CHAPTER VIII

ECONOMIC ANALYSIS

8.0

INTRODUCTION

Economic analysis is a continuation of market analysis which had been done in design
project one. Economic analysis is a process done to determine whether the plant will
give profit or loss to the company by analyzing the strengths and weaknesses of the
economy.

8.1

CAPITAL COST ESTIMATION

Capital costs are the total cost needed to build a plant. Capital cost are fixed and it is
not depends on the level of output. The cost other than the purchased cost of
equipment must take into consideration in order to calculate the capital cost. Table 8.1
show the factors that affecting the cost associated with evaluation of capital cost of
chemical plants.

Estimation of capital cost can be classified into three types according to their accuracy
and purpose:

8.1

Table 8.1: Factors affecting the cost associated with evaluation of capital cost of chemical plants
Factor
Associated
With
The
Symbol
Comments
Installation Of Equipment
1.

Direct project expenses

(a)

Equipment

f.o.b.

cost

Purchased cost of equipment at manufacturer's site

(f.o.b.= free on board)

(b)

(c)

Material

required

for

Includes all piping, insulation and fireproofing, foundation and structural support,

Installation

instrumentation and electrical, and painting associated with equipment

Labor to install equipment

Includes all labor associated with installing the equipment and material mentioned in

and material

(a) and (b)

2.

Indirect project expenses

(a)

Freight, insurance and taxes

Includes all transportation cost for shipping equipment and materials to the plant
site, all insurance on the items shipped, and any purchase taxes that may be
applicable

(b)

Construction overhead

Includes all fringe benefit such as vacation, sick leave retirement benefit, etc.; and
salaries and overhead for supervisory personnel

(c)

contractor

engineering

expenses

3.

Includes salaries and overhead for the engineering, drafting, and project
management personnel on the project

Contingency and fee

8.2

(a)

Contingency

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.

(b)

Contractor fee

4.

Auxiliary facilities

(a)

Site development

This fee varies depending on the type of plant and a verity of other factors

Includes the purchase of land, grading and excavation of the site; installation and
hook-up of electrical, water and sewer systems; and construction of all internal
roads, walkways, and parking lots

(b)

Auxiliary buildings

Includes administration offices, maintenance shop and control rooms, warehouses,

and service buildings (e.g., cafeteria, dressing rooms, and medical facility)

(c)

Off-sites and utilities

Includes raw material and final product storage; raw material and final product
loading and unloading facilities; all equipment necessary to supply required process
utilities (e.g., cooling water, steam generation, fuel distribution systems, etc.); central
environmental control facilities (e.g., waste water treatment, incinerators, flares,
etc.); and fire protection systems

(Source:Turton,2003)

8.3

Preliminary ( approximate) estimates

Authorization (budgeting) estimates

Detailed ( quotation) estimates

There are a few techniques in estimating the cost of a new chemical plant. There are:

1.

Lang factor technique

Lang factor technique is a simple technique to estimate the capital cost. The

total cost is calculated by multiplying the total purchased cost for all major items of
equipment by a constant, which is called the Lang Factor. Values for Lang Factors,
FLang are given in Table 8.2 below.
Table 8.2: Lang Factors for the Lang factor technique
Type of chemical plant
Lang Factor= FLang
Fluid processing plant
4.74
Solid-fluid processing plant
3.63
Solid processing plant
3.10
( Source: Turton, 2003)

The capital cost calculation is calculated using Equation 9.1 below

(8.1)

Where

N
,

the capital cost (total module) of the plant

the purchased cost for the major equipment units

the total number of individuals unit

the Lang factor

This technique is insensitive to changes in process. It cannot accurately account for the
common problems of special materials of construction and high operating pressure.

8.4

2.

Module costing technique

The equipment module costing technique is a common technique to estimate the cost
of a new chemical plant. This approach, introduced by Guthrie, (1969) in the late 1960s
and early 1970s, forms the basis of many of the equipment module techniques in use
today. This costing technique relates all costs back to the purchased cost of equipment
evaluated for some base conditions.

Deviations from these base conditions are handled by using multiplying factors that
depend on the following:

The specific equipment type

The system pressure

The specific materials of construction

Equation 8.2 below used to calculate the bare module cost for all equipment. The bare
module cost is the sum of the direct and indirect cost shown in Table 8.3.

(8.2)

Where

bare module equipment cost which are direct and indirect

cost

bare module cost factor

= purchased

cost

for

base

condition

8.5

Table 8.3: Summary of equation used in estimating equipment cost

Purpose
Purchased equipment cost,
Pressure factor, Fp for process
vessel
Pressure factor, Fp for other
process equipment
Bare module and material
factor for heat exchangers,
process vessels and pumps

Formulae
log

log

log

Equation
+

[log

( + 1)
+ 0.00315
2[850 0.6( + 1)]
=
0.0063
=

log

[log

8.3

8.4

8.5

8.6

(Source: Turton, 2003)

8.1.1

Steps for Calculating Bare Module Costs

Figure 8.1: Step to estimate bare module cost for equipment (Source: Turton,2003)
8.6

