Overview of Process Economics

An essential component of any sustainable design is the economic aspect. In designing a new process or retrofitting an existing one, many of the technical and environmental decisions are strongly impacted by the economic factors. Therefore, it is critical for engineers to study process economics to be able to do the following: Evaluate feasibility of new projects Improve performance of existing processes Make design and operating decisions Compare alternatives Decide strategic directions for the company Establish sound policies for process and product objectives (for example, matters pertaining to the environment, safety, and quality)

This chapter provides an overview of basic concepts and tools in cost estimation and economics of chemical processes to answer the following questions: What are the cost items involved in installing and operating a process? What types of cost estimation can be carried out and to what level of accuracy? How do we estimate the cost of building a plant or implementing a project? How do we account for the changes in market conditions and for the time value of money? How do we estimate the recurring costs associated with running the plant? How do we assess the economic viability of a project? How do we screen competing projects and select the most attractive alternative(s)?

To address these questions, this chapter focuses on the following topics: Cost types and estimation Depreciation Break-even analysis Time value of money Profitability analysis

COST TYPES AND ESTIMATION

Two primary costs should be evaluated: capital investment and operating costs. The total capital investment (TCI) or capital cost is the money needed to purchase and install the plant and all its ancillaries and to provide for the necessary expenses required to start the process operation. Once the plant is in production mode, then the continuous expenses needed to run the plant are referred to as the operating costs. The following sections provide the basis for how these costs are estimated, what the key elements in each cost are, and how these costs can be extrapolated and updated. Specifically, the following costs are discussed: Capital (fixed, working, and total) Equipment Operating Production (total annualized cost)

CAPITAL COST ESTIMATION

The TCI of a process is classified into two types of expenditures: fixed capital investment and working capital investment: The fixed capital investment (FCI) is the money required to pay for the processing equipment and the ancillary units, acquiring and preparing the land, civil structures, facilities, and control systems. In turn, the FCI is further classified into two components: manufacturing (or direct) and nonmanufacturing. The manufacturing FCI involves the fixed-cost items that are directly associated with production such as the processing equipment, installation, piping, pumping/compression, process instrumentation, process utility facilities and distribution, process waste treatment systems, and all the civil work associated with the production units. The nonmanufacturing FCI includes the fixed-cost items that are not directly tied to production such as land, analytical laboratories, storage areas, nonprocess utilities and waste treatment, engineering centers, research and development laboratories, administrative offices, cafeterias and restaurants, and recreational facilities. On the other hand, the working capital investment (WCI) is the money needed to pay for the operating expenditures up to the time when the product is sold as well as the expenses required to pay

for stockpiling raw materials before production (typically one to two months of raw materials are stockpiled prior to production). An important characteristic of the WCI is that it is recoverable at the end of the project. For instance, if the plant stockpiles a twomonth reserve of raw materials prior to starting the operation and maintains a two-month stock throughout the operation, then there is no need to buy raw materials during the last two months of the project, and the value of the WCI can indeed be fully recovered. Typically, the WCI ranges between 10 percent and 25 percent of the TCI. Figure 2.1 is a summary of the main components constituting the TCI. As the word estimation indicates, there is a level of uncertainty in most cost estimation studies. Depending on the objective of the cost estimation, there are different desired levels of accuracy. The Association for the Advancement of Cost Engineering (AACE) International (www.aacei.org) defines several types of cost estimation studies along with their accuracy ranges. Other classifications are also available in the literature. Table 2.1 provides a brief description of some types of estimates along with their accuracy levels and needed information. An important perspective in conducting a specific type of cost estimation study is to attain the right level of details. If there is a need to quickly generate ballpark c ost estimates of a potential project to decide on whether or not further assessment is needed, then an order-of-magnitude estimate or a study estimate may be all that is required at this stage. Little effort is spent and very rough estimates are obtained. However, these estimates may be exactly what is needed to decide on whether or not to consider the project any further and to charter more detailed studies where the time and effort are then justified. Several approaches are used for capital cost estimation. The following are some of the most commonly used methods: 1. Manufactures quotation 2. Computer-aided tools 3. Capacity ratio with exponent 4. Updates using cost indices 5. Factors based on equipment cost 6. Empirical correlations 7. Turnover ratio The following describes basic concepts and applications of these methods.

1. Manufacturers quotation Capital cost estimates may be obtained directly from specialized manufacturers and engineering firms. Depending on the level of details of the planned project, availability of resources, time limitations, and objective of the cost estimate, different levels of accuracy can be obtained. 2. Computer-aided tools Various computer-aided resources may be used to evaluate the FCI. Of particular importance are tools that are linked to process simulators because they are integrated with equipment performance and sizing as evaluated by simulation. Examples include ICARUS (www.aspentech.com) and SuperPro Designer (http://www.intelligen.com). 3. Capacity ratio with exponent When there are two identical (or at least very similar) plants of different capacities with the FCI known for one of them, then the FCI of the other plant may be estimated as follows:

Where FCIB and FCIA are the fixed capital investments of plants B and A, and CapacityB and CapacityA are the capacities (for example, flow rate of main product) of plants B and A, the exponent x is usually less than 1.0 and should be evaluated based on the actual data of the specific process. If no such data are available, x may be assumed to be 0.6 to 0.7 (hence, the name sixth-tenthsfactor rule) for order-of-magnitude estimates. Equation 2.2 is an expression of the economy of scale, which indicates that as the plant capacity increases, the FCI per unit production decreases. For instance, when x 0.6, doubling the plant capacity does not double the FCI but instead leads to 52 percent increase in FCI. Table 2.2 shows values of x for different pieces of equipment.

