Lecture 10 Cost Factors in Capital Investment

CHENG5193 :PLANT DESIGN AND ECONOMICS
3
CHAPTER
Financial & Economic Analysis of a Plant
Lecture 10 :Cost Factors In Capital Investment

Tesfa Nega
Faculty of Chemical and Food Engineering, Bahir Dar
Institute of Technology, Bahir Dar, Ethiopia
Email: tesfanega510@gmail.com
02/21/2024 1
Faculty of Chemical and Food Engineering
Outline
 Cost Factors in Capital Investment
02/21/2024 2
CHENG5193– PLANT DESIGN AND ECOMONICS
Cost index: example
In a desalination plant, an evaporator of area 200 m2 was purchased in 1996

at a cost of $ 3,00,000. In 2002, another evaporator of area 50 m 2 was added.
What was the cost of the second evaporator (in $)? Assume that the cost of
evaporator scales as (Capacity) 0.54. The Marshall and Swift was 1048.5 in
1996 and 1116.9 in 2002.
Solution
02/21/2024 3
Cost Factors in Capital Investment
 Capital investment, as defined earlier, is the total amount of money needed

to supply the necessary plant and manufacturing facilities plus the amount
of money required as working capital for operation of the facilities.
 The cost factors presented here are based on a careful study by Bauman
and associates plus additional data and interpretations from other more
recent sources with input based on modern industrial experience.
 A grass-roots plant is defined as a complete plant erected on a new site.
Investment includes all costs of land, site development, battery limit
facilities, and auxiliary facilities.
 A geographical boundary defining the coverage of a specific project is a
battery limit.
02/21/2024 4
Table 4 summarizes this typical variation in component costs as percentages of

fixed-capital investment for multiprocessing grass-roots plants or large battery-
limit additions.
02/21/2024 5
 Usually this encompasses the manufacturing area of a proposed plant or

addition, including all process equipment but excluding provision of
storage, utilities, administrative buildings, or auxiliary facilities unless so
specified.
 Normally this excludes site preparation and therefore, may be applied to
the extension of an existing plant.
02/21/2024 6
Cost Factors in Capital Investment: Estimating Purchase

Equipment Cost
 The foundation of a fixed capital investment estimate is the equipment
cost data. From this information through the application of factors or
percentages based upon the estimators experience the fixed capital
investment is developed. These cost data are reported as purchased
equipment cost, delivered purchase equipment cost or installed cost.
 Purchase equipment cost: Price of the equipment at the manufacturer's
plant.
 Delivered cost: Purchase price plus the delivery charge to the purchaser’s
plant.
 Install cost: This means the equipment has been purchased, delivered and
placed on a foundation in the purchaser's plant. It does not include cost for
piping, electrical, instrumentation, insulation, etc.
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Cost Factors in Capital Investment: Purchased Equipment
 The cost of purchased equipment is the basis of several predesign methods

for estimating capital investment. Purchase requirement represents 15 to
40% of fixed capital investment (FCI).
 Sources of equipment prices, methods of adjusting equipment prices for
capacity, and methods of estimating auxiliary process equipment are
therefore essential to the estimator in making reliable cost estimates.
 The various types of equipment can often be divided conveniently into (1)
processing equipment, (2) raw-materials handling and storage equipment,
and (3) finished-products handling and storage equipment.
 The cost of auxiliary equipment and materials, such as insulation and
ducts, should also be included.
02/21/2024 8
Cost Factors in Capital Investment: Purchased Equipment
 The most accurate method for determining process equipment costs is to

obtain firm bids from fabricators or suppliers. Often, fabricators can
supply quick estimates which will be very close to the bid price but will
not involve too much time.
 Second best in reliability are cost values from the file of past purchase
orders. When used for pricing new equipment, purchase-order prices must
be corrected to the current cost index.
 Limited information on process equipment costs has also been published
in various engineering journals. Costs, based on January 1, 1990 prices,
for a large number of different types and capacities of equipment are
presented in Chaps. 14 through 16.
02/21/2024 9
Cost Factors in Capital Investment: Estimating Equipment Costs by Scaling
 It is often necessary to estimate the cost of a piece of equipment when no