8.1.2

Cost of Equipment

The cost of major equipment such as reactor, distillation column separator and heat
exchanger are calculated to estimates the cost of piping and insulation. From Figure
9.1, the equipment use in this plant can be concluded as in Table 8.4 below:
Table 8.4: Total equipment used in plant
Items
Quantity
1
Storage tank
7
2
Heater
3
3
cooler
4
4
Mixer
4
5
Reactor
2
6
Separator
2
7
Heat exchanger
1
8
Distillation column
2
9
Compressor
1
Total
26
(Source : Tourton,2003)
8.1.2.1

Cost of Reactor

The purchased cost of separator at ambient operating pressure using any kind of
material for construction,

is calculated using

versus V graph. The volume of

reactor made from carbon steel is calculated by substituting value in Table 8.5 into
Equation 8.7 below;

(8.7)

Table 8.5: Purchased cost, of the reactor

Reactor
Height Diameter Total volume
Hydroformylation reactor
4m
5m
42
Hydrogenation reactor
5m
4m
42
From the graph of

/ versus V, the

/A
840
840

35280
35280

for both reactor as stated in Table 8.5 above.

The bare pressure factor, FP for reactor with thickness less than 0.0063 m is found to be
1. The bare module factor, FBM for reactor is found to be 4.

Thus, CBM for

hydroformylation and hydrogenation reactor is calculated using Equation 8.6;

8.7

)=
= 35280 4
= $141120

This is the bare module cost for 2001 (CEPCI=397). The cost for 2010 can thus be
calculated by using Equation 9.8 as follows using the CEPCI of 525. (Chemical
Engineering Design, 2008)

(8.8)

For reactor,
2010 =

2001

2010
2001

= 141120
= $186619.60
= RM 565,514.10

For three hydrogenation reactor

= RM 565,514.10 x 3 = RM 1,696,542.24

Total cost for purchasing reactors

=RM 565,514.10 + RM 1,696,542.24

=RM 2,262,056.33

8.1.2.2

Cost of Separator

The purchased cost of separator at ambient operating pressure using any kind of
material for construction,

is calculated using Equation 8.3. The constant value of K1 ,

K2, K3 are 3.4974, 0.4485 and 0.1074 respectively. Meanwhile, the capacity, A of the
separator is in terms of volume, m3. Thus A is calculated using Equation 8.7 as below:

) ( .

= 7.82

8.8

Therefore, Cp is calculated by using Equation 8.3 that gives the total of $9631.38.
The bare module factor, FBM for demister pad made from nickel alloy gives identification
number as 65 (Turton, 2003) and the factor is found to be 5.3. The bare module cost
then calculated as below;

= ($9631.38)(5.3) = $ 51 046.31

Bare Module Cost, CBM obtained above was from the analysis made during the period
of May to September 2001 with an average value of the CEPCI, I1 of 397 (Turton,
2003). CEPCI, I2 is obtained from the Appendix A (Figure A.2) where I2 is 520.
Therefore, cost of separator in 2011 is calculated using Equation 8.8:

= ($51 046.31)

520
= $66 861.67
397
= RM 202,611.1

8.1.2.3

Cost of Heat Exchanger

The costing of a shell and tube heat exchanger, with floating head type, heat transfer
area of 24.10 m2, pressure of 81 bars and having carbon steel as material of
construction using the algorithm outlined in Figure 8.1.

The cost curve for this heat exchanger is shown in Figure 8.2 below. Referring to the
evaluation path shown in Figure 8.3,

(2001) =
=

$650

24.1

= $15,665

8.9

Cp0/A

A
Figure 8.2: Purchased cost for heat exchanger

The bare module cost, CBM for shell and tube heat exchanger is given in Equation 8.6.
The B constant value is as shown in Table 8.6.
Table 8.6: Constants for bare module factor for heat exchanger
Equipment
Type

Equipment Description

B1

B2

Heat
exchanger

Fixed tube sheet, floating head, U-tube,

bayonet, kettle reboiler, and Teflon tube

1.63

1.66

(Source: Turton, 2003)

The pressure factor is obtained from Equation 8.4. Inserting the three constants shown
in Table 9.7 and P = 80 barg (81 bar)
log

= 0.03881 0.11272 log

log

= 0.1218

81 + 0.08183[log

81]

= 1.32

The value of FM can be found from Figure 8.3 by using identification number of one. The
details for identification number of one as shown in Table 8.8.
8.10

factor,
Material

Identification
Figure 8.3: Material factor
From Figure 8.3, the material factor, FM is 1. This is the case since at base conditions,
(material of construction is carbon steel and operating near atmospheric pressure) the
value of FM and also FP are always unity.
Substituting the data into Equation 8.6;

(2001) =

= 30488 (1.63 + 1.66 1 1.08)

= $104,354

This is the bare module cost for 2001 (CEPCI=397). The cost for 2010 can thus be
calculated as follows using the CEPCI of 525. (Chemical Engineering Design, 2008)

8.11

Table 8.7: Pressure factor for heat exchanger

Equipment
Type

Equipment Description

C1

bayonet, fixed tube sheet,

floating head, kettle reboiler, U0.03881
tube (both shell and tube)
(Source: Turton, 2003)

Heat
exchanger

C2

-0.11272

C3

Pressure
Range
(barg)

0.08183 5<P<140

Table 8.8: Identification number for material factor for heat exchanger
identification
number

