PROCESS ECONOMICS

Lecture # 4
Analysis of Cost Estimation
 INSTRUCTIONAL LEARNING OBJECTIVES
After completing this chapter, students should be able to understand the
following:

 Introduction
 Factors Affecting Investment
 Estimation of Capital Investment
 Classifications of Capital Cost Estimates  Cost Indexes
 Methods for Estimating Capital Investment  Estimating Cost by Scaling
 Cash Flow for Industrial Operations  Estimating fixed costs
 Direct, Indirect, Fixed, & Variable cost
 Components of capital cost
2
 COST ESTIMATION

 Estimation (or estimating) in general, computation of a price

with regard to time and resource requirements upon which a
firm quotation is based.
 For the most part, engineers generally have the responsibility of
cost estimation.
 Future costs are very critical to the analysis of a project.
 Revenue generation generally comes from marketing or sales
areas.
 COST ESTIMATION

 What is the purpose of estimating?

 Quoting, bidding, or evaluating bids;

 Profitability analysis;
 Basis for make versus buy decisions;
 Investment justification;
 Basis for comparing manufacturing methods;
 Basis for cost reduction;
 Planning new products and services;

All these involve developing cash flows for feasible alternatives.

 COSTS TO ESTIMATE

What costs are to be estimated?

 Equipment cost
 Delivery charges
 Installation costs
 Insurance costs (premiums)
 Training of personnel for equipment use.
 Capital Cost Estimation

 Capital Costs  Product Costs

 Fixed capital  Manufacturing costs

 Manufacturing (direct) Fixed costs
 Nonmanufacturing (indirect)  Overhead costs
 Working capital  General expenses
 Administrative expenses
 Distribution & marketing costs
 R&D
 Capital Cost Estimation

 Capital Cost pertains to the costs associated with construction of new plant or
modifications to an existing chemical manufacturing plant.

 Capital investment (new plant)

 Types of costs include:

 Initial Costs
 Operating Costs
 Maintenance Costs
 Product Costs
 Cost of Capital (Interest Lost)
8
Cumulative Cash Position
Project Cash Flow and Economic Evaluation
The best methods of assessing the profitability
Consider Curve 1 of alternatives are based on projections of the
A = Start of the project cash flows during the project life.
.B = Design and other preliminary work
C = buildings, plant and equipment

.Working capital = plant between C and D AN = Project lifetime

LD = Maximum investment
D = Production starts
E = Production is below design conditions
F = The project breakeven point, the
.cumulative cash flow is again zero
G = The end of the projects life (Design);
the net rate of cash flow may decrease N
owing to, for example, increasing
maintenance costs, a fall in the market
.price for the product, and so on
.H = The end of the project (real)

Cash flow for a typical project

Project Cash Flow and Economic Evaluation

Payback time or Pay-Back Period (PBP) = Payback time AF.

A time period in which the capital itself and the interest on it

must be entirely paid back.
LD = Maximum
investment
PBP = fixed capital investment (FCI)/ annual cash flow (Aj)
PBP = total investment/ average annual cash flow

Return on Investment (ROI( = ratio of average yearly income

(HK) over the productive life of the project (KD) to the total
initial investment (LD), expressed as a percentage.

ROI = HK/KD × 100/LD % per year

ROI = [net annual profit/total investment]×100%
Project Cash Flow and Economic Evaluation

 Annual discounted cash flow (ADCF)

 at the end of year 1 => ADCF1 = ACF1/(1 + i);

LD = Maximum
 at the end of year 2 => ADCF2 = ACF2/(1 + i)2 investment

 and at the end of year n => ADCFn = ACFn/(1 + i)n

The sum of the annual discounted cash flows over n years

ΣADCF is known as the net present value (NPV) of the
project.
NPV =ΣADCF
Net present value (NPV): The net present value of a project is
the sum of the present values of each individual cash flow.
 Project Cash Flow and Economic Evaluation

The value of NPV is directly dependent on the choice

of the fractional interest rate i and project lifetime n.

Curve 1 = no discounting, i = 0, and the project NPV is

equal to the final net cash position given by H.

Curve 2 = effect of discounting at a fixed rate of

interest, and the corresponding project NPV is given
by J .

