# Capital

source
and sink
V, manufacturing
fixed capital
investment for
project
A
x
, non-
manufacturing
fixed capital
investment for
project
W, working capital
investment for
project
Operations for
complete project
Loans
Preferred stock Bonds
Common stock
Other capital input
Stockholders’
dividends
Repayment of
borrowed capital
Other
investments
T
o
t
a
l

c
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(
w
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h
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t

l
a
n
d
)
C
oj
Costs for
operations (not
including
depreciation)
s
j
Total income from
sales $s j -c oj Gross profit (before depreciation charge) Total capital Investment (without land), T=W+A x +V (s j – c oj – d j )(1-φ) Net profit after taxes d j Depreciation charge (s j – c oj – d j )(1-φ) Gross profit (s j – c oj – d j )φ Income taxes (φ is generally 35% of gross profit) A j Net cash flow from the project including depreciation charge A j = (s j – c oj – d j )(1-φ) + d j =(s j – c oj )(1-φ) + d j φ Capital source and sink V, manufacturing fixed capital investment for project A x , non- manufacturing fixed capital investment for project W, working capital investment for project Operations for complete project Operations for complete project Loans Preferred stock Bonds Common stock Other capital input Stockholders’ dividends Repayment of borrowed capital Other investments T o t a l c a p i t a l i n v e s t m e n t ( w i t h o u t l a n d ) C oj Costs for operations (not including depreciation) s j Total income from sales$
s
j
-c
oj
Gross profit
(before depreciation
charge)
Total capital
Investment
(without
land),
T=W+A
x
+V
(s
j
– c
oj
– d
j
)(1-φ) Net profit after taxes
d
j
Depreciation charge
(s
j
– c
oj
– d
j
)(1-φ) Gross profit
(s
j
– c
oj
– d
j
)φ Income taxes
(φ is generally 35% of gross profit)
A
j
Net cash flow from
the project including
depreciation charge
A
j
= (s
j
– c
oj
– d
j
)(1-φ) + d
j
=(s
j
– c
oj
)(1-φ) + d
j
φ
Analysis of Cost
Estimation
Net profit = Total income – all expenses
direct plant expenses
raw materials, labor, utilities
indirect expenses
administrative salaries, product sales, distribution costs
Capital
source
and sink
Operations for
complete project
Loans
Preferred stock Bonds
Common stock
Other capital input
Stockholders’
dividends
Repayment of
borrowed capital
Other
investments
T
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t
a
l

c
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p
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t

l
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d
)
s
j
Total income from
sales $s j -c oj Gross profit (before depreciation charge) V, manufacturing fixed capital investment for project A x , non- manufacturing fixed capital investment for project W, working capital investment for project C oj Costs for operations (not including depreciation) Total capital Investment (without land), T=W+A x +V (s j – c oj – d j )(1-φ) Net profit after taxes d j Depreciation charge (s j – c oj – d j ) Gross profit (s j – c oj – d j )φ Income taxes (φ is generally 35% of gross profit) A j Net cash flow from the project including depreciation charge A j = (s j – c oj – d j )(1-φ) + d j =(s j – c oj )(1-φ) + d j φ Cash flow for industrial operations Raw materials and labor Estimation of Capital Investment V, manufacturing fixed capital investment for project A x , non- manufacturing fixed capital investment for project W, working capital investment for project Total capital Investment (without land) T = W + A x + V T o t a l c a p i t a l i n v e s t m e n t ( w i t h o u t l a n d ) Total capital investment (without land) Fixed capital Investment A x + V Some of the capital investment can occur as a lump sum. 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. Cumulative cash position – effects of cash flow over full life cycle of industrial operation (time value of money was neglected) Here the total capital investment is repaid in 5 years Factors Affecting Investment and Production Costs The engineer must be aware of actual prices for raw materials and equipment, company policies, government regulations and others • Sources of Equipment • Price fluctuations • Company policies • Operating time and rate of production • Government policies Must keep up to date with prices and wage fluctuations: Monthly Labor Review (US Bureaus of Labor Statistics) Major effect on the profits! Direct effect! Occupational Employment and Wage Estimates: http://www.bls.gov/oes/oes_data.htm e.g., Raleigh Durham area: http://www.bls.gov/oes/current/oes_6640.htm If equipment stands idle for an extended period, raw materials and labor costs are usually low; HOWEVER, many other costs (fixed costs) like maintenance, protection, depreciation, continue even though the equipment is not active. Not producing a product – no producing revenue Downtime should be kept to a necessary minimum (main source of poor profitability in process plants). Maximum gross earnings T o t a l p r o d u c t c o s t T o t a l I n c o m e ( a l l p r o d u c t s ) Fixed Costs Breakeven point Gross earnings Loss Breakeven chart for chemical processing plant Rate of Production, Kg/s D o l l a r s$
0 0.05 0.1 0.15 0.2
0.005
0.010
0.015
0.020
0.025
0
Government Policies
Law and regulations that have a direct effct
on industrial costs
• Export tariff regulations
• Depreciation taxes
• Income tax rules
• Environmental and safety regulations
V, manufacturing
fixed capital
investment for
project
A
x
, non-
manufacturing
fixed capital
investment for
project
W, working
capital investment
for project
Total capital
Investment
(without land)
T = W + A
x
+ V
T
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d
)
Total Capital Investment (without land)
Fixed capital
Investment A
x
+ V
Capital: “a stock of
accumulated
wealth” Capital is
savings that may
be used. Used for
example in
investment to
promote the
production of other
goods
V, manufacturing
fixed capital
investment for
project
A
x
, non-
manufacturing
fixed capital
investment for
project
W, working
capital investment
for project
Total
capital
Investment
(TCI)
(without land)
T = W + A
x
+ V
T
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t
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l