Equipment Type

Equipment Description

Material of
construction

Heat exchanger

Double pipe, multiple pipe, fixed

tube sheet, floating head

CS-shell/CS-tube

(Source: Turton, 2003)

8.12

 2010 =

2001

= 104354

2010
2001

525
397

= $138000
= RM 418,181.80
8.1.2.4

Cost of distillation column

For distillation column, the

value is obtained by using

versus V graph. The

volume of distillation column is calculated as below;

Height = 15.056 m ; Diameter = 1.3728 m ;

Material of Construction: Carbon steel.
By using the value of height and diameter above, the volume of column is calculated as:

V r 2 h
1 . 3728 2 15 . 056

89 .14 m 3

From Figure H.1 (appendix), the

Thus,

Cp0
V

obtained is 800.

800

C p0 650 89 .14
C0p = $57941

The pressure factors for process vessels,Fp is calculated by using equation 8.4 as
expressed below.

Fp

(1.2 1)1.3728
0.00315
2850 0 .6(1.2 1)

0.0063
= 0.78
8.13

The bare module cost, CBM for distillation column is given in Equation 8.6. The B
constant value is as shown in Table 8.9 below.

Table 8.9: Constants for bare module factor for distillation column
Equipment Type

B1

B2

Distillation column

2.25

1.0

(Source: Turton et al, 2003)

Substituting in Equation 8.6, thus;

FBM = B1 + B2 FP FM
= 2.25 + (1.82) (0.78) (1.0)
= 3.67

Bare Module Cost, CBM;

CBM = C 0p FBM
= 57941 (3.67)
= $ 212643.50
This is the bare module cost for 2001 (CEPCI=397). The cost for 2010 can thus be
calculated as follows using the CEPCI of 521.9. (Chemical Engineering Design, 2008)

New CBM

= 212643.5

521.9
397

= $ 279543.20
= RM 847,101.50

The purchased cost of vessel internal at ambient operating pressure using any kind of
material for construction

is calculated using Equation 8.3. The constant value of K1 ,

K2, K3 are 2.9949, 0.4465 and 0.3961 respectively. So, the

is;

8.14

D = 1.3728 m; A = 1.50 m2; Number of trays = 25 trays

Material of construction = Carbon Steel

log 10 C 0p K 1 K 2 log 10 ( A ) K 3 log 10 ( A)

2.9949 0.4465 log 10 (1 .50 ) 0.3961log 10 (1.50 )

= 1218.45
Formula for Sieve Tray:
From Table A.5, Material and Quantity Factors for Sieve Trays

CBM C 0p NFBM Fq

Where,
N = the number of tray
Fq = the quantity factor for trays
For tray >20,

F q = 1.00
Thus, bare module cost is calculated as below;

C BM C p0 NFBM Fq
1218 .45 25 3 .67 1 .00

= $ 111792.79
= RM 335378.36

This is the bare module cost for 2001 (CEPCI=397). The cost for 2010 can thus be
calculated as follows using the CEPCI of 521.9. (Chemical Engineering Design, 2008)
New CBM = 335378.36

521.9
397

= RM 440891.60

8.15

Total Costing for Distillation Column = RM 838629.60 + RM 440891.60

= RM 1279521.20

Assuming the distillation column 1 is the same properties with the distillation column
2.Therefore, Total Costing for Distillation Column 3 and 4 is = RM 1279521.20x 2
= RM 2559042.40

The bare module cost for all equipments are concluded in Table 8.10 below. Almost all
of the equipments are made from carbon steel since the components involve in this
plant are not reactive towards carbon steel.
Table 8.10: Summary on bare module cost for equipment used in 1-propanol production
plant

Material of
Construction

Bare module
cost at non-base
conditions,
(RM)

Bare module
cost at base
conditions,
(RM)

Carbon steel

3,719,731.02

2,812,824.45

Carbon steel

418,140

316,192.62

Fired-Heater (E-100)

Carbon steel

720,794.58

545,057.91

Fired-Heater(E-101)

Carbon steel

994,515.08

752,042.91

Fired-Heater(E102)

Carbon steel

964,742.601

729,529.10

Cooler (E-103)

Carbon steel

602,959.70

455,952.40

Cooler (E-104)

Carbon steel

610,575.30

461,711.16

Cooler (E-106)

Carbon steel

590,093.41

446,222.98

Cooler (E107)

Carbon steel

602,959.70

455,952.40

Reactor (PFR-100)

Carbon steel

565,514.10

427,593.60

Reactor (CRV-100)

Carbon steel

1,696,542.25

1,282,780.80

Equipment

Compressor
Compressor (K-100)
Heat Exchanger
Heat Exchanger(E-105)
Fired-Heater

Cooler

Reactor

Storage Tank
8.16

Storage Tank (Tk-101)

Carbon steel

172,628.07

130,539.70

Storage Tank (Tk-102)

Carbon steel

201,651.47

152,486.93

Storage Tank (Tk-103)

Carbon steel

201,651.47

152,486.93

Storage Tank (Tk-104)

Carbon steel

187,677.17

141,919.69

Storage Tank (Tk-105)

Carbon steel

172,628.07

130,539.70

Storage Tank(Tk-106)