Curve 3 shows a larger rate of interest, but it is chosen

such that the NPV is zero at the end of the project.

A project with a negative NPV is not a profitable

13
proposition.
 Project Cash Flow and Economic Evaluation
 Gross earnings (gross profit = total income -
total product cost);
a general range for gross profit cost is 15-40%
of gross earnings
 Net annual profit = gross annual earnings -

income taxes

In the production
 Breakeven = Point when Total revenues (R) =
Total costs (TC)
Cash flows =Total income (R)
Operating costs (TC)
Gross or Total profit (R - TC)
Depreciation charge (d)
Net profit (R - TC – d)
Project Cash Flow

• The flow of cash for the fixed capital investment is usually spread over
the entire construction period.
• Because income from sales and cost of operations may occur on an
irregular time basis, a reservoir of working capital must be available to
meet these requirements.

15
 Direct, Indirect, Fixed, & Variable cost

 Net profit = Total income – all expenses

 Direct plant expenses
raw materials, labor, utilities

 Indirect expenses
administrative salaries, product sales, distribution cost
 Fixed cost
 Variable cost

Breakdown of fixed capital investment items for a chemical process  Table 6-1
16
 Fixed and Variable Cost

The linear cost function y = a + bX The Independent

Variable:
The cost driver
The Dependent
Variable:
The cost that is The Intercept: The slope of the line:
being predicted Fixed Costs variable cost per unit
Variable Costs – costs
that change in total in
Fixed Costs – costs that relation to some chosen
do not change in total in Production
Cost
activity or output
Co st
relation to some chosen Total
Variable
activity or output Cost

Fixed Cost

Units of Output kg; $/m3; $/m2; $/m/$ 20

 The linear cost function in cost terms

The general cost equation: y = a + bx

ues
en
TC = FC + VX Re
v

Total Cost
The general cost
Total Cost (TC) is the a l c ost equation:
The activity (X) is the Tot
dependent variable. independent variable. Y = a + bX
Variable cost
in cost terms
The intercept term (FC) is The X term coefficient (V)
Fixed cost TC = FC + VX
the estimate of fixed costs. is the estimate of variable
cost per unit of activity,
the slope of the cost line.
Activity

Example:
A college student pays SR1000 per month to rent a two-bedroom apartment, and SR500 for other monthly
expenses. The monthly rent will be a fixed cost. The costs for other monthly expenses would be a variable cost.
21
The linear cost function
Example

22
Linear Breakeven Analysis

Total income
Making is better Revenues (R)
Cost

Total Cost (TC)

Breakeven point
Loss
Variable Cost (VC)

Fixed Cost ( FC)

Profits (P) : P = R – TC
Breakeven: P = 0 => R = TC
Product Quantity (Q)
Q’
Breakeven chart for chemical processing plant

Maximum
gross earnings
 COMPONENTS OF CAPITAL COST
Capital cost for new design
The total investment required for a new plant (design) can be broken down into
five main parts:

1. Inside Battery Limits (ISBL) investment;

2. Off-site Battery Limits (OSBL) investment;
3. Engineering fees;
4. Utility investment;
5. Working capital;

We want to estimate the entire amount of money that the investor has to put into
the project to get it started. This has several components:
Chapter2: Plant Location & plant Layout
COMPONENTS OF CAPITAL COST

Components of Capital Cost

 COMPONENTS OF CAPITAL COST

Inside Battery Limits (ISBL) plant investment

• The battery limit is a geographic boundary that defines the
manufacturing area of the process (system that converts raw
materials into products).
• This is the cost of the plant “inside the fence”: Includes equipment,
bulk materials, installation costs, foundations, roads, etc.
• It includes process equipment and buildings or structures to house it
but excludes boiler-house facilities, site storage, pollution control, site
infrastructure, and so on;
Total Capital Investment (TCI or CT)

• The term Capital Investment has two usages in business:

• Firstly, Capital Investment refers to money used by a business to
purchase fixed assets, such as land, machinery, or buildings (Fixed-
capital investment, FCI or CF).
• Secondly, Capital Investment refers to money invested in a business
with the understanding that the money will be used to purchase fixed
assets, rather than used to cover the business' day-to-day operating
expenses (working capital, WC or CW).

