Capital Cost Estimation

Dr. Rakesh Kumar

 Capital Investments
• Before an industrial plant can be put into operation, a large sum of money
must be supplied to purchase and install the necessary machinery and
equipment.

• The capital needed to supply the necessary manufacturing and plant

facilities is called the fixed-capital investment(FCI).

• The capital necessary for the operation of the plant is termed the working
capital(WC).

• The sum of the fixed-capital investment and the working capital is known
as the total capital investment(TCI)

• The fixed-capital portion may be further subdivided into manufacturing

fixed-capital investment and nonmanufacturing fixed-capital
investment
 Fixed-Capital Investment
• Manufacturing fixed-capital investment: represents the capital
necessary for the installed process equipment with all auxiliaries that are
needed for complete process operation. Expenses for piping,
instruments, insulation, foundations, and site preparation are typical
examples of costs included in the manufacturing fixed-capital investment

• Nonmanufacturing fixed capital: required for construction overhead

and for all plant components that are not directly related to the process
operation is designated as the nonmanufacturing fixed-capital
investment.

• These include the land, processing buildings, administrative, and other

offices, warehouses, laboratories, transportation, shipping, and receiving
facilities, utility and waste-disposal facilities, shops, and other permanent
parts of the plant
 Working-Capital
• Investment
The working capital for an industrial plant consists of the total amount of
money invested in (1) raw materials and supplies carried in stock, (2)
finished products in stock and semifinished products in the process of
being manufactured, (3) accounts receivable, (4) cash kept on hand for
monthly payment of operating expenses, such as salaries, wages, and
raw-material purchases, (5) accounts payable, and (6) taxes payable.

• The raw-materials inventory included in working capital usually amounts

to a 1-month supply of the raw materials valued at delivered prices.
Finished products in stock and semifinished products have a value
approximately equal to the total manufacturing cost for 1 month’s
production.

• The ratio of working capital to total capital investment varies with different
companies, but most chemical plants use an initial working capital
amounting to 10 to 20 percent of the total capital investment
 Types of Capital Cost
Estimate
 1. Order of Magnitude Estimate: Based on similar cost data

 2. Study Estimate: Based on knowledge of Major Equipment

 3. Preliminary Estimate: Based on sufficient data

 4. Definitive Estimate: Based on almost complete data

 5. Detailed Estimate: Based on complete engineering drawings,

specifications and site surveys
 Capital Cost Estimate Classifications
Estimate Type Accuracy Data Diagrams Notes

Order of + 25%, - Existing plants BFD Capacity +

Magnitude 15% inflation
Study (Major + 30%, - Roughly sized major PFD Generalized
equipment, 20% equipment charts cost
Factored)
Preliminary + 25%, - major equip. + piping PFD Group
Design (scope) 15% + instr. + Elec. + util. project
Definitive + 15%, - 7% Prelim spcs for all PFD +
equipment P&ID
Detailed (firm or + 6%, - 4% Complete engineering
contractor
Capital Cost Estimate Classifications
 Example
The estimated capital cost from a chemical plant using the study estimate method
(Class 4) was calculated to be $2 million. If the plant were to be built, over what range
would you expect the actual capital estimate to vary?

For a Class 4 estimate, from Table 5.2, the expected accuracy range is between 3 and
12 times that of a Class 1 estimate. A Class 1 estimate can be expected to vary from
+6% to -4%. We can evaluate the narrowest and broadest expected capital cost
ranges as:
Lowest Expected Cost Range
High value for actual plant cost ($2.0 x 106)[1 + (0.06)(3)] = $2.36 X 106
Low value for actual plant cost ($2.0 x 106)[1 - (0.04)(3)] = $1.76 x 106

Highest Expected Cost Range

High value for actual plant cost ($2.0 x 106)[1 + (0.06 )(12)] = $3.44 x 106
Low value for actual plant cost ($2.0 x 106)[1 - (0.04 )(12)] = $1.04 x 106

The actual expected range would depend on the level of project definition and effort. If
the effort and definition are at the high end, then the expected cost range would be
between $1.76 and $2.36 million. If the effort and definition are at the low end, then
the expected cost range would be between $1.04 and $3.44 million.
Estimating Purchased Equipment Costs
 Vendor quote
 Most accurate

- based on specific information

- requires significant engineering

 Use previous cost on similar equipment and scale for

time and size
 Reasonably accurate

- beware of large extrapolation

- beware of foreign currency

 Use cost estimating charts and scale for time

 Less accurate

 Convenient
Effect of Size (Capacity)