Carbon steel

187,677.17

141,919.69

Storage Tank(Tk-107)

Carbon steel

82,682.06

62,523.38

Vessel (V-101)

Carbon steel

202,590.86

154,670.32

Vessel (V-102)

Carbon steel

213082.08

161,130.64

Mixer (Mix-100)

Carbon steel

3,455.49

2,613.01

Mixer (Mix-101)

Carbon steel

6,274.97

4,745.07

Mixer (Mix-103)

Carbon steel

1,521.99

1,150.92

Mixer (Mix-104)

Carbon steel

1,004.18

759.35

DC (T-100)

Carbon steel

10,253,895.70

7,753,898.47

DC(T-101)

Carbon steel

9,409,710.45

7,115,533.83

Cast steel

62,523.44

82,379.03

32,847,222.38

24,875,157

Separator

Mixer

Distillation Column

Waste treatment
Totals

8.1.3

Grass roots and total module cost

According to Turton et al, (2003), the term grass roots refers to a completely new facility
in which we start the construction on essentially undeveloped land, a grass field. The
term total module cost refers to the cost of making small to moderate expansions or
alterations to an existing facility. It is necessary to account for other costs in addition to
the direct and indirect costs (item 1 and 2 respectively) which are equivalent to bare
module cost costs to estimate these costs. These additional costs are contingency and
fee costs as well as auxiliary facilities costs as shown in Table 8.1 (item 3 and 4
respectively).
8.17

The total module cost can be evaluated from the following formula

= 1.18

(8.9)

and the grass roots cost can be evaluated from

+ 0.5

(8.10)

Where n is represents the total number of pieces of equipments. Inserting the values
into the equations above equations gives the following

= 1.18

= 1.18 (32,847,222,38)
=

38,759,722.41

+ 0.5
= 38,759,722.41 + 0.5 (24,875,157.00)
=

8.2

51,197,300.91

ESTIMATION OF MANUFACTURING COSTS

The cost associated with the day-to-day operation of a chemical plant must be
estimated before economic feasibility of a proposed process can be assessed. There
are many elements that influence the manufacturing cost. A list of important costs
involved, including a brief explanation of each cost, is given in Table 8.11. The cost
information provided in the table is divided into three categories.

8.18

Table 8.11: Factors affecting the cost of manufacturing(COM)

FACTOR

DESCRIPTION OF FACTOR

1.

Factor that vary with the rate of production

Direct costs

A.
Raw materials
(CRM)

Cost of chemical feed stocks required by the process.

Flow rates obtained from the PFD

B.
Waste treatment
(CWT)
C.
Utilities (CUT)

Costs of waste treatment to protect environment

Costs of utility streams required by process. Includes
but not limited to
a.

Fuel gas, oil, and/ or coal

b.

Electric power

c.

Steam (all pressures)

d.

Cooling water

e.

Process water

f.

Boiler feed water

g.

Instrument air

h.

Inert gas (nitrogen) etc.

i.

Refrigeration

Flow rates for utilities found on the PFD/PIDs

D.
Operating labor
(COL)
E.
Direct supervisory
and clerical labor

Costs of personnel required for plant operations

F.
Maintenance and
repairs

Costs of labor and material associated with the

G.

Costs of miscellaneous supplies that support daily

Operating supplies

Cost of

administrative/ engineering and support

personnel.

maintenance

operation not considered to be raw materials. Example

include

chart

paper,

lubricants,

miscellaneous

chemical, filters, respirators and protective clothing for

operators, etc.
H.

laboratory charges

Costs of routine and special laboratory test required for

product quality control and troubleshooting.

I.
Patents and
royalties

Cost of using patented or licensed technology.

8.19

Factors not affected by the level of production

2.

Fixed cost

A.

Depreciation

Costs of associated with physical plant (buildings,

equipment, etc.). Legal operating expense for tax
purposes.
Costs associated with property taxes and liability

B.
Local taxes and
insurance

insurance. Based on plant location and severity of the

C.
Plant overhead
cost (sometimes referred
to as factory expenses)

Catch-all costs associated with operations of auxiliary

process.

facilities supporting the manufacturing process. Costs

involve payroll and accounting services, fire protection
and safety services, medical services, cafeteria and
any

recreation

facilities,

payroll

overhead

and

employee benefits, general engineering, etc.

3.

General expenses

Costs associated with management level and

administrative activities not directly related to the
manufacturing process

A.
Administration
costs

Costs of administration. Includes salaries, other

administration, buildings, and other related activities.
Costs of sales and marketing required to sell chemical

B.
Distribution and
selling costs

products. Includes salaries and other miscellaneous

C.
Research and
development

Costs of research activities related to the process and

costs.

product. Includes salaries and funds to researchrelated equipment and supplies, etc.

(Source : Turton)

I) Direct manufacturing cost

These costs represent operating expenses that vary with production rate. When product
demand drops, production rate is reduced below the design capacity. At this lower rate,
we would expect a reduction in the factors making up the direct manufacturing costs.
These reductions may be directly proportional to the production rate, for example, raw
8.20

material, or might be reduced slightly, for example, maintenance costs or operating

labor.