⟶ CT = CF +CW
Total Capital Investment (TCI or CT)

Total capital cost breakdown

Total Capital Investment (cont.)

 Fixed-capital investment = direct costs + indirect costs

CF = CD+CI
 The fixed capital CF includes the cost of the purchased equipment,
installation, piping, instrumentation and control, electrical, site
improvement and foundations, auxiliary facilities, land, processing
buildings, off-site facilities (administrative and other offices,
warehouses, laboratories, shops), engineering, start-up, contractors
fee, and contingency.
 EXAMPLE 6-1
Estimation of Fixed-Capital Investment Using Ranges of
Process-Plant Component Costs

Make a study estimate of the fixed-capital investment for a process

plant if the purchased-equipment cost is $100,000. Use the ranges of
process-plant component cost outlined in Table 6-3 for a process plant
handling both solids and fluids with a high degree of automatic controls
and essentially outdoor operation. Do not include land.
 SOLUTION
The estimated cost for a component cost is calculated as $100,000 multiplied by the
normalized percentage for the component, and then divided by the normalized
percentage for the purchased equipment. All values are rounded to the nearest $1000.

25×100/109

8.3×100,000/22.9
9.2×36,000/8.3
Working Capital, WC or CW
• The working capital CW, is necessary for the operation of the plant.
• The working capital CW in an industrial plant consists of the total amount of money
invested in:
1. Raw materials;
2. Supplies carried in stock (Usually 1-month supplies valued at delivery prices);
3. Finished semi-finished products (for 1 month’s production);
4. Accounts receivable payable;
5. Cash kept on hand for monthly payment of operating expenses (salaries, wages and
raw materials purchases)
6. Accounts payable
7. Taxes payable
WC = varies with different companies;
Most chemical plants used 10-20% (it may increase to as much as 50% or more for companies
producing products of seasonal demand)
 COST INDEXES
 Cost indexes can be used to give a general estimate from published data;
 Cost index is based on time in the past (Historic Cost Data);
 An index value for a given time showing the cost at that time relative to a certain base
time.

 We can project costs forward by using extrapolated values of an index or an expected

inflation rate.
 Inflation = rising prices for goods & services (Future dollars less valuable than present dollars)
 Costing for inflationary effects
 COST INDEXES
 An index is a dimensionless number that indicates how a cost or a price has
changed with time (typically escalated) with respect to the base year.

Cn = Ck (In /Ik )

Cn = cost or selling price of an item in year n

Ck = cost or price of the item at an earlier point in time (say year k)
In = index value in year n
Ik = index value in year k
 COST INDEXES
 Most common indexes:

 Marshall and Swift all-industry

 Process-industry equipment indexes
 Engineering News-record construction index
 Nelson-Farrar refinery construction index
 The Chemical Engineering Plant Cost Index (CEPCI) or “CE”
 Nelson-Farrer Refinery Construction Index or “NF index”
 Journal of Engineering News Record
 Construction cost index
 Journal of Process Engineering
 Monthly cost indices
 COST INDEXES
 Marshall & Swift Equipment Cost Indexes

 The Marshall and Swift (formerly known as Marshall and Stevens)

equipment index is found in each issue of the magazine Chemical
Engineering and is normally divided into two categories:

 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.
 COST INDEXES
CHEMICAL ENGINEERING www.chemengonline.com December 2010
COST INDEXES
 COST INDEXES
 The Chemical Engineering Plant Cost Index (CEPCI or CE)
 The four major components of this index are weighted by percentage in the following
manner:
 equipment, machinery, and supports: 61
 erection and installation labor: 22
 buildings, materials, and labor: 7
 engineering and supervision: 10

 The major component, equipment:

 fabricated equipment: 37
 process machinery: 14
 pipe, valves, and fittings; 20
 process instrument and controls; 7
 pumps and compressors: 7
 electrical equipment an materials: 5
 COST INDEXES
The Chemical Engineering Plant Cost Index (CEPCI or CE)
 COST INDEXES
The Chemical Engineering Plant Cost Index (CEPCI or CE)
 COST INDEXES
The Chemical Engineering Plant Cost Index (CEPCI or CE)
 COST INDEXES
The Chemical Engineering Plant Cost Index (CEPCI or CE)
 COST INDEXES
Nelson-Farrer Refinery Construction Index