cost data are available for the particular size of operational capacity
involved.
 Good results can be obtained by using the logarithmic relationship known as
the six-tenths-factor rule, if the new piece of equipment is similar to one of
another capacity for which cost data are available.
 According to this rule, if the cost of a given unit at one capacity is known,
the cost of a similar unit with X times the capacity of the first is
approximately (X) 0.6 times the cost of the initial unit.
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Cost Factors in Capital Investment: Estimating Equipment Costs by Scaling
 The cost capacity concept should preferably use within a 10-fold range of
capacity. Two pieces of equipment should be similar with regard to type of
construction, materials of construction, temperatures and pressure operating
range and other important variables.
 Purchased-equipment costs for vessels, tanks, and process- and materials
handling equipment can often be estimated on the basis of weight.
 Generally, the cost data generated by this method are sufficiently reliable to
permit order-of magnitude estimates.
02/21/2024 11
Cost Factors in Capital Investment: Purchased-Equipment Installation
 The installation of equipment involves costs for labor, foundations, supports,

platforms, construction expenses, and other factors directly related to he
erection of purchased equipment. Table 6 presents the general range of
installation cost as a percentage of the purchased-equipment cost for various
types of equipment.
 Installation labor cost as a function of equipment size shows wide variations
when scaled from previous installation estimates.
 Table 7 shows exponents varying from 0.0 to 1.56 for a few selected pieces
of equipment.
 Installation costs for equipment, therefore, are estimated to vary from 25 to
55 percent of the purchased-equipment cost.
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Cost Factors in Capital Investment: Purchased-Equipment Installation

Table 6: Installation cost for equipment as a Table 7: Typical exponents for equipment
percentage of the purchased-equipment cost installation labor vs. size
02/21/2024 13
Cost Factors in Capital Investment: Instrumentation and controls

 Include: Cost of instrument, installation labour, auxiliary equipment and
materials. Total instrumentation cost depends on the amount of control
required (=6 to 30 % of the purchased cost for all equipment).
 For the normal solid-fluid chemical processing plant (= 13 % of the
purchased equipment or =3% of TCI).
 Depending on the complexity of the instruments and the service,
additional charges for installation and accessories may amount to 50 to 70
percent of the purchased cost, with the installation charges being
approximately equal to the cost for accessories.
02/21/2024 14
Cost Factors in Capital Investment: Piping

Includes: Labour, valves, fittings, pipes, supports, and other items involved in the complete
erection of all piping used directly in the process. Estimate: 80% of the purchase equipment
cost (=20% of FCI).
Labor for installation is estimated as approximately 40 to 50 percent of the total installed
cost of piping. Material and labor for pipe insulation is estimated to vary from 15 to 25
percent of the total installed cost of the piping and is influenced greatly by the extremes in
temperature which are encountered in the process streams.
Table 8: Estimated cost of piping
02/21/2024 15
Cost Factors in Capital Investment: Electrical systems

 Includes: Power wiring, lighting, transformation and service, and instrument and
control wiring.
 In ordinary chemical plants, electrical-installations cost amounts to 10 to 15
percent of the value of all purchased equipment.
 However, this may range to as high as 40 percent of purchased-equipment cost for
a specific process plant.
 Thus, the electrical installation cost is generally estimated between 3 and 10
percent of the fixed capital investment.
Table 9: Component electrical costs

as percent of total electrical cost
02/21/2024 16
Cost Factors in Capital Investment: Buildings Including Services

 The cost for buildings including services consists of expenses for labor, materials,
and supplies involved in the erection of all buildings connected with the plant.
Table 10: Cost of buildings including services based on purchased-equipment cost
02/21/2024 17
Cost Factors in Capital Investment: Buildings Including Services
Table 10: Cost of buildings and services as a percentage of fixed-capital investment for
various types of process plants
02/21/2024 18
Cost Factors in Capital Investment: Yard Improvements

 Costs for fencing, grading, roads, sidewalks, railroad sidings, landscaping,
and similar items constitute the portion of the capital investment included in
yard improvements.
 Yard-improvements cost for chemical plants approximates 10 to 20 percent
of the purchased-equipment cost (or = 2 to 5 % FCI).
Table 12: Typical variation in

percent of fixed-capital investment
for yard improvements
02/21/2024 19
Cost Factors in Capital Investment: Service Facilities