II)

Fixed manufacturing cost

These are independent of changes in production rate. They include property taxes,
insurance, and depreciation, which are changed at constant rates even when the plant
is not in operation.

III)

General expenses

These costs represent an overhead burden that is necessary to carry out business
functions. They include management, sales, financing, and research functions. General
expenses seldom vary with production level. However, items such as research and
development and distribution and selling cost may decrease if extended periods of low
production levels occur.

The cost of manufacturing, COM can be estimated when the following costs are known.

I)

Fixed capital investment, (FCI):(CGR)

II)

Cost of operating labor (COL)

III)

Cost of raw material (CRM)

IV)

Cost of utilities (CUT)

V)

Cost of waste treatment (CWT)

8.2.1

Estimation of Operating Labour Cost

The technique used to estimate operating labor requirements is based on data obtained
from five chemical companies and correlated by Alkayat and Gerrard. According to this
method, the operating labor requirement for chemical processing plants is given by

= 6.29 + 31.7

+ 0.23

(8.11)

8.21

where

is the number of operators per shift,

is the number of processing steps

involving the handling of particulate solids, for example, transportation and distribution,
particulate size control, and particulate removal.

is the number of nonparticulate

processing steps handling and includes compression, heating and cooling, mixing and
reaction. In general, value of

is zero and the value of

is given by

(8.12)

Where the equipment is refers to compressors, towers, reactors, heaters/furnace and

exchangers. The value of

is the number of operators required to run the process

unit per shift. A single operator works on the average 49 weeks (3 weeks off for
vacation and sick leave) a year, five 8-hour shifts a week. This amounts leads to

49

5
.

245
.

A chemical plant normally operates 24 hours/day and this requires

365

1095

The number of operators needed to provide this number of shifts is

1095

.
245

= 4.5

Using Equation 8.11 and information in Table 8.12;

= 6.29 + 31.7

+ 0.23

= [6.29 + 0 + 0.23 7]

.
.

= 2.81

8.22

Table 8.12: Results for the estimation of operating labor

Equipment type

Number of Equipment

1)

Compressors

2)

Exchangers

3)

Heaters

4)

Reactors

5)

Vessels

TOTAL

Note : Pumps and Vessels are not counted in evaluating

From calculation above, the number of operators required per shift is 2.81. So,
Operating labor = 4.5 2.81 = 12.65 (rounding up to the nearest integer yields 13
operators)

To estimate the cost of operating labor, the hourly wage of an operator is required.
Chemical plant operators are relatively highly paid. The hourly rate for miscellaneous
plant and operators is RM20 (Department of Human Resource). Therefore
8

20 344

= 13
=

55,040

55,040

715,520

2001)

2010 = 715,520
=

8.2.2

525
397

946,216.62

Cost of Raw Material

The production of 1-Propanol is to reach 100,000 metric tonne per year. The costs of
raw material needed for this production rate are shown in Table 8.13 below. From Table
8.13, the total raw material cost is RM 19,596,816.43.

8.23

Table 8.13: Raw Material Cost

Raw Materials

Amount (kg/hr)

Cost (RM/kg)

RM/hr(x1000)

Ethylene

6805

1.50

10,207.50

Hydrogen

3338

1.00

3338

30565

1.50

10,188.33

48157.2

455

21,911,526

Carbon monoxide
Catalyst

Total

19,596,816.43

(Source : www.titangroup.com,www.mox.cokayom.my)
8.2.3

Cost of Utilities

This term includes steam (high pressure, medium pressure, low pressure), cooling and
process water, electricity, boiler feed water and effluent treatment.

Table 8.14: Cost of utilities

Price (RM/unit)

Amount

RM/year

Steam

1.00/kg

26.32 kg/h

217,197.92

Cooling water

0.05/kg

341.85kg/hr

141,115.68

0.087/kWh

53kWh

38,068.42

Utilities

Electricity

Total

394,382.02

(Source: Encyclopedia of Chemical Processing and Design)

8.2.4

Cost of Waste Treatment

The cost of waste treatment is calculated and concluded in Table 8.15 below.
Table 8.15: Waste treatment Cost
Item
Waste

Price (RM/unit)

Amount

RM/year

2.42/m3

0.14 m3/h

2,742.02

Total

2,742.02

(Source: Fogler)
8.24

8.2.5

Calculation of Manufacturing Cost

The cost of manufacturing with and without depreciation can be obtained using the
formulae given by Turton, (2003)
= 0.280

+ 2.73

+ 1.23(

(8.13)

and
= 0.180

+ 2.73

+ 1.23(

(8.14)

where COM and COMd are cost of manufacturing with and without depreciation
respectively. Other symbols are the same as encountered before. Using the value of
fixed capital investment (FCI which is equivalent to CGR) estimated in section 8.2.2, the
production cost for 1-propanol can be calculated as follows
= 0.280

+ 2.73

+ 1.23(

= 0.280(51,197,300.91) + 2.73(946,216.62)
+ 1.23(394,382.02 + 2,742.02 + 19,596,816.43)
= 41,510,962.41