Cost Exponent

Cost Equipment Cost

Attribute - Size

where
Effect of Capacity
Effect of Size (Capacity) cont.
 n = 0.4 – 0.8 Typically
 Often n ~ 0.6 and referred as the (6/10)’s
Rule
 Assume all equipment have n = 0.6 in a
process unit and scale-up using this method
for whole processes
 Order-of-Magnitude estimate
Effect of Capacity on Purchased
Equipment Cost
 Economy of Scale
Example:
Use the six-tenths-rule to estimate the % increase in purchased
cost when the capacity of a piece of equipment is doubled.

Ca /Cb = (2/1)0.6 = 1.52

% increase = (1.52 -1.00)/1.00)(100) = 52%
Example: Compare the error for the scale-up of a heat
exchanger by a factor of 5 using the six-tenth- rule in place of
the cost exponent given in Table 5.3.

Using Equation 5.1:

Cost ratio using six-tenth-rule (i.e. n = 0.60) = 5.00.6 = 2.63
Cost ratio using (n =0.59) from Table 5.3 = 5.00.59 = 2.58
% Error = (2.63 -2.58)/2.58)(100) = 1.9 %
 Effect of Capacity on Purchased
Equipment Cost
Rearranging equation 5.2
 Effect of Time

 C = Cost
 I = Value of cost index
 1,2 = Represents points in time at which costs
required or known and index values known
Cost Indicies
• Marshall & Swift Equipment Cost Indexes
• All-industry equipment index - arithmetic average of indexes for 47
different types of industrial, commercial, and housing equipment
• Based on an index value of 100 for the year 1926
• Account for cost of machinery and major equipment plus costs for
installation, fixtures, tools, office, and minor equipment

• Engineering News-Record Construction Cost Index

• Indicates variance in labor rates and materials costs for industrial
construction
• One of three basis’ used: 100 for 1913, 1949 or 1967

• Nelson-Farrar Refinery Construction Cost Index

• Petroleum industry construction costs
• Basis - 100 for 1946
Chem. Engr. Plant Cost Index
(CEPCI)
• Construction costs for chemical plants

• Equipment, machinery and supports, 61%; erection and

installation labor, 22%; buildings, materials, and labor, 7%;
engineering and supervision, 10%

• Major components subdivided as: fabricated equipment, 37%;

process machinery, 14%; pipe, valves, and fittings, 20%; process
instruments and controls, 7%; pumps and compressors, 7%;
electrical equipment and materials, 5%; structural supports,
insulation and paint, 10%

• Basis - 100 for 1957-1959

 Chemical Engineering Plant Cost Index from 1950 to 2008
700

600
f(x) = 0.000000122391 x ⁶ − 0.00142696 x ⁵ + 6.92977 x ⁴ − 17942.2 x³ + 26121800 x²
− 20275400000 x + 6554820000000
500 R² = 0.99466207071883

400

300

200

100

0
1950 1960 1970 1980 1990 2000 2010
Effect of Time
Marshal & Swift and CEPCI
 Basis for the CEPCI
Components of Index Weighting of Component (%)

Equipment, Machinery and Supports:  

 
 
37
(a) Fabricated Equipment
14
(b) Process Machinery
20
(c) Pipe, Valves, and Fittings
7
(d) Process Instruments and Controls
7
(e) Pumps and Compressors
5
(f) Electrical Equipment and Materials
10
(g) Structural Supports, Insulation, and
100 61 % of total
Paint
Erection and Installation Labor 22

Buildings, Materials, and Labor 7

Engineering and Supervision 10

Total 100
Example:

The purchased cost of a heat exchanger of 500 m2 area in 1990 was $25,000.
a. Estimate the cost of the same heat exchanger in 2001 using the two indices
introduced above.
b. Compare the results.

From Table 5.4: 1990 2001

Marshal and Swift Index 915 1094
Chemical Engineering Plant Cost Index 358 397

a. Marshal and Swift: Cost = ($25,000)(1094/915) = $29,891

CEPCI: Cost = ($25,000)(397/358) = $27,723

b. Average Difference: ($29,891 -27,723)/($29,891 + 27,723)/2)(100) = 7.5%

Example:

The capital cost of a 30,000 metric ton/year isopropanol plant in 1986 was
estimated to be $7 million. Estimate the capital cost of a new plant with a
production rate of 50,000 metric tons/year in 2001.