 Utilities for supplying steam, water, power, compressed air, and fuel are part of the
service facilities of an industrial plant.
 Waste disposal, fire protection, and miscellaneous service items, such as shop, first aid,
and cafeteria equipment and facilities, require capital investments which are included
under the general heading of service-facilities cost.
 The total cost for service facilities in chemical plants generally ranges from 30 to 80
percent of the purchased-equipment cost with 55 percent representing an average for a
normal solid-fluid processing plant.
 For a single-product, small, continuous-process plant, the cost is likely to be in the
lower part of the range.
 For a large, new, multi-process plant at a new location, the costs are approximate to be
near the upper limit of the range.
 The cost of service facilities, in terms of capital investment, generally ranges from 8 to
20 percent with 13 percent considered as an average value.
02/21/2024 20
Cost Factors in Capital Investment: Service Facilities

Table 13:Typical variation in percent of fixed-capital investment for service
facilities
02/21/2024 21
Cost Factors in Capital Investment: Land
 The cost for land and the accompanying surveys and fees depends on the
location of the property and may vary by a cost factor per acre as high as
thirty to fifty between a rural district and a highly industrialized area.
 As a rough average, land costs for industrial plants amount to 4 to 8
percent of the purchased-equipment cost or 1 to 2 percent of the total
capital investment.
02/21/2024 22
Cost Factors in Capital Investment: Engineering and Supervision
 The costs for construction design and engineering, drafting, purchasing,

accounting, construction and cost engineering, travel, reproductions,
communications, and home office expense including overhead constitute
the capital investment for engineering and supervision.
 This cost, since it cannot be directly charged to equipment, materials, or
labor, is normally considered an indirect cost in fixed-capital investment
and is approximately 30 percent of the purchased-equipment cost or 8
percent of the total direct costs of the process plant.
02/21/2024 23
Cost Factors in Capital Investment: Engineering and Supervision
 Table 14: Typical variation in percent of fixed-capital investment for

engineering and services
02/21/2024 24
Cost Factors in Capital Investment: Construction/Field Expense
 Includes temporary construction and operation, construction tools and

rentals, home office personnel located at the construction site, construction
payroll, travel and living, taxes and insurance, and other construction
overhead.
 This expense item is occasionally included under equipment installation, or
more often under engineering, supervision, and construction.
 If construction or field expenses are to be estimated separately, then Table
15 will be useful in establishing the variation in percent of fixed-capital
investment for this indirect cost.
 For ordinary chemical-process plants the construction expenses average
roughly 10 percent of the total direct costs for the plant.
02/21/2024 25
Cost Factors in Capital Investment: Construction/Field Expense
 Table 15: Typical variation in percent of fixed-capital investment for

construction expenses
02/21/2024 26
Cost Factors in Capital Investment: Contractor’s Fee & Contingencies
 Contractor’s Fee: The contractor’s fee varies for different situations, but it
can be estimated to be about 2 to 8 percent of the direct plant cost or 1.5 to
6 % FCI.
 Contingencies:
 A contingency factor is usually included in an estimate of capital
investment to compensate for unpredictable events, such as storms, floods,
strikes, price changes, small design changes, errors in estimation, and other
unforeseen expenses, which previous estimates have statistically shown to
be of a recurring nature.
 Contingency factors ranging from 5 to 15 percent of the direct and indirect
plant costs are commonly used, with 8 percent being considered a fair
average value.
02/21/2024 27
Cost Factors in Capital Investment: Startup expenses
 After plant construction has been completed, there will be some changes
before the plant can operate at the maximum design conditions.
 These changes will involve expenditures for materials and equipment and
results in loss of income while the plant is shut down or is operating at
only partial capacity.
 Allowance of 8 to 10% of the fixed capital investment for this startup
expenses is satisfactory.
 In the overall cost analysis, startup expense may be represented as a one-
time expenditure in the first year of the plant operation or as part of the
total capital investment depending on the company policy.
02/21/2024 28
Method of Capital Cost Estimation
 Various methods can be employed for estimating capital

investment.
The choice of any one method depends upon the amount of
detailed information available and the accuracy desired.
02/21/2024 29
Method of Capital Cost Estimation: Detailed-item Estimate