42

10

And
= 0.180

+ 2.73

+ 1.23(

= 0.180(51,197,300.91) + 2.73(946,216.62) + 1.23(394,382.02 + 2,742.02 +

19,596,816.43)
= 36,391,232.31

37

The direct (variable) and fixed manufacturing costs can be evaluated as follows

)=

+ 1.33

+ 0.069

+ 0.03
8.25

= 19,596,816.43 + 2,742.02 + 394,382.02 + 1.33(946,216.62) + 0.069(51,197,300.91)

+ 0.03( 41,510,962.41 )
=

26,030,351.21

And

) = 0.708

+ 0.168

= 0.708(946,216.62) + 0.168(51,197,300.91)
=

8.3

9,271,067.92

TOTAL REVENUE

SELLING PRICE FOR N-PROPANOL

The price for 1 kg n-propanol is RM4.40 (Matrade). So, the total revenue for production
of 95,836,944kg of n-propanol and carbon monoxide and propanal are RM
567,405,823.50 as shown in Table 8.16.

Table 8.16: Total revenue

Selling Item Selling Price (RM/Kg) Production Rate (kg/ hr)
n-Propanol
4.40
11642.00
CO
1.30
39.36
Propanal
2.50
6980.80
Total (RM/yr)
18662.16
(Source:Matrade)

8.4

Income (RM/year)
422,911,948.80
410,162.69
144,083,712
567,405,823.50

PROFITABILITY ANALYSIS

According to Turton (2003), in the economic analysis of a project, it is assumed that any
new land purchases required are done at the start of the project, that is, at time zero.
After the decision has been made to build a new chemical plant, the construction phase
of the projects starts. Depending on the size and scope of the project, this construction
may take anywhere from six months to three years to complete.
8.26

In this plant, it is assumed that it takes a typical value of two years for time from project
initiation to the start-up of the plant. Over the two-year construction phase, there is a
major capital outlay. This represents the fixed capital investment for purchasing and
installing the equipment and auxiliary facilities required to run the plant. The distribution
of this fixed capital investment is usually larger towards the beginning of construction.
At the end of second year, construction has finished and the plant is started up. At this
point, the additional expenditure for working capital is required to float the first few
months of operations. This is a one-time expense at the start-up of the plant and will be
recovered at the end of the project.

After start-up, the process begins to generate finished products for sale, and yearly
cash flows become positive. The cash flows for early years of operation are larger than
those for later years due to the effect of depreciation. The time for depreciation used in
this plant is six years. The method of depreciation used is based on Modified
Accelerated Cost Recovery System (MACRS). Under this method, all equipment is
assigned a class life, which is the period over which the depreciable portion of the
investment may be discounted. Most equipment in a chemical plant has a class life of
9.5 years. The MACRS method uses a double declining balance method and switches
to a straight line method when straight line method yields a greater depreciation
allowance for the year. The Table 8.17 is the depreciation allowance using MACRS
method.

In order to evaluate the profitability of a project, a life of a project must be assumed.

This is not the working life of the equipment nor is it the time over which depreciation is
allowed. It is a specific length over which the profitability of different projects is to be
compared. Lives of 10, 12 and 15 years are commonly used for this purpose. In this
plant, a project life of 10 years is assumed.

8.27

Table 8.17: Depreciation schedule for MACRS method for equipment with a 9.5 year
class life
Year

Depreciation allowance (% of capital investment)

20.00

32.00

19.20

11.52

11.52

5.76

(Source: Analysis, Synthesis and Design of Chemical Process, 2003)

8.4.1

Estimation of Land Cost

The non-discounted techniques do not take into account the time value of money and
are not recommended for evaluating new large projects. Figure 9.6 below shows the
graph of cumulative cash flow for non-discounted after tax cash flow based on
information in Table 9.19. The taxation rate, t used is 45% since the rate is often in the
range of 40% to 50% according to Turton, (2003).

8.4.2

Nondiscounted After-Tax Cash Flow

Cost of land: RM 129.17 RM 139.93 per meter square

Wide of land required: 121,532 m2 according to Dairen Chemical Company in Johor
Total cost of land: RM 139.93 x 121532 m2= RM 17,005,972.76.

8.28

8.4.3

Discounted After-Tax Cash Flow

For discounted criteria, we discount each of the yearly cash flows back to time zero.
The following tables show the discounted cash flow from 10% to 16% p.a. All the value
is in unit of $106

150

Cash (RM106)

100

50

cumulative cash position

payback period
0

Land
FCL

-50

-100

Land
+
WC

10

12

14

16

18

20

FCIL

Time (years)

Figure 8.4: Cumulative cash flow diagram for nondiscounted after-tax cash flow

8.29

Table 8.18: Nondiscounted after-tax cash flows

End of
year (k)

Investment

FCIL- d

(R-COMd-dk)x(1-t) +dk

Cash flow

Cumulative Cash flow

17

51

-17

-17

34

51

-34

-51

27.2

51

-9

-78.2

10.2

40.8

56

39

1.3

1.3

-76.9

16.32

24.48

56

39

12.58

12.58

-64.32

9.792

14.688

56

39

10.948

10.948

-53.372

5.8752

8.8128

56

39

9.9688

9.9688

-43.4032

5.8752

2.9376

56

39

12.9064

12.9064

-30.4968

2.9376

56

39

11.4376

11.4376

-19.0592

56

39

8.5

8.5

-10.5592

10

56

39

8.5

8.5

-2.0592

11

56

39

8.5

8.5

6.4408

12

56

39

8.5

8.5

14.9408

13

56

39

8.5

8.5

23.4408
8.30

14

15

16

17

18
19

56

39

8.5

8.5

31.9408

56

39

8.5

8.5

40.4408

56

39

8.5

8.5

48.9408

56

39

8.5

8.5

57.4408

66

39

8.5

8.5

65.9408

27.2

66

39

13.5

40.7

106.6408

All of the values are in RMmillion

Cost of land = RM17 million

Total fixed capital investment, FCIL = RM51 million

Plant start-up at end of year2

Taxation rate =26% (MIDA)