 For oil refinery and petrochemicals projects, the Oil and

Gas Journal publishes the Nelson-Farrer Refinery
Construction Index (NF index): http://www.ogj.com
 The Nelson-Farrer index is on a U.S. Gulf Coast basis
rather than U.S. average and is more reliable than the
CE index for the types of equipment used in
hydrocarbon processing.
 Base year 1946 =100
• The Nelson-Farrar refinery construction index has
shown a very large increase with time and should be
used with caution and only for refinery construction.
Other Cost Indexes
 Other cost indexes for materials and labors for various types of industries are
published monthly by
 The US Bureau of Labor Statistics in the Monthly Labor Review
http://www.bls.gov/opub/mlr/mlrhome.htm

 North Carolina Department of Revenue:

 Cost Index and Depreciation Schedules
http://www.dor.state.nc.us/publications/cost_archive/99archive/costindex.html

 Ministry of Labor in the Saudi Arabia

http://portal.mol.gov.sa/Sites/default.aspx
 EXAMPLE

(0.35*115.9)+(0.35*127)+(0.2*121.5)+(0.1*109.8)=
 COST INDEXES
 All cost indices should be used with caution
and judgment. The longer the period over
which the correlation is made, the more
unreliable the estimate.
 Between 1970 and 1990, prices rose
dramatically. Prices then grew at a more or
less steady 2 to 3% per year until 2003, when
high demand for fuels projects and high
energy prices caused another period of
steeper price inflation.
 For use with chemical-plant investment
estimates, the Marshall and Swift equipment
cost indexes and the Chemical Engineering
plant cost indexes are recommended.
 COST INDEXES – Using Excel
Chemical engineering plant cost index, 1957-59 = 100
Year Cost-index
1980 261
1981 267
1982 314
index
1983 317 600
1984 323
1985 325
1986 318
550
1987 324
1988 343 500
1989 355
1990 358

Cost index
1991 361 450
1992 358
1993 359
1994 368
400
1995 381
1996 382 350
1997 387
1998 390
300 5 4 3 2
1999
2000
391
394
y = -0.0002x + 1.6858x - 6723.7x + 1E+07x - 1E+10x + 5E+12
2001 394 250 2
2002 396 R = 0.9662
2003 402
2004 444 200 Years
2005 468
2006 500 1978 1985 1992 1999 2006 2013
2007 525
2008 575
2009 522
2010 551
2011 565 Jan.'11

`
 EXAMPLE
A certain index for the cost of purchasing and installing utility boilers is
keyed to 1974, where its baseline value was set at 100. Company X
installed a 50,000 lb/hr in 1989 for $350,000 when the index had value
of 312. This same company must install another boiler of the same size in
1996. The index in 1996 is 468.
What is the cost of new boiler?

Approximate cost of new boiler =

C1996 = $350,000 (468/312) = $525,000
 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 2010 using the two indices
Marshal and Swift Index, and Chemical Engineering Plant Cost Index.
b. Compare the results.
 SOLUTION
From Tables:
1990 2010
Marshal and Swift Index 915 1473.3
Chemical Engineering Plant Cost Index 358 550.8

a. Marshal and Swift: Cost = ($25,000)(1473.3/915) = $40,254

Chemical Engineering: Cost = ($25,000)(550.8/358) = $38,464

b. Average Difference: ($ 40,254 - 38,464)/($ 40,254 + 38,464)/2)(100) = 4.54%

 EXAMPLE
A centrifuge cost $95,000 in 1998. What is the cost of the same
centrifuge in third quarter of 2004? Use the CE index.
 Estimating Equipment Cost by Scaling

 Sometimes referred to as the exponential model

 Often used to cost industrial plants and equipment

CA /CB = (SA /SB )n => or CA = CB (SA /SB )n

CA = cost for plant A

CB = cost for plant B
SA = size of plant A
SB = size of plant B
n = cost-capacity factor to reflect economies of scale
 Purchased Equipment
 The cost of purchased equipment is the basis of several predesign methods
for estimating capital investment.
 The various types of equipment can often be divided conveniently into:

 Processing equipment
 Raw-materials handling and storage equipment
 Finished-products handling and storage equipment

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

obtain firm bids from fabricators or suppliers.
• 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.
 Purchased Equipment