c
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p
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)
Fixed capital
Investment
A
x
+ V
Working capital (WC): The capital
necessary for the operation of the
plant
Fixed-capital Investment (FCI): The
capital needed to supply the
required manufacturing and plant
facilities
Direct cost
Indirect cost
(WC/TCI) = varies with different companies
Most chemical plants used 10-20% (it may
increase to as much as 50% for companies
producing products of seasonal demand)
V, manufacturing
fixed capital
investment for
project
A
x
, non-
manufacturing
fixed capital
investment for
project
W, working
capital investment
for project
T
o
t
a
l

c
a
p
i
t
a
l

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n
v
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s
t
m
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n
t

(
w
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l
a
n
d
)
Fixed Capital Investment (FCI)
Fixed capital
Investment
A
x
+ V
Direct Costs: Capital necessary for the
installed process equipment with all
components that are needed for
complete process operation and also:
• Site preparation
• Piping
• Instruments
• Insulation
• Foundations
• Auxiliary facilities
(field office, supervision expenses,
contractor’s fees, etc) and for all plant
components that are not directly related
to the process operation:
• Processing building
• Warehouses
• Laboratories
• Shops
V, manufacturing
fixed capital
investment for
project
A
x
, non-
manufacturing
fixed capital
investment for
project
W, working
capital investment
for project
Total capital
Investment
(without land)
T = W + A
x
+ V
T
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t
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c
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p
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)
Fixed capital
Investment
A
x
+ V
Total amount of money invested in:
1. Raw materials and supplies
carried in stock (*)
2. Finished products in stock
3. Semi-finished products being
manufactured
4. Accounts receivable
5. Cash kept on hand for monthly
payment of operating expenses
(salaries, wages and raw
materials purchases)
6. Accounts payable
7. Taxes payable
Working Capital (WC)
(*) Usually 1-month supplies valued at delivery prices
Types of Capital Cost Estimates
1. Order-of-magnitude estimate (ratio estimate) based on similar
previous cost data (+/- 30%)
2. Study estimate (factored estimate) based on knowledge of major
items of equipment (+/- 30%)
3. Preliminary estimate (budget authorization estimate or scope
estimate) based on sufficient data to permit the estimate to be
budgeted (+/- 20%)
4. Definitive estimate (project control estimate) based on almost
complete data but before completion of drawing and
specifications (+/- 10%)
5. Detailed estimate (contractor’s estimate) based on complete
engineering drawings, specifications and site surveys (+/- 5%)
Cost Indexes
An index value for a given time showing the cost
at that time relative to a certain base time.
obtained was cost original time at value index
time present at value index
cost original cost Present × =
Ok if less than 10 years
We can project costs forward by using extrapolated values of
an index or an expected inflation rate.
Most common indexes:
• Marshall and Swift all-industry
• Process-industry equipment indexes
• Engineering News-record construction index
• Nelson-Farrar refinery construction index
• Chemical Engineering plant cost index
Cost Indices
• Marshall & Swift Equipment Cost Indexes
– all-industry equipment index - arithmetic average of indexes for
47 different types of industrial, commercial, and housing
equipment
– based on an index value of 100 for the year 1926
– account for cost of machinery and major equipment plus costs
for installation, fixtures, tools, office, and minor equipment
• Engineering News-Record Construction Cost Index
– indicates variance in labor rates and materials costs for industrial
construction
– one of three basis’ used: 100 for 1913, 1949 or 1967
• Nelson-Farrar Refinery Construction Cost Index
– petroleum industry construction costs
– basis - 100 for 1946
Cost Indices
Chem. Engr. Plant Cost Index (CEPCI)
• construction costs for chemical plants
• equipment, machinery and supports, 61%;
erection and installation labor, 22%; buildings,
materials, and labor, 7%; engineering and
supervision, 10%
• major components subdivided as: fabricated
equipment, 37%; process machinery, 14%; pipe,
valves, and fittings, 20%; process instruments
and controls, 7%; pumps and compressors, 7%;
electrical equipment and materials, 5%;
structural supports, insulation and paint, 10%
• basis - 100 for 1957-1959
Cost Indices
Chem. Engr. Plant Cost Index (CEPCI)
CAPCOST®
• CAPCOST® is a Microsoft Excel
program for estimating bare module, total
module, and grass roots costs of complex
chemical plants.
CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2006
CHEMICAL ENGINEERING
CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2006
Chemical Engineering Plant Cost Index from 1950 to 2005
y = 2E-07x
6
- 0.0028x
5
+ 13.738x
4
- 35882x
3
+ 5E+07x
2
- 4E+10x + 1E+13
R
2
= 0.9933
0
50
100
150
200
250
300
350
400
450
500
1940 1950 1960 1970 1980 1990 2000 2010
468.2 2005
444.2 2004
401.7 2003
395.6 2002
394.3 2001
394.1 2000
390.6 1999
389.5 1998
386.5 1997
381.7 1996
381.1 1995
368.1 1994
359.2 1993
358.2 1992
361.3 1991
357.6 1990
355.4 1989
342.5 1988
323.8 1987
318.4 1986
325.3 1985
322.7 1984
316.9 1983
314 1982
297 1981
261.2 1980
CEI YEAR
Update
Aug 2006 Final - CHEMICAL
ENGINEERING PLANT COST
INDEX
351.9 Engineering & Supervision
475.2 Buildings
312.9 Construction Labour
637.7 Structural Supports & Misc.
414.2 Electrical Equipment
788.3 Pumps and Compressors
437.2 Process Instruments
731.7 Pipe, valves and fittings
556.2 Process Machinery
560.9 Heat Exchangers and Tanks
602.3 Equipment
Detailed breakdown for Aug 2006 (final)
CEPCI 510 Aug 2006
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
Current Labor Statistics
"Current Labor Statistics" from the print edition of Monthly Labor Review
Pre-formatted data tables
BLS data for use in databases and spreadsheets
"Current Labor Statistics" from the print edition of Monthly Labor Review
The print edition of Monthly Labor Review regularly features 56 tables of current labor statistics. These tables can be downloaded and printed for reference. (PDF
624K).
--------------------------------------------------------------------------------
Employment and Unemployment Tables
Historical Data for the "A" Tables of the Employment Situation Release (Household/CPS data)
Historical Data for the "B" Tables of the Employment Situation Release (Establishment/CES data)
Tables from Employment and Earnings (Household/CPS data)
Annual average data
Monthly data
Quarterly data
Tables from Employment and Earnings (Establishment/CES data)
Monthly data
Occupational Employment and Wage Data
Employment Projections Tables
http://www.bls.gov/opub/mlr/mlrhome.htm
Occupational
Labor force (demographic)
Education and training
Earnings, occupations
Prices and Living Conditions Tables
Consumer Price Index for All Urban Consumers (CPI-U), All Items, Indexes and Annual Percent Changes from 1913 to the present
International Price Indexes—Historical Tables
Consumer Expenditure Survey data
Standard Bulletin (e.g. Age of reference person, Income before taxes)
Cross-tabulated Bulletin (e.g. Age of reference person by income before taxes)
Metropolitan Statistical Areas (MSAs)
All Consumer Units
Compensation and Working Conditions Tables
Employment Cost Index, Historical Listing (TXT) (PDF 500K)
National Compensation Surveys
Productivity Tables
Industry Labor Productivity Data Tables
Industry Multifactor Productivity Data Tables
Foreign Labor Statistics Tables
International Comparisons of Foreign Labor Statistics
International Price Indexes—Historical Tables
Cost Index and Depreciation Schedules
http://www.dor.state.nc.us/publications/cost_archive/99archive/costindex.html
Cost Components in Capital Investment
Capital investment 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.
Example 6-1: 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 (Table 6-3) for a process plant handling both solids and fluids with a high degree of automatic controls and essential outdoor operation. Do not include land. Sizes and specifications determined from equipment parameters fixed or calculated along with the material and energy balances Purchased Equipment The cost of purchased equipment is the basis of several predesign methods for estimating capital investment. Equipment: 1. Processing equipment 2. Raw materials handling and storage equipment 3. Finished-products handling and storage equipment. 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) Estimating Equipment Cost by Scaling Predictions can be made using the six-tenths factor rule b equipment of Capacity a equipment of Capacity b equipment of Cost a equipment of Cost = × = X X .6 0 Use only in the absence of other information. Do not use beyond 10-fold range of capacity Purchased-equipment prices are usually quoted as f.o.b. (free on board, meaning that the purchaser pays the freight). Pre-design estimates od delivery allowance: 10% of the purchased- equipment cost is recommended f.o.b. prices! Check Example The six-tenths factor rule Typical exponents in the six-tenths factor rule Purchased-Equipment Installation (25-55%!!!) Involves costs for labor, foundations, supports, platforms, construction expenses, etc. There is wide variations of installation labor cost depending on equipment size. Instrumentation and Controls 8-50 % of the total delivered cost (taking 26%, this is about 5% of the total capital investment). 