 A detailed-item estimate requires careful determination of each individual
item shown in Table 1 (see page 159-160).
Equipment and material needs are determined from completed drawings
and specifications and are priced either from current cost data or preferably
from firm delivered quotations.
Estimates of installation costs are determined from accurate labor rates,
efficiencies, and employee-hour calculations.
Extensive data and large amount of engineering time are required to
prepare such a detailed-item estimate. Thus, it is almost always prepared by
contractors bidding on lump-sum work from finished drawing and
specifications. An accuracy in the range of ± 5% is expected.
02/21/2024 30
Estimating Capital Investment: Unit Cost Estimate

Results in good estimating accuracies for fixed-capital investment provided
accurate records have been kept of previous cost experience. This method,
which is frequently used for preparing definitive and preliminary estimates,
also requires detailed estimates of purchased price obtained either from
quotations or index-corrected cost records and published data.
Accuracy: between 10 to 20%. Used for preparing definitive and preliminary
estimates.
02/21/2024 31
Estimating Capital Investment: Unit Cost Estimate
02/21/2024 32
Estimating Capital Investment: Percentage Of Delivered Equipment Cost
 This method for estimating the fixed or total-capital investment requires

determination of the delivered-equipment cost. The other items included in the
total direct plant cost are then estimated as percentages of the delivered-
equipment cost.
The additional components of the capital investment are based on average
percentages of the total direct plant cost, total direct and indirect plant costs, or
total capital investment.
It yields most accurate results when applied to projects similar in
configuration to recently constructed plants.
02/21/2024 33
Estimating Capital Investment: Percentage Of Delivered Equipment Cost
Accuracy: between 20 to 30%. Used for preparing definitive and

preliminary estimates. Let E= delivered purchased- equipment cost.
Such factor should be determined on the basis of the type of process

involved, design complexity, required materials of construction, location of
the plant, past experience, and other items dependent on the particular unit
under consideration.
02/21/2024 34
Estimating Capital Investment: Factorial Method: Lang Factors

Originally proposed by Lang and used quite frequently to obtain order-of-magnitude cost
estimates.
The cost of a process plant may be obtained by multiplying the equipment cost by some
factor (Lang,1947; Hand, 1958) to approximate the fixed or total capital investment. These
factors vary depending upon the type of process plan being considering.
These values may be used as Lang Factors for estimating
the fixed capital investment or the total capital investment
Lang Factors (F)
Types of plant
Fixed capital investment Total capital
investment
Solid processing plant 3.9 4.6
Solid-fluid processing plant 4.1 4.9
Fluid processing plant 4.8 5.7
02/21/2024 35
Accuracy of the capital Table. Typical factors for capital cost based on
investment estimate can be delivered equipment costs
increased by using not one but a
number of factors: different
factors for different types of
equipment, separate factors for
installation of equipment,
foundations, utilities, piping, etc.
02/21/2024 36
Classification of processes by Lang (1947). A distillation unit would be

classified as a typical fluid process plant, a coal briquetting plant as a typical
solid processing plant and a solvent extraction plant complete with bean
preparation and metal processing facilities as a typical solid-fluid processing
plant.
 A capital cost investment estimate proposed by Hirsch and Glazier.
02/21/2024 37
02/21/2024 38
Estimating Capital Investment: Power Factor Applied to Plant-Capacity Ratio
 This method for study or order-of-magnitude estimates relates the fixed-

capital investment of a new process plant to the fixed-capital investment of
similar previously constructed plants by an exponential power ratio.
For certain similar process plant configurations, the fixed-capital

investment of the new facility is equal to the fixed-capital investment of the
constructed facility C multiplied by the ratio R, defined as the capacity of
the new facility divided by the capacity of the old, raised to a power X.
X This power has been found to average between 0.6 and

Cn =C(R) 0.7 for many process facilities.
02/21/2024 39
For a similar process plant configurations, the fixed capital investment (Cn)
of the new facility (involving the direct and indirect plant cost) can be
approximated as: f = lumped cost index factor relative to the original facility cost,
D, I : the direct cost (D), and the total indirect cost (I) for the
previously installed facility of a similar unit on an equivalent site.
R = (capacity of new facility) / (capacity of old facility).
 The value of the power x approaches unity when the capacity of the process
facility is increased by adding identical processes units instead of increasing
the size of the process equipment.
 The lumped cost index factor f is the product of: a geographic labour cost
index (fE), the corresponding area labor productivity index (fL), and a
material and equipment cost index (eL).
02/21/2024 40
For a new similar single-process plant at a new location with a different

capacity and with the same number of process units, the following relationship
has given good results for the fixed-capital investment estimation:
02/21/2024 41
For a similar plant at a new location and with a different capacity, but with
multiples of the original process units: Fixed-capital investment can be
estimated by the following equation with better accuracy.
More accurate estimates obtained by subdividing the process plant into

various process units, such as crude distillation units, reformers, alkylation
units, etc., and applying the best available data from similar previously installed
process units separately to each subdivision.
02/21/2024 42
Estimating Capital Investment: Investment Cost Per Unit of Capacity.

 Many data have been published giving the fixed-capital investment
required for various processes per unit of annual production capacity such
as those shown in Table 19.
Table 19: Capital-cost data for

processing plants (1990)
02/21/2024 43
02/21/2024 44
 Although these values depend to some extent on the capacity of the

individual plants, it is possible to determine the unit investment costs
which apply for average conditions.
 An order-of-magnitude estimate of the fixed-capital investment for a
given process can then be obtained by multiplying the appropriate
investment cost per unit of capacity by the annual production capacity
of the proposed plant.
 The necessary correction for change of costs with time can be made
with the use of cost indexes.
02/21/2024 45
Estimating Capital Investment: Turnover Ratio
 A rapid evaluation method suitable for order-of-magnitude estimates.
Gross Annual Sales = (annual production rate)

(average selling price of the product )
 The reciprocal of the turnover ratio is sometimes called the capital ratio or
the investment ratio.
 Turnover ratios of up to 5 are common for some business establishments
and some are as low as 0.2.
 For the chemical industry, as a very rough rule of thumb, the ratio can be
approximated as 1.
02/21/2024 46
Cost Analysis: Numerical Example 1
The purchase cost of a shell and-tube heat exchanger with 10 m2 of heating

surface was $ 4200 in 1990. What should be the purchase cost of a similar heat
exchanger with 100 m2 of heating surface in year 2000? Use both Marshal Swift
index and chemical engineering plant cost index. Additional data also given the
purchased cost capacity exponent for this type of heat exchanger is 0.6 for
surface areas ranging from 10 to 40 and 0.81 for surface areas ranging from 40
to 200 m2.
Year Marshal and Swift Index Chemical Engineering Plant cost Index
1990 929.3 357.6
2000 1097.7 394.1
02/21/2024 47
Cost Analysis: Numerical Example : solution
Inflation correction is due to year

change and capacity correction is
due to change in capacity.
02/21/2024 48
 A process plant was erected in City-A for a direct cost of RS 300 Lakh
and indirect cost of RS 150 Lakh in 1990. Estimate the fixed cost capital
investment in1999 for a similar process plant located in City-B with
twice the process capacity but within equal number of process units use
a power factor of 0.6.
City Relative labour Relative productivity Year Marshall and Swift
rate factor equipment index
A 0.87 1.05 1990 915.1

B 1.25 0.90 1999 1068.53
 Solution
 Relative labour rate ratio= 1.25/0.87=1.437
 Relative productivity factor ratio=0.90/1.05=0.857
02/21/2024 49
 Labour cost for City-B relative to City-A=1.437/0.857=1.677 (This is f).

f= lumped cost index factor relative to the original facility
cost=1.677
D= the direct cost =300 lakh
I= the indirect cost=150 lakh
R= the capacity of the new facility /capacity of the old
facilities =2
x =0.6
02/21/2024 50
Cost Analysis: International Location Factor: Numerical

Example 2
 Consider the cost of constructing a polymer plant with capacity of 20000
metric tons per year was estimated as 60 million dollar on a 2006 U.S. Gulf
Coast basis. What would be the cost in U.S. dollars on a 2006 Germany
basis?
Country Region Location factor Location factors will produce the cost in US $.
United States Gulf Coast 1.00 The location factors in the table are based on 2003
East Coast 1.04 data and can be updated the 2003 data by dividing
Canada Ontario 1.00 by the ratio (U.S. dollar /local currency) in 2003
France 1.13 and multiply by the ratio (U.S. dollar/local
Germany 1.11 currency) in the year of interest. For future cost
India 1.02 estimate, predict currency variation.
02/21/2024 51
Cost Analysis: International Location Factor: Numerical

Example 2
 Solution
 The 2003 location factor for Germany =1.11.

 The average exchange rate in 2003:1 Euro = 1.15 $.
 The average exchange rate in 2006: Euro= 1.35 $.
The 2006 location factor for Germany is
=[(2003 location factor) /(U.S$/ Euro in 2003)] * (U.S$ / Euro in 2006)
=1.11*1.35/1.15
=1.30
The cost of building the polymer plant in Germany in 2006
= $60 million * 1.30=$78 million.
02/21/2024 52
THANK YOU..
02/21/2024 53

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CHENG5193 :PLANT DESIGN AND ECONOMICS

Financial & Economic Analysis of a Plant

Lecture 10 :Cost Factors In Capital Investment

 Cost Factors in Capital Investment

Cost index: example

In a desalination plant, an evaporator of area 200 m2 was purchased in 1996

Cost Factors in Capital Investment

 Capital investment, as defined earlier, is the total amount of money needed

Cost Factors in Capital Investment

Table 4 summarizes this typical variation in component costs as percentages of

Cost Factors in Capital Investment

 Usually this encompasses the manufacturing area of a proposed plant or

Cost Factors in Capital Investment: Estimating Purchase

Cost Factors in Capital Investment: Purchased Equipment

 The cost of purchased equipment is the basis of several predesign methods

Cost Factors in Capital Investment: Purchased Equipment

 The most accurate method for determining process equipment costs is to

Cost Factors in Capital Investment: Estimating Equipment Costs by Scaling

 It is often necessary to estimate the cost of a piece of equipment when no

Cost Factors in Capital Investment: Estimating Equipment Costs by Scaling

Cost Factors in Capital Investment: Purchased-Equipment Installation

 The installation of equipment involves costs for labor, foundations, supports,

Cost Factors in Capital Investment: Purchased-Equipment Installation

Cost Factors in Capital Investment: Instrumentation and controls

Cost Factors in Capital Investment: Piping

Table 8: Estimated cost of piping

Cost Factors in Capital Investment: Electrical systems

Table 9: Component electrical costs

Cost Factors in Capital Investment: Buildings Including Services

Cost Factors in Capital Investment: Buildings Including Services

Cost Factors in Capital Investment: Yard Improvements

Table 12: Typical variation in

Cost Factors in Capital Investment: Service Facilities

Cost Factors in Capital Investment: Service Facilities

Cost Factors in Capital Investment: Land

Cost Factors in Capital Investment: Engineering and Supervision

 The costs for construction design and engineering, drafting, purchasing,

Cost Factors in Capital Investment: Engineering and Supervision

 Table 14: Typical variation in percent of fixed-capital investment for

Cost Factors in Capital Investment: Construction/Field Expense

 Includes temporary construction and operation, construction tools and

Cost Factors in Capital Investment: Construction/Field Expense

 Table 15: Typical variation in percent of fixed-capital investment for

Cost Factors in Capital Investment: Contractor’s Fee & Contingencies

Cost Factors in Capital Investment: Startup expenses

Method of Capital Cost Estimation

 Various methods can be employed for estimating capital

Method of Capital Cost Estimation: Detailed-item Estimate

Estimating Capital Investment: Unit Cost Estimate

Estimating Capital Investment: Unit Cost Estimate

Estimating Capital Investment: Percentage Of Delivered Equipment Cost

 This method for estimating the fixed or total-capital investment requires

Estimating Capital Investment: Percentage Of Delivered Equipment Cost

Accuracy: between 20 to 30%. Used for preparing definitive and

Such factor should be determined on the basis of the type of process

Estimating Capital Investment: Factorial Method: Lang Factors

Estimating Capital Investment: Factorial Method: Lang Factors

Estimating Capital Investment: Factorial Method: Lang Factors