 Limited information on process equipment costs has also been published

in various engineering journals.
 Costs for a large number of different types and capacities of equipment
are presented in Chaps. 14 through 16. (Peters and Timmerhaus).
 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.
 Because of this, the 0.6 factor should only be used in the absence of other
information.
 Estimating Equipment Cost by Scaling
 The cost of most plant items varies with the equipment size in a non-linear manner:

 By taking logs, we can usually get a reasonably good correlation over a few orders
of magnitude
n
Cost A  Size A 
   = Xn =>
Cost B  Size B 

 Cost of equipment A = Cost of equipment B × X 0.6

 The exponent n is 0.6 for many types of equipment, hence this is often known as
the “Six-tenths rule”
 Estimating Equipment Cost by Scaling
 n = cost-capacity factor to reflect economies of scale, actually, it is vary from 0.3 to 1.0
 In general:

 0<n<1 for single equipment

 0.5<n<1 for whole plant

 The value of n traditionally taken as 0.6; the well known six-tenths factor rule.
 Predictions can be made using the six-tenths factor rule.
 Use only in the absence of other information.
 Do not use beyond 10-fold range of capacity.
Typical exponents in the six-tenths factor rule
(n)

Minimum

Maximum
Investment Cost Per Unit Capacity
Estimating Equipment Cost by Scaling
 Figure 6.5 presents a log-log plot of capacity versus cost for shell and
tube heat exchangers, the straight line with a slope =0.6
 EXAMPLE 6-2

The purchased cost of a 0.2-m3 glass-lined, jacketed reactor was $10,000 in 1991.
Estimate the purchased cost of a similar 1.2-m3, glass-lined, jacketed reactor in
1996. Use the annual Chemical Engineering plant cost index to update the
purchase cost of the reactor.

Chemical Engineering plant cost index

For 1991 361
For 1996 382
SOLUTION
 Equipment Cost
The cost factors for materials of construction

M
Q 
CE CB   f M f PfT
 QB 

CE  equipment cost with capacity Q

C B  known base cost for equipment with capacity Q B
M  constant depending on equipment type
f M  correction factor for materials of construction
f P  correction factor for design pressure
f T  correction factor for design temperature
Materials Cost Factors, fM

Express costs relative to plain carbon steel

• Carbon steel 1.0

• Aluminum & bronze 1.07
• Cast steel 1.1
• 304 stainless steel 1.3
• 316 stainless steel 1.3
• 321 stainless steel 1.5
• Hastelloy C 1.55
• Monel 1.65
• Nickel & inconel 1.7
 Correction factor for materials of construction, fM

Note, the application of the factors from Tables 2.2 to 2.4 should only be applied to the equipment and pipework
Correction factor for design pressure, fP and temperature, fT

Note, the application of the factors from Tables 2.5 to 2.6 should only be applied to the equipment and
pipework

Matches' Process Equipment Cost Estimates

http://www.matche.com/equipcost/Default.html
The fixed-capital investment of a new process plant

 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.

Cn is new fixed-capital investment

C is the fixed-capital investment of the constructed facility
fe is the cost index ratio at the time of cost Cn to that at the time of C
R is a ratio, defined as the capacity of the new facility divided by the capacity of the
old, raised to a power X.
 This power has been found to average between 0.6 and 0.7 for many process
facilities.
 Table 6-11 gives the capacity power factor (x) for various kinds of processing
plants.
The fixed-capital investment of a new process plant

 A closer approximation for this relationship which involves the direct and
indirect plant costs has been proposed as:

The ratio R, defined as the capacity of the new facility divided by the capacity of the
old, raised to a power X.
f = a lumped cost index factor relative to the original facility cost, it is the product of a
geographic labor cost index, area labor productivity index, and a material and
equipment cost index.
D = the direct cost for previously installed facility
I = the indirect cost for previously installed facility
 Location (geographic) Factors

Capital Investment
Location (geographic)
Factors

US Gulf Coast 1.00

US west Coast 1.25
Western Europe 1.20
Mexico 0.95
Japan 1.15
Pacific Rim 1.00
India 0.85
EXAMPLE 6-4: Estimating relative costs of
construction labor as a function of geographical area