4. Updates using cost indices Cost estimates are made and reported for a given time. With inflation and price fluctuation, it is necessary to account for the FCI as a function of time. Cost indices are very useful in adjusted cost estimates based on time. A basis value (for example, 100) of the cost index is set for a certain year. The values of the cost index are published regularly (for example, monthly or quarterly). Suppose that the cost of a given plant at time t1 (referred to as FCIt1) is known. It is desired to get the cost of an identical plant at time t2 (designated as FCIt2). The cost index is used as follows:

There are several useful cost indices. These include the Chemical Engineering Plant Cost Index (published monthly at Chemical Engineering, www.ChE.com), the Nelson-Farrar Refinery Construction Index (published monthly at Oil and Gas Journal, www.ogjonline. com), and the Engineering News Record Construction Index (published weekly at Engineering News Record, http://enr.construction.com). In using cost indices, it is usually advisable to keep the updating period within 20 years. Table 2.3 provides a listing of recent values of the Chemical Engineering Plant Cost Index. 5. Ratio factors based on delivered equipment cost This approach is based on assigning all the items in the FCI and the TCI a ratio to the delivered equipment cost. In his seminal work, Lang (1948) proposed a method for estimating the FCI of a chemical plant based on the cost of the equipment delivered (but not installed) to the plant. Upon surveying the detailed costs of 14 plants, Lang developed factors for predicting the various cost items such as installation, instrumentation, piping, electrical systems, facilities, engineering, and so on. Lumped together, these factors are referred to as the Lang factor, which is used in estimating the FCI as follows: [2.4a] Hence, [2.4b] FCI = FCI Lang Factor* FCI = FCI Lang Factor*Delivered Equipment Cost

where q is the index for the process equipment, NEquipment is the total number of equipment in the process, and CqDelivered is the cost of equipment q delivered to the plant site. The value of the Lang factor depends on the type of the materials processed in the facility (for example, solid, solid-fluid, fluid) as shown by Table 2.4. To utilize the Lang factor method, the cost of the different pieces of equipment must first be determined. The estimation of equipment cost is discussed later in this chapter. Peters et al. (2003) revised the Lang factor by developing an itemized list of the various components involved in estimating the FCI. Assuming a ratio of 15:85 for the WCI:FCI, Peters et al. (2003) also provided an estimation for evaluating the TCI using the following expression: [2.5] TCI = TCI Lang Factor*Delivered Equipment Cost The revised Lang factors are given in Table 2.5, and the details of the different items contributing to these factors are given in Table 2.6. For each $100 spent on purchased equipment cost (delivered to the gates of the plant), Table 2.6 gives the corresponding expenditures for the different cost items. As can also be seen from Table 2.6, Peters et al. (2003) broke down the FCI into two categories: total direct cost, which is also referred to as total installed equipment cost (which accounts for purchased equipment cost, installation, instrumentation, piping, electrical work, and so on) and total indirect cost (which accounts for the nonmanufacturing FCI items such as engineering, legal expenses, contractors fees, contingency, and so on).

Another modification of the Lang approach is the Hand method (Hand, 1958), which assigns different cost factors depending on the type of equipment. Hand classified the process equipment into eight categories. Each category has a value of its multiplier depending on the specific requirements for civil work, installation, piping, insulation, and so on. Table 2.7 includes the equipment categories and the values of the associated factors to be used in the following expression:

where fqHand is the Hand factor for equipment q and CqDelivered is the delivered cost of equipment q. The rationale for the different factors is that the installation expenses differ depending on the type of equipment. For instance, fired heaters and compressors cost less to install than distillation columns. Another observation is that the instruments are treated as a separate category of equipment and should be added to the cost estimate of the other units. It is worth noting that companies may have their own experience-based factors that are appropriately developed for specific applications. Whenever available, these factors should be used in favor of the generic multipliers. 6. Empirical correlations There are useful expressions to estimate the cost of specific industries or general classes of processes. Depending on the basis for these expressions, their general applicability and accuracy vary significantly. The following are examples of simplified correlations that should be cautiously used for rough and quick estimates of FCI (expressed in 2010 US $), depending on the predominant phase nature of the process: For gas-phase plants (adapted with modification from Timm [1980], Gerrard [2000], and Coker [2007]): [2.7] FCI = 36,000*N*F0.62 where N is the number of functional units (these are major processing steps such as separation, reaction, and finishing but not heat exchange or compression/pumping unless they have substantial duties such as refrigeration and liquefaction), and F is the process throughput tonne/yr. For liquid- and/or solid-phase plants (adapted with modification from Bridgwater and Mumford [1979], Gerrard [2000], and Coker [2007]): [2.8a] and [2.8b] FCI = 458,000*N*F0.30 For F < 60,000 tonne/yr where N is the number of functional units and F is the process throughput tonne/yr. FCI = 7000*N*F0.68 For F 60,000 tonne/yr