Salvage value of plant = RM 1 million

Assume a project life of 17 years

8.31

Table 8.19: Discounted cash flow for discount rate = 7% p.a

End of
year (k)

Non-discounted
cash flow

Discounted cash
flow

Cumulative Discounted
cash flow

-17

-17

-17

-34

-31.7757

-48.7757

-27.2

-23.7575

-72.5332

1.3

1.061187

-71.472

12.58

9.597222

-61.8748

10.948

7.805773

-54.0691

9.9688

6.642632

-47.4264

12.9064

8.037457

-39.389

11.4376

6.656787

-32.7322

8.5

4.623437

-28.1087

10

8.5

4.320969

-23.7878

11

8.5

4.038289

-19.7495

12

8.5

3.774102

-15.9754

13

8.5

3.527198

-12.4482

14

8.5

3.296447

-9.15174

15

8.5

3.080791

-6.07094

16

8.5

2.879244

-3.1917

17

8.5

2.690882

-0.50082

18

8.5

2.514843

2.014026

19

40.7

11.25389

13.26791

Table 8.20: Discounted cash flow for discount rate = 8% p.a

End of
year (k)

Non-discounted
cash flow

Discounted cash
flow

Cumulative Discounted
cash flow

-17

-17

-17

-34

-31.4815

-48.4815

-27.2

-23.3196

-71.8011

1.3

1.031982

-70.7691

12.58

9.246676

-61.5224

10.948

7.451025

-54.0714
8.32

9.9688

6.282035

-47.7894

12.9064

7.53076

-40.2586

11.4376

6.179379

-34.0792

8.5

4.252116

-29.8271

10

8.5

3.937145

-25.89

11

8.5

3.645504

-22.2445

12

8.5

3.375467

-18.869

13

8.5

3.125432

-15.7436

14

8.5

2.893919

-12.8497

15

8.5

2.679554

-10.1701

16

8.5

2.481069

-7.68903

17

8.5

2.297286

-5.39175

18

8.5

2.127117

-3.26463

19

40.7

9.430681

6.16605

Table 8.21: Discounted cash flow for discount rate = 9% p.a

End of
year (k)

Non-discounted
cash flow

Discounted cash
flow

Cumulative Discounted
cash flow

-17

-17

-17

-34

-31.1927

-48.1927

-27.2

-22.8937

-71.0864

1.3

1.003839

-70.0825

12.58

8.911989

-61.1705

10.948

7.115449

-54.0551

9.9688

5.94407

-48.111

12.9064

7.060243

-41.0508

11.4376

5.740146

-35.3106

8.5

3.913636

-31.397

10

8.5

3.590492

-27.8065

11

8.5

3.294029

-24.5125

12

8.5

3.022045

-21.4904

13

8.5

2.772518

-18.7179

14

8.5

2.543595

-16.1743
8.33

15

8.5

2.333573

-13.8407

16

8.5

2.140893

-11.6998

17

8.5

1.964122

-9.73572

18

8.5

1.801947

-7.93377

19

40.7

7.91573

-0.01804

Table 8.22: Discounted cash flow for discount rate = 10% p.a
End of
year (k)

Non-discounted
cash flow

Discounted cash
flow

Cumulative Discounted
cash flow

-17

-17

-17

-17

-34

-30.9091

-47.9091

-34

-27.2

-22.4793

-70.3884

-27.2

1.3

0.976709

-69.4117

1.3

12.58

8.592309

-60.8194

12.58

10.948

6.797847

-54.0216

10.948

9.9688

5.627128

-48.3944

9.9688

12.9064

6.623024

-41.7714

12.9064

11.4376

5.335725

-36.4357

11.4376

8.5

3.60483

-32.8309

8.5

8.5

3.277118

-29.5537

8.5

8.5

2.979198

-26.5745

8.5

8.5

2.708362

-23.8662

8.5

8.5

2.462147

-21.404

8.5

8.5

2.238316

-19.1657

8.5

8.5

2.034832

-17.1309

8.5

8.5

1.849848

-15.281

8.5

8.5

1.68168

-13.5994

8.5

8.5

1.5288

-12.0706

8.5

40.7

6.654775

-5.41578

40.7

8.34

Cumulative cash flow diagram using different discount rates

150

Cash (RM million)

100

50

0
0

10

15

20

-50

-100

Time (years)

Figure 8.5: Cumulative cash flow diagram using different discount rates
i)

Payback Period

Payback period is defined as time required after start-up, to recover the fixed capital
investment, FCIL required for the project, with all cash flows discounted back to time
zero. The payback period shown in Figure 9.8 can be found as follows.

