ECONOMIC ANALYSIS

OF SETTING UP A
CHEMICAL PLANT

Dr Ir Jay Nambiar
 CAPITAL INVESTMENT
Amount of money required to construct a
chemical plant and start-up operations

Fixed Capital
Working Capital
Land Cost
 FIXED CAPITAL
Made up of Direct Capital Cost & Indirect
Capital Cost:
Buildings
Equipment
Electrical
Piping
Instrumentation
Site development
Contractors fees
Contingency
 FIXED CAPITAL ESTIMATION
Actual capital can be determined once
equipment specs are finalised
But the estimated capital can be calculated
based on the Lang Factor. (Wain, 2014)
This method utilises the equipment purchase
cost to calculate both the direct and indirect
capital cost in the fixed investment.
 FIXED CAPITAL ESTIMATION
Cost Index Cost Index
NH 3 Plant
Total Cost
Equipment Quantity USD/Unit 2015 2016 USD/Unit (RM)
Cooler 1 75,000.00 631.4 546.2 64,879.63 280,280.01
Heater 4 79,060.00 631.4 546.2 68,391.78 1,181,810.02
Heat Exchanger 8 90,521.00 631.4 546.2 78,306.26 2,706,264.22

Primary Reformer 1 388,000.00 674 647 372,456.97 1,609,014.12

Secondary Reformer 1 388,000.00 674 647 372,456.97 1,609,014.12

High Temperature Shift
Converter 1 150,000.00 674 647 143,991.10 622,041.54
Low Temperature Shift
Converter 1 150,000.00 674 647 143,991.10 622,041.54

Separator 3 180,050.00 674 647 172,837.31 2,239,971.60

Ammonia Converter 1 400,000.00 674 647 383,976.26 1,658,777.45

Methanator 1 163,080.00 674 647 156,547.12 676,283.57

Absorbtion Unit 1 350,000.00 674 647 335,979.23 1,451,430.27

Pump 3 120,000.00 950.9 972.2 122,687.98 1,590,036.22

Total Equipment Purchase Cost (RM) 16,240,000
 APPLYING LANG FACTOR Direct Cost
Direct Cost Factors

F1 Equipment Installation 0.4

F2 Piping 0.7

F3 Instrumentation 0.2

F4 Electrical 0.1

F5 Buildings, Process 0.15

F6 Utilities 0.5

F7 Storages 0.15

F8 Site Development 0.05

F9 Ancillary Buildings 0.15

 TOTAL DIRECT COST ESTIMATION
Total direct cost = Equipment purchase cost x
(1 + F1 + F2 + F3 + F4 + F5 + F6 + F7 + F8 + F9)

= RM 16,240,000 x (1 + 0.40 + 0.70 + 0.20 + 0.10

+ 0.15 + 0.50 + 0.15 + 0.05 + 0.15)

= RM 55, 240,000
APPLYING LANG FACTOR Indirect Cost

Indirect Cost Factors

F10 Design And Engineering 0.3

F11 Contractors Fee 0.05

F12 Contingency 0.1

Fixed Capital Investment (FCI) = Total direct cost x (1 +
F10 + F11 + F12)
= RM 55, 240,000 x (1+ 0.30 + 0.05 + 0.10)
= RM 80,100,000
 WORKING CAPITAL
The working capital is the additional investment
needed to start the plant up and operate it to the
point when income is earned.
It includes the cost of:
Start-up
Initial catalyst charges
Raw materials and intermediates in the process
Finished product inventories
Funds to cover outstanding accounts from
customers
Typical estimate = 5% of Fixed Capital Investment
 LAND COST
Depends on:

Location
Total area required (including for future
expansion)
Price/m2
 TOTAL CAPITAL INVESTMENT
Total Capital Investment = Fixed Capital
Investment + Working Capital + Land Cost

= RM 80,100,000 + RM 4,004,000 + RM 7,746,186

= RM 91,850,000
TOTAL OPERATING (PRODUCTION) COST

An estimate of the annual operating cost to

manufacture a product is required to judge
the viability of a project
This allows making the right choice between
possible alternative production methods.
Similar to fixed capital investment, operation
cost is divided into:
direct and indirect costs.
OPERATING COST DIRECT and INDIRECT

Direct operating cost, also known as

manufacturing cost can be further classified
into two categories:

Variable operating cost, and

Fixed operating cost.
VARIABLE OPERATING COST COMPONENTS

Variable operating costs depends on product

throughput AND include:

Expenses for raw materials

Catalysts

All utilities throughout the plant operation

 FIXED OPERATING COST
COMPONENTS
Fixed operating costs must be paid regardless of
production throughput AND mainly consists of:
Maintenance
Operating labour
Laboratory costs
Supervision
Plant overhead
Capital charges
Insurances and local taxes
OPERATING COST DIRECT and INDIRECT

Indirect operating cost refers to other general

expenses involved in the operation of the
company such as:

Administration
Marketing
Research and Development
TOTAL OPERATING (PRODUCTION) COST

Total Operating Cost:

Variable Operating Cost +

Fixed Operating Cost +
General Expenses
MAINTENANCE COST ESTIMATION
Based on a % of Fixed Capital Investment that
ranges from:

8% for Chemical Plants with numerous heavy-

duty equipment
5% for standard plant
2% for light duty equipment
 MISCALLANEOUS MATERIALS COSTS
Miscellaneous materials include those that are
required to operate the plant but are not covered
under raw materials and maintenance e.g.
safety clothing
hard hats
safety glasses
instrument charts
pipe gaskets
cleaning materials
Estimate base on 10% of maintenance cost
 OVERHEAD COST OF PLANT
Overheads are costs associated with operating
the plant not included under the other
headings e.g.
General management
Plant security
Medical
Canteen
General clerical staf
Estimate based on 50% of the operating
labour cost.
 OTHER COSTS
Laboratory costs required for process monitoring
and quality control
estimate base on 30% of operating labour costs
Capital charges - cost of borrowing from e.g. bank
estimate base on 10% of fixed capital investment
Insurance charges coverage for buildings,
equipment etc.
estimate base on 1% of fixed capital investment
 OTHER COSTS
Local taxes as applied by local councils,
industrial parks, government agencies
estimate base on 1% of fixed capital
investment
Royalties payment for IPR and licenses
outsourced from outside organisations
Estimate base on 1% of fixed capital
investment
 GENERAL EXPENSES
Administrative + Distribution and Marketing
costs - incurred in the process of selling and
distributing the product; includes expenses for
the sales office, shipping expenses, cost of
containers as well as technical sales service.
estimate base on 1 % of the fixed capital
investment.
 TOTAL REVENUE ESTIMATE
The revenue generated by plant operation comes from
sale of product.
Annual sales revenue, (RM/year) = Total sale product
(tonne/year) x Product sales price (RM/tonne)
Based on ICIS pricing, the price for, Ammonia is RM
1463/tonne. Using 8760 hours per year as the annual
operating hours, the total revenue is calculated as
below:
Price of Ammonia = RM 1463/tonne
Plant production rate = 100000 metric tonne/year
Total annual revenue = RM 1463/tonne x 100000 metric
tonne/year = RM 161,268,000 /year
 PROFITABILITY ANALYSIS
A profitability analysis is a quantitative measure
of profit with respect to the investment
required.
Economic performance of a project, can be
based on the following economic criteria:
Rate of Return (ROR)
Net Present Worth (NPW)
Payback period
Discounted cash flow rate of return (DCFRR)
ASSUMPTIONS FOR PROFITABILITY ANALYSIS

Certain assumptions have to be made in profitability analysis

e.g.
Project life of plant say 20 years;
Plant construction period say is 2-3 years before commencing
production. Hence, total investment cost is distributed evenly
over that construction period.
Plant operates 365 days/year.
Local taxes are assumed to be at 10% from the profit annually.
Assume that operating cost, sale income and cost of raw
materials beginning from the fourth operating year to the end
of project plant life are constant throughout the years.
Decide on minimum attractive rate of return (MARoR)
 DEPRECIATION
Depreciation is a charge to the revenue resulting
from an investment in real property. The
depreciation rates depend on government policy and
on accounting practices of the particular company.
Depreciation (D) can be calculated by using the
following equation:
D = (B - SV) / n,
= [B - (0.03 x Fixed Capital Investment)] / n
where B = total capital investment
SV = salvage value, 3% from the fixed capital
investment AND n = total plant life
 RATE OF RETURN (ROR)
ROR is the ratio of annual profit to investment.
Basically a simple concept, the calculation of the
ROR is complicated by the fact that the annual
profit (net cash flow) will not be constant over
the life of the project.
Can base ROR on the average income over the
life of the project and the original investment.
ROR = X 100%
 DISCOUNTED CASH FLOW RATE OF RETURN
(DCFRR)
Discounted Cash Flow Rate of Return (DCFRR) or also
known as Internal Rate of Return (IRR)
It is a measure of the maximum rate that the project
could pay and still break even by the end of the
project life.
It is determined by calculating the net present worth
(NPW) at various interest rates.
The interest rate at which the cumulative NPW at the
end of the project is zero is the DCFRR.
The more profitable the project is, the higher the
percentage of DCFRR that the project can aford.
 DISCOUNTED CASH FLOW RATE OF RETURN
(DCFRR)
The following formula is used to calculate
DCFRR:
, where,
NFW = estimated net cash flow in year n
r= discounted cash flow rate of return (per
cent/ 100)
t = life of projects, years
 PAYBACK PERIOD
Pay-back period is the time required after the start of
the project to pay of the initial investment from income.
It is a useful criterion for judging projects that have a
short life, or when the capital is only available for a short
time.
It is often used to judge small improvement projects on
an operating plant and typically, a pay-back time of 2 to
5 years is expected.
Pay-back time as a criterion of investment performance
does not, by definition, consider the performance of the
project after the pay-back period.
 SENSITIVITY ANALYSIS
It is a tool to examine the efects of uncertainties in the forecasts on
the viability of a project.
To carry out sensitivity analysis, the investment and cash flows are
first calculated using what are considered the most probable values
for the various factors.
After establishing this base case, cash flows, and whatever criteria of
performance are to be used, are then calculated assuming a range
of error for each of the factors in turn
Example, a fluctuation of 10 per cent on the sales price might be
assumed.
This will show how sensitive the cash flows and economic criteria
are to errors in the forecast figures.
It gives some idea of the degree of risk involved in making
judgements on the forecast performance of the project.
CASH FLOW RM1300/tonne NH3 selling price
150,000,000.00

100,000,000.00

50,000,000.00

0.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-50,000,000.00

-100,000,000.00

-150,000,000.00
CASH FLOW RM1600/tonne NH3 selling price
600,000,000.00

500,000,000.00

400,000,000.00

300,000,000.00

200,000,000.00

100,000,000.00

0.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-100,000,000.00

-200,000,000.00