If a given chemical process plant is erected near Dallas, Texas (Southwest area) with
a construction labor cost of $100,000 what would be the construction labor cost of
an identical plant if it were to be erected at the same time near Los Angeles (Pacific
Coast Area) for the time when the factors given in Table 6.12 apply?
 SOLUTION

Relative median labor rate-Southwest 0.88 from Table 6.12

Relative median labor rate-Pacific Coast 1.22 from Table 6.12
Relative labor rate ratio = 1.22/0.88 = 1.3864

Relative productivity factor-Southwest 1.04 from Table 6.12

Relative productivity factor-Pacific Coast 0.89 from Table 6.12
Relative productivity factor ratio = 0.89/1.04 = 0.8558

Construction labor cost of Southwest to Pacific Coast = (1.3864)/(0.8558) = 1.620

Construction labor cost at Los Angeles = (1.620 × $100,000) = $162,000
EXAMPLE 6-5: Estimation of Fixed-Capital Investment
with Power Factor Applied to Plant/Capacity Ratio

If the process plant described in Example 6-1 was erected in the Dallas area for a
fixed-capital investment of $436,000 in 1990, estimate the fixed-capital investment
in 1998 for a similar process plant located near Los Angeles with twice the process
capacity but with an equal number of process units. Use the power factor method
to evaluate the new fixed-capital investment, and assume the factors given in Table
6-12 apply.
SOLUTION

Marshall and Swift all-industry index (Table 6-2)

EXAMPLE: Estimating cost of plant using
scaling factors and cost index
Make a preliminary estimate of the cost of building a 600-MW fossil
fuel power plant. It is known that a 200-MW plant cost $100 million 20
years ago when the appropriate cost index was 400. That cost index is
now 1,200. The power-sizing factor is 0.79.
 SOLUTION

• Today’s estimated cost of a 200-MW plant = C200-MW = CB (IA /IB )

 $100 million × (1,200/400) = $300 million

• Today’s estimated cost of a 600-MW plant = C600-MW = CB (SA /SB )n

 $300 million × (600/200)0.79 = $714 million
For equipment
CA = CB (IA /IB ) (SA /SB )n
See example 6-2
 Purchased-equipment

 Purchased-equipment prices are usually quoted as f.o.b. (free on

board, meaning that the purchaser pays the freight).
 Pre-design estimates delivery allowance: 10% of the purchased
equipment cost is recommended.
 The cost of purchased equipment is the basis of several predesign
methods for estimating capital investment.

Types of Equipment:
 1. Processing equipment

 2. Raw materials handling and storage equipment

 3. Finished-products handling and storage equipment.

 Purchased-equipment
 Sizes and specifications determined
from equipment parameters fixed or
calculated along with the material and
energy balances (See Chapter 12).
 Most accurate method: obtain firm
bids from fabricators and suppliers.
 Second best: cost values from the file
of past purchase orders (must be
corrected with the appropriate cost
index ratio).
 Capital investment is the total amount
of money needed to supply the
necessary plant and manufacturing
facilities plus the amount of money FCI = Fixed Capital Investment
required as working capital for
operation of the facilities.
 Purchased-equipment Installation

 Involves costs for labor, foundations, supports, platforms, construction expenses, etc.
 There is wide variations of installation labor cost depending on equipment size.

 Labor & materials for installation 8-9%

of Purchased-Equipment.
 This is equivalent to approximately 2 %

of total capital investment.

 Instrumentation and Controls
 8-50 % of the total delivered cost (taking 26%, this is about 5% of the total capital
investment).
 It depends on the amount of control required and may amount to 6 to 30 percent

of the purchased cost for all equipment.

Piping
Includes labor, valves, fitting, pipe, support, etc.
 Can run as high as 80% of the total delivered cost (about 20 % of the total fixed
capital investment).
 Electrical Systems & Buildings
Electrical Systems
• 15-30% of the delivered purchased equipment cost (4-8 % of fixed capital investment).

Buildings
• Buildings including services, consist of labor, materials and supplies. Plumbing, heating,
ventilation are included.
Yard Improvements
 Fencing, grading, roads,
sidewalks, railroad sidings,
landscaping: 10-20% of the
delivered purchased
equipment cost (2-5 % of fixed
capital investment).

