Costing and Project Evaluation

Capital cost estimates can be broadly classified into three types

according to their accuracy and purpose:

Preliminary (approximate) estimates, accuracy typically ±30 per

cent, which are used in initial feasibility studies and to make
coarse choices between design alternatives. They are based on
limited cost data and design detail.

Authorisation (Budgeting) estimates, accuracy typically ± 10 - 15

per cent. These are used for the authorisation of funds to
proceed with the design to the point where an accurate and
more detailed estimate can be made.

Detailed (Quotation) estimates, accuracy ± 5 -10 per cent, which are

used for project cost control and estimates for fixed price contracts.
These are based on the completed (or near complete) process design,
firm quotations for equipment, and a detailed breakdown and
estimation of the construction cost.
 FIXED AND WORKING CAPITAL
Fixed capital is the total cost of the plant ready for start-up. It is
the cost paid to the contractors. It includes the cost of:

1. Design, and other engineering and construction supervision.

2. All items of equipment and their installation.

3. All piping, instrumentation and control systems.

4. Buildings and structures.

5. Auxiliary facilities, such as utilities, land and civil engineering work.

 Working capital
is the additional investment needed

1. Start-up.

2. Initial catalyst charges.

3. Raw materials and intermediates in the process.

4. Finished product inventories.

5. Funds to cover outstanding accounts from customers.

Most of the working capital is recovered at the end of the project.

 COST ESCALATION (INFLATION)
• All cost-estimating methods use historical data
The Process Engineering index, over a ten-year period
(January to January), is shown in Figure 6.1a
 The Marshall and Swift index (M and S equipment cost index),
base year 1926. (published by The journal Chemical Engineering,
under the name of the CPE plant cost index). The index over a
ten-year period is shown in Figure 6.1b.
 RAPID CAPITAL COST ESTIMATING METHODS

• An approximate estimate of the capital cost of a project can

be obtained from a knowledge of the cost of earlier projects
using the same manufacturing process
• The capital cost of a project is related to capacity by the
equation

The value of the index n is traditionally taken as 0.6; the well-known six-tenths rule.
 THE FACTORIAL METHOD OF COST
ESTIMATION
• Lang factors: The fixed capital cost of the
project is given as a function of the total
purchase equipment cost by the equation:

• Detailed factorial estimates

• To make a more accurate estimate, in addition to the cost of
equipment are:
1. Equipment erection, including foundations and minor
structural work.
2. Piping, including insulation and painting.
3. Electrical, power and lighting.
4. Instruments, local and control room.
5. Process buildings and structures.
6. Ancillary buildings, offices, laboratory buildings, workshops.
7. Storages, raw materials and finished product.
8. Utilities (Services), provision of plant for steam, water, air,
firefighting services (if not costed separately).
9. Site, and site preparation.
 SUMMARY OF THE FACTORIAL METHOD
1. Prepare material and energy balances, draw up preliminary flow-sheets, size
major equipment items and select materials of construction.
2. Estimate the purchase cost of the major equipment items. Use Figures 6.3 to
6.6 and Tables 6.2 and 6.3, or the general literature.
3. Calculate the total physical plant cost (PPC), using the factors given in Table 6.1

4. Calculate the indirect costs from the direct costs using the factors given in
Table 6.1.
5. The direct plus indirect costs give the total fixed capital.
6. Estimate the working capital as a percentage of the fixed capital; 10 to 20 per
cent.
7. Add the fixed and working capital to get the total investment required.
 OPERATING COSTS
• An estimate of the operating costs, the cost of
producing the product,
1. Fixed operating costs: costs that do not vary
with production rate. These are the bills that
have to be paid whatever the quantity
produced.
2. Variable operating costs: costs that are
dependent on the amount of product produced.
 Fixed costs
1. Maintenance (labour and materials).
2. Operating labour.
3. Laboratory costs.
4. Supervision.
5. Plant overheads.
6. Capital charges.
7. Rates (and any other local taxes).
8. Insurance.
9. Licence fees and royalty payments.
 Variable costs
1. Raw materials.
2. Miscellaneous operating materials.
3. Utilities (Services).
4. Shipping and packaging.
 Rate of return calculations
• Rate of return (ROR), which is the ratio of
annual profit to investment, is a simple index
of the performance of the money invested.

• From Figure 6.8.

 Breakeven Quantities
• we computed the total number of cartoons needed to be produced
from each product to achieve factory’s breakeven state by using the
below equation

Fixed cost assigned to the product – (profit per unit * # of units needed) = 0
 Project Evaluation

• We used many criteria to evaluate the feasibility of the project which are :

• Payback Period = Cost of Investment \ Annual Cash Flow

Cost of investment = Startup Capital Cost + Raw Material cost

• Rate of Return = Annual Profit \ Cost of Investment

• Net Present Value = ∑ {Net Period Cash Flow/ (1+R) ^T} - Initial Investment
FEASIBILITY STUDY OF
LIME PICKLE
MANUFACTURING PLANT

A.A.A.H.E PERERA
Food Science & Technology
University of Sri Jayewardenepura
 INTRODUCTION
What Is Pickling?
Food Preservation Technique - foods soaked in solutions to prevent spoilage

Why do people like Lime Pickle so much?