= 17 10 +
=

10.2 10
1.1546

24.65 10

Therefore, find time after start-up when cumulative cash flow is

=5+

24.65 10

(30.50 + 24.65)
(30.50 + 19.06)

= 5.51
This means that plant takes about 5.5 years after start-up to get back the fixed capital
investment. In other words, it takes about 7.5 years for the plant to "repay" the sum of
the original investment after the commencement of constructions.

8.35

ii)

Net Present Worth

The discounted cumulative cash position, more commonly known as the net present
value (NPV) or net present worth (NPW) of the project is defined as cumulative
discounted cash position at the end of the project. The net present value decision rule is
to accept positive net present value project and reject project with the negative NPV.
The net present worth for the project is RM6.17x106 as shown in Table 9.21. Therefore,
the project is accepted since the net present value is positive.
iii)

Present Value Ratio

Again, the net present value of a project is greatly influenced by the level of fixed capital
investment and a better criterion for comparision of projects with different levels may be
the present value ratio (PVR)
=

A present value ratio of unity for a project represents a break even situation. Values
greater than unity indicate profitable processes while those less than unity represent
unprofitable projects. Therefore, for this project, the PVR can be evaluated as follows

1.03 + 9.25 + 7.45 + 6.28 + 7.53 + 6.18 + 4.25 + 3.93 + 3.65 + 3.38 + 3.13 + 2.89 + 2.68
10
+2.48 + 2.30 + 2.12 + 9.43
=
(17 + 31.48 + 23.32) 10
=

77.97 10
71.80 10

= 1.08>1

iv)

Discounted Cash Flow Rate of Return

The discounted cash flow rate of return (DCFROR) is defined to be the interest rate at
which all the cash flows must be discounted in order for net present value or net
present worth of the project to be equal to zero. Therefore, the DCFROR represents the
highest, after-tax interest or discount rate at which the project can just break even. It is
worth noting that for evaluation of the discounted cash flow rate of return, no interest
8.36

rate is required since this is what is calculated. If the value of DCFROR is greater than
internal discount rate, then the project is considered to be profitable.
The net present values for several discount rates which have previously been
calculated (Table 8.18 to Table 8.22) are summarized in the following Table 8.23.
Table 8.23: NPV as a function of discount rates ( values in $million)
Interest or Discount Rate
7%

Net present worth

30.32

8%

21.82

9%

14.36

10%

7.84

12%

-2.93

The value of DCFROR can be calculated by interpolating from the table above.

(0 7.84x10 )
10%)
=
(12% 10%)
(2.93x10 7.84x10 )

= 11.46%

Clearly, the DCFROR is greater than internal discount rate (11.46% p.a). Therefore, the
project is considered to be profitable.

8.5

CONCLUSION

Table 8.26 summarizes the costs and profitability criteria for this plant. The fixed capital
investment for this plant is around RM51 million and the cost of manufacturing with and
without depreciation are RM41million and RM36 million respectively. The breakeven
point is achieved when the plant produces 6000 metric tonnes per year of 1-propanol

8.37

which is well below the planned production of 100000 metric tonnes per year. By
considering a discount rate of 10% per annum, the payback period is 5.5 years after
start-up or 7.5 years after the beginning of the constructions. The net present worth or
net present value is found to be RM50.86 million) and the present value ratio is 1.08.
The discounted cash flow rate of return for the plant is computed to be 11.46% which
gives the net present value of zero. Based on these criteria, it can be concluded that the
proposed 1-propanol plant is profitable.
Table 8.24: Summary of economic analysis
Items

Data/Value

Grass root cost, CGR or Fixed capital investment, FCI

RM51*

Cost of manufacturing with depreciation, COM

RM41*

Cost of manufacturing without depreciation, COMd

RM36*

Depreciation method

MACRS

Variable cost, VC

RM26*

Fixed cost, FC

RM9.27*

Project life after start-up

17 years

Payback period
Net present value at 8% discount rate (NPV)
Present value ratio (PVR)

5.5 years after start-up

RM6.16*
1.08

Discounted cash flow rate of return (DCFROR)

8.99%

Salvage value

RM1*

.Note*: in million

8.38

8.6

REFERENCES

1)
Turton et al, 2003, Analysis, Synthesis, and Design of Chemical Processes,
Prentice Hall International Series.
2)
Peters. Max S. and Timmerhaus, Klaus D. (1991). Plant Design and Economics
for Chemical Engineers. 4th Edition. Singapore: McGraw-Hill Book Company.
3)
Ulrich, G. D. (1984). A Guide to Chemical Engineering Process Design and
Economics. Toronto : John Wiley & Sons.
4)
Perry, R.H. and Green, D.W. (1997). Perrys Chemical Engineering Handbook.
7th ed. USA: McGraw-Hill, Inc
5)
Sinnott, R.K. (1983). Chemical Engineering Volume 6. 1st ed. Great Britain:
Pergamon Press.
6)
Mark, H.F., Othmer, D.F., Overberger, C.G. and Searborg, G.T. (1963). KirkOthmer: Encyclopedia of Chemical Technology Volume 1. 3rd ed. USA: Interscience
Publisher. 414-424.

8.39