Service Facilities
 Utilities for supplying steam,
water, power, compressed air
and fuel. Also includes shop,
first aid, cafeteria...30-80% of
the delivered purchased
equipment cost (55% on
average for plant handling
solid/liquids). This is equivalent
to 8-20 % - 14% average - of
fixed capital investment)
Health, Safety, and environmental Functions
• See previous table. This is an increasingly important issue. Pollution mitigation is
sometimes the driving force for new process development.

Land
• Cost factor per acre as high as 30-50% between a rural district and highly industrialized
area. Average land cost for industrial plants amount to 4-8% of the delivered purchased
equipment cost (1-2 % of fixed capital investment).
• By law, land cost cannot be depreciated – not included in the fixed-capital investment.

Engineering and Supervision

• Considered as an indirect capital; cost investment – approx. 30% of the delivered
purchased equipment cost (8 % of fixed capital investment).

Legal Expenses
• 1-3 % of fixed capital investment
Construction expenses
• Indirect cost associated to temporary construction, and operation, construction tools
and rentals, home office personnel, construction payroll, travel and living, taxes and
insurance, and other construction overhead. 8-10 % of fixed capital investment.

Contractor’s Fee
• 2-8% of direct plant cost or 1.5-6% of fixed capital investment

Contingencies
• Unexpected events and changes (storms, floods, strikes, etc.)
• 5-15 % of fixed capital investment (8 % average).
 GROSS PROFIT, NET PROFIT, AND CASH FLOW

 Gross profit (also called gross earnings) = the product sales revenue - the total product cost.
 Gross profit is expressed both with and without depreciation included as follows:

where
gj is gross profit, depreciation not included, in year j
sj is the total income
coj is the cost for operation (not including depreciation)

where
Gj is gross profit, depreciation included, in year j
dj is the depreciation charge
 GROSS PROFIT, NET PROFIT, AND CASH FLOW

 Net profit (also called net earnings) = the amount retained of the profit after income taxes
have been paid:

where
F is the fixed income tax rate
NPJ is the net profit in year j

 The cash flow resulting from process operations is given by

where NPJ is the net profit in year j

EXAMPLE 6-7: Breakeven Point, Gross and Net
Profit for a Process Plant

The annual variable production costs for a plant operating at 70 percent

capacity are $280,000. The sum of the annual fixed charges, overhead
costs, and general expenses is $200,000, and may be considered not to
change with production rate. The total annual sales are $560,000, and
the product sells for $4/kg. What is the breakeven point in kilograms of
product per year? What are the gross annual profit Gj (depreciation
included) and net annual profit for this plant at 100 percent capacity if
the income tax rate is 35 percent of gross profit?
 SOLUTION
 The breakeven point occurs when the total annual product cost equals the total annual
sales.
 The total annual product cost is the sum of the fixed charges (depreciation included),
overhead, and general expenses, and the variable production costs.
 Total annual sales are the product of the number of kilograms of each product and
corresponding selling price per kilogram. Thus,
SOLUTION
 Summary
Cost Components in Capital Investment
 Equipment costs may be obtained from equipment vendors or from published cost data. Care should be
taken as to the basis of such cost data.

 Free On Board (FOB) means the manufacturer pays for loading charges onto a shipping truck, railcar, barge
or ship, but not freight or unloading charges.

 To obtain a delivered cost requires typically 5 to 10% to be added to the FOB cost.

 The delivery cost depends on location of the equipment supplier, location of site to be delivered, size of the
equipment, and so on.

 The cost of a specific item of equipment will be a function of:

 size
 materials of construction
 design pressure
 design temperature.

 The cost of the services (utilities and off-sites) ranges typically from 20 to 40% of the total installed cost of
the battery limits plant
 Summary
Cost Components in Capital Investment

A typical list of fixed-capital investment items for a chemical process

Range, % Indirect costs Range, % Direct Costs
4-21 Engineering and supervision 1-2 Land
4-16 Construction expenses 2-5 Yard improvements
2-6 Contractor’s fee 3-18 Buildings (including services)
5-15 Contingency 15-40 Purchased equipment
6-14 Purchased-equipment installation
2-8 Instrumentation and controls (installed)
3-20 Piping (installed)
Electrical equipment and materials
2-10 (installed)
8-20 Service facilities (installed)