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 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% avg - 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) Methods for Estimating Capital Investment A: Detailed-Item Estimate B: Unit Cost Estimate C: Percentage of Delivered-Equipment Cost D: Lang Factors for Approximation of Capital Investment E: Power factor Applied to Plant/Capacity ratio F: Investment cost per unit capacity G: Turnover ratio Less detailed information required! Less preparation time! Degree of accuracy decreases! Methods for Estimating Capital Investment A: Detailed-Item Estimate Accuracy of +/- 5% Methods for Estimating Capital Investment B: Unit Cost Estimate For preparing definitive and preliminary estimates, requires detailed estimates of purchased price (quotation or index-corrected costs and published data) 10-20% accuracy ( ) F f n d d f e H e f L M y f x M x f L E E n C ( ¸ ( ¸ ∑ ∑ ∑ ∑ + + | . | \ | + + + = ' new capital investment delivered purchased- equipment cost delivered- equipment labor cost specific material unit cost specific material quantity specific material labor unit cost per employee- hours labor employee- hour for the specific material unit cost for engineering Engineering employee- hour unit cost for drawings or specifications number of drawings or specifications Construction / field expense factor (>1) Methods for Estimating Capital Investment C: Percentage of Delivered-Equipment Cost Requires determination of delivered equipment cost 20-30% accuracy see next table and textbook spreadsheet ∑ ∑ | . | \ | + + + + + = | . | \ | + + + + + = n n f f f f E E f E f E f E f E n C ... ... 3 2 1 3 2 1 1 E is the delivered purchased-equipment cost f i are multiplying factors for piping, electrical, indirect costs, etc. (average % values presented in next table) Percentage of Delivered-Equipment Cost (cont’d) Check Example Percentage of Delivered-Equipment Cost (cont’d) 9. A second evaluation sheet, 'Year-0$', also is included. It is the same as sheet 'Evaluation', except that all the inflated $values are converted to constant, year-0 dollars (as discussed in the text). This method is considered to reflect more realistically the effect of inflation on the profitability measures. The user may change the default inflation rates in order to study their impacts on profitability. 8. The sheet 'Evaluation' uses values from other sheets to calculate the common profitability measures. The user may change defaults, or enter desired values into the sheet. In particular, the user may change the default inflation rates in order to study their effects on profitability. All calculations in 'Evaluation' are made in current (i.e. inflated) dollars. Inflation adjustments are made from the time of the estimates. To make evaluations for periods of less than 10 years, leave unneeded columns blank. For periods greater than 10 years, insert columns as needed and copy from an existing year column into the new columns. Check equations for correct cell references. 7. On the 'Annual TPC' sheet, all values are calculated from information available on other sheets. The user may change defaults or enter preferred values. The calculated annual TPC is transferred to 'Evaluation'. 6. The 'Depreciation' sheet is used only if the user wishes to change the default (5-year MACRS) depreciation method. To make a change, copy the appropriate MACRS row to the 'Annual depreciation" row of sheets 'Evaluation' and 'Year-0$', or,
enter constant annual (straight line) value into depreciation row of those sheets.
5. On the sheet 'Utilities' the quantity of each utility needed annually must be entered in appropriate units. The total annual
utilities cost is transferred to sheet 'Annual TPC'.
4. On the sheet 'Materials & Labor' enter the product prices and flowrates, the raw materials prices and flow rates, and the
labor requirements and current ENR labor index.
3. On the sheet 'Capital Inv.' enter the estimated current total purchased cost of the process equipment. For the proposed
plant type, copy the corresponding "Fraction of calculates and transfers results to appropriate subsequent sheets.
2. Purchased Equipment Costs may be obtained from the file "Equipment Costs,“ the graphs in the text, or otherwise, and
entered manually into cell H12 on the Capital Inv.' spreadsheet.
1. The sheets are intended for use in the sequence presented. However, any sheet may be by-passed so long as the
information skipped is input manually where needed in subsequent sheets. Default values may be replaced by the user.
The basis for all costs is Jan. 2002.
Cost & Evaluation Workbook accompanying Plant Design and Economics for
Chemical Engineers, 5th edition
Methods for Estimating Capital Investment
D: Lang Factors for Approximation of
Capital Investment
To obtain order-of-magnitude estimates.
Obtained by multiplying the equipment cost by some factor to
approximate the fixed or total capital investment.
D: Lang Factors for Approximation of Capital Investment (cont’d