Cost in 2001 = (Cost in 1986)(Capacity Correction) (Inflation Correction)

= ($7,000,000)(50,000/30,000)°.6(397/318)
=($7,000,000)(1.359)(1.248) = $11,870,000

Example: 2 heat exchangers, 1 bought in 1990 and the other in 1995 for
the same service
A B
Area = 70 m2 130 m2
Time= 1990 1995
Cost = 17 K 24 K
I = 358 381

What is the Cost of a 80 m2 Heat Exchanger Today ?

Example:

The capital cost of a 30,000 metric ton/year isopropanol plant in 1986 was
estimated to be $7 million. Estimate the capital cost of a new plant with a
production rate of 50,000 metric tons/year in 2001.

Cost in 2001 = (Cost in 1986)(Capacity Correction) (Inflation Correction)

= ($7,000,000)(50,000/30,000)°.6(397/318)
=($7,000,000)(1.359)(1.248) = $11,870,000

Example: Heat exchangers, 1 bought in 1990 and the other in 1995 for
the same service
A B
Area = 70 m2 130 m2
Time= 1990 1995
Cost = 17 K 24 K
I = 358 381
What is the Cost of a 80 m2 Heat Exchanger Today 2008 ? CI(2008)
= 575
• Must First Bring Costs to a Common Time

A = 70

B = 130

By solving we get n = 0.46

Gate 2013
The purchase cost of a heat exchanger of 20 m2 area was Rs. 500000 in 2006.
What will be the estimated cost (in Rs. to the nearest integer) of a similar heat
exchanger of 50 m2 area in the year 2013? Assume the six-tenths factor rule for
scaling and the cost index for 2006 as 430.2. The projected cost index for the
year 2013 is 512.6.

Solution: From six tenth rule

Cost of heat exchanger in 2006

Cost of heat exchanger in 2013

 Factors Affecting Capital Cost
• Direct project expenses
• Indirect project expenses
• Contingency and fee
• Auxiliary facilities
1. Direct project expenses

Factor Symbol Comments

Equipment Cp Purchased cost of equipment at
f.o.b. cost manufacturer's site
Materials CM Includes all piping, insulation and installation
fireproofing, foundations and structural
supports, instrumentation and electrical, and
painting associated with the equipment
Labor CL Includes all labor associated with equipment
and material installing mentioned above
 2. Indirect project expenses
Factor Symbol Comments
Freight, CFIT Transportation costs for shipping equipment
insurance, and materials to the plant site, all insurance
and taxes on the items shipped, and any purchase
taxes that may be applicable
Construction CO Includes all fringe benefits such as vacation,
overhead sick leave retirement benefits; etc.; labor
burden such as social security and
unemployment insurance, etc.; and salaries
and overhead for supervisory personnel. It is
about 8 to 10 % of the FCI.
Contractor CE Salaries and overhead for the engineering,
engineering drafting, and project management personnel
expenses on the project. It is about 8 % of the FCI.
 3. Contingency and Fee

Factor Symbol Comments

Contingency CCont A factor to cover unforeseen circumstances.

These may include loss of time due to
storms and strikes, small changes in the
design, and unpredicted price increases. It
is about 5 to 15 % of the FCI.

Contractor fee CFee Fee varies depending on the type of plant

and a variety of other factors. It is about 1.5
to 6 % of the FCI.
 4. Auxiliary facilities

Factor Symbol Comments

Site CSite Land; grading and excavation of the site;
development installation and hook-up of electrical, water,
and sewer systems; and construction of all
internal roads, walkways, and parking lots
Auxiliary CAux Administration offices, maintenance shop and
buildings control rooms, warehouses, and service
buildings

Off-sites and COff Raw material and final product storage &
utilities loading & unloading facilities; all equipment
necessary to supply required process utilities;
central environmental control facilities; and
fire protection systems
 Capital Cost Modules
1. Total Module Cost (Lang Factor)
2. Bare Module Cost

Total Module Cost

 Chemical Plant Type Lang Factor FLang
Fluid Processing Plant 4.74

Solid-Fluid Processing Plant 3.63

Solid Processing Plant 3.10

Example:

Determine the capital cost for a major expansion to a fluid processing

plant that has a total purchased equipment cost of $6,800,000.

Capital Costs = ($6,800,000)(4.74) = $32,232,000