capacity exponents:
Plant cost index from Chemical Engineering in year 2000=394.1
Plant cost index from Chemical Engineering in year 2002=390.4

The acetic acid plant cost scaled with an exponent factor of 0.68 with its plant capacity.
Using the equation and adjusting the change of cost with Index F

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CHE4161 - Engineers in Society

𝑛
𝐼𝑝
𝐼𝑟
= ( )( )
𝑄𝑝
𝑄𝑟
𝐹𝑝
𝐹𝑟

Then
𝑛
𝐼𝑝 = 𝐼𝑟( )( )
𝑄𝑝
𝑄𝑟
𝐹𝑝
𝐹𝑟
= $8𝑚𝑖𝑙𝑙𝑖𝑜𝑛× ( 15000 0.68 390.4
9000 ) (394.1 )≈$11. 22 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

5. The estimated cost for a multiple cyclone system with a capacity of 60000 cubic feet per
minute is $450000.
(a) If the $200000 cost for a 35000 cubic feet capacity cyclone was inserted in the
cost-capacity equation, what value of the exponent in the estimation equation was
used?
(b) What can be concluded about the economy of scale between the two systems?

Possible Solution:
(a)
𝑛
𝐼𝑝
𝐼𝑟
= ( )
𝑄𝑝
𝑄𝑟

60000 𝑛
450000
200000
= ( 35000 )
ln 𝑙𝑛 ( 450000
200000 ) = 𝑛 ln 𝑙𝑛 ( 60000
35000 )
𝑛≈1. 505

(b) Since n > 1 the cost of multiple cyclone system escalates rapidly with increasing
capacity. This relationship suggests that the projected cyclone’s system becomes high
very quickly with its capacity, the cost increases much quicker than an equipment that
scales linearly with its capacity.

6. During a major expansion in 1994, Dowalla Import Company developed a new process line
for which the delivered equipment cost was $1.75 million. 11 years later the board of
directors decided to expand into new markets and planned to build the current version of the
same line. Estimate the cost if the following factors are applicable
● Construction cost factor: 0.20
● Installation cost factor: 0.50
● Indirect cost factor applied against equipment:0.25
● Plant cost index changed from 2509 in year 1994 to 3713 in the year 2005.

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CHE4161 - Engineers in Society

Possible Solution:
Using the equation that uses a different factor to account for different type of capital
investment:
𝐼 = 𝑓×𝐶

where 𝐶 is the cost of equipment, 𝑓 is the lumped factor and I is the total capital investment.
The lumped factor 𝑓 can be calculated as
𝑓 = 1 + 0. 2 + 0. 5 + 0. 25 = 1. 95
Using the equation above then 𝐼 = 𝑓×𝐶 = 1. 95×$1. 75 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 = $3. 41 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Using the cost inflation index to update the cost from 1994 to 2005:
𝐼𝑝
𝐼𝑟
= ( )
𝐹𝑝
𝐹𝑟

𝐼𝑝 = 𝐼𝑟 × ( )
𝐹𝑝
𝐹𝑟
= $3. 41 𝑚𝑖𝑙𝑙𝑖𝑜𝑛× ( 3713
2509 ) = $5. 05 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
where p is the projected price in year 2005 wheares r is the reference price in year 1994.