• Spicy & Tangy flavour – preferred by Southeast Asians
• Sour & Acidic flavour - preferred by Europeans
• Enhances the tastes of the meal
• Increases the satisfaction after every meal
• NO ARTIFICIAL FLAVOURS ----->100% NATURAL

Lime + Brine  Fermentation (LAB)  Lactic Acid

Lactic Acid gives the desirable sour tangy flavor & preserve lime
 PRODUCT IDENTIFICATION
 Nutritional Facts
• Type of Product -
Lime Pickle (per 100g)
 Energy (Kcal/KJ) 43.56/182.1

 Protein(g) 1.48
• Ingredients -
 Carbohydrates (g) 9.06
Lime , Salt, Chili Pieces, SMS
 Minerals (g) 12.72
Foods (Pvt) Ltd.
• Type of Packaging -
 Health Benefits
Glass Bottles + Metal Lids
 contributes to modest
• Size - 50g diabetes control
 improved digestion
 liver protection
• Storage Conditions -  supply of probiotics
Cool & Dry Place, away from  good supply of essential
sunlight vitamins, minerals, and
antioxidants
 ability to heal ulcers
• Shelf life - 1 year
FINANCIAL FEASIBILITY
 SELLING PRICE PER UNIT
COST ITEM AMOUNT (RS.)
Raw Materials 3.37
Packing Materials 9.52
Labor Cost 2.85
Utility & Overhead Cost 8.94
Depreciation Cost 3.34
Total Production Cost 28.03
20.10% Profit Margin 5.89
Price Without Tax 33.91
13% Tax 4.41
Price To Retailer 38.32
5.502% Sales Margin 1.84
Consumer Price 40.16
RAW MATERIALS COST/month
Quantity/ Quantity/ Year Cost per Total cost (Rs.)
Month 1kg (Rs.)
Lime 360 kg 4 320 kg 50.00 18 000.00
Salt 90 kg 1 080 kg 170.00 6 300.00
Chili Pieces 15 kg 180 kg 400.00 6 000.00
SMS 0.2 kg 2.4 kg 200.00 40.00
Total Cost       30 340.00

PACKING MATERIALS COST/month

Item Quantity/ Quantity/ Cost per Total cost
Month Year unit
Glass Jar with Lid 9 000 108 000 6.60 59 400.00

Labels 9 000 108 000 2.00 18 000.00

Corrugated Boxes 750 9 000 11.00 8 250.00

Total Cost       85 650.00

 SALARIES OF EMPLOYEES
Types of No. of Requirement Individual Total EPF & ETF (15%) Total
Employees Salary (Rs.) Amount (Rs.) Monthly Amount (Rs.)
(Monthly) (Monthly) (Annually)
Production Staff  
Production 1 20 000.00 20 000.00 3 000.00 276 000.00
Supervisor
Trained Workers 2 15 000.00 30 000.00 4 500.00 414 000.00
Semi Trained 4 10 000.00 40 000.00 6 000.00 552 000.00
Workers
General Administration Staff  
Accountants 1 18 000.00 18 000.00 2 700.00 248 400.00
Sales 2 16 000.00 32 000.00 4 800.00 441 600.00
Representatives
Drivers 2 10 000.00 20 000.00 3 000.00 276 000.00
Security officers 1 11 000.00 11 000.00 1 650.00 151 800.00

Total Cost 13   181 000.00 25 650.00 2 479 800.00

 TOTAL PROJECT COST

Particular Cost (LKR)

Total fixed assets 5 685 354.00

Total working capital for 3 months 625 280.00

Total cost of the project 6 310 634.00

 BREAK EVEN POINT ANALYSIS

BEP in Units = Fixed Cost

Per unit Contribution to Fixed Cost

Breakeven point = 47 252

units (Glass Jars)
No of Units Total cost Revenue

20,000 1,105,495 766, 379

40,000 1,542,139 1,532,759
60,000 1,978,784 2,299,138
80,000 2,415,428 3,065,517
BREAK EVEN POINT CHART
3,500,000

3,000,000

2,500,000

2,000,000
Revenue
Fixed cost
1,500,000
Total cost
1,000,000

500,000

-
- 20,000 40,000 60,000 80,000

47252 glass
jars
 NPV & IRR
IRR = A + { (B – A) (a / a – b)}
A – Cost of capital 1 (10%) Discount factor NPV
B – Cost of capital 2 (12%)
a – NPV1
10% 2,747,410.23
b – NPV2 12% 2,546,688.22

NPV greater than 0

IRR = 37.3 %
IRR > COST OF CAPITAL
 PROJECT SHOULD
BE ACCEPTED
 PAYBACK PERIOD
Payback period = Total capital investment/Periodic cash flow
Year Net Cash Flow Cumulative Net Cash Flow

  (5,685,354) (5,685,354)
1 (7,046,571) (1,361,217)
2 1,245,731 (2,606,948)
3 1,329,505 3,936,453

Payback period = 3 years + (2,606,948/1,329,505)

= 3.96 years
= 3 years & 9 months
 ASSUMPTIONS MADE…

• Working hours & days per month (8 hours/25 days) remain constant for 3 years.

• 1 US $ (United States Dollar) = 133.36 LKR (Sri Lankan Rupee)

• Price of the product will be fixed for the 3 years (40 LKR).
• Employee salaries will remain constant for 3 years.
• Electricity, Water, Fuel, Telephone charges like expenses will not be changed
• Raw material & packaging material costs are same for the 3 years
• Government policies & tax rates will not be changed.
• Depreciation rates are constant for all 3 years.
 CONCLUSION
According to the study this project is feasible in each
aspect of Market, Production, Technical, Environmental,
Financial, Legal & Socioeconomic and it is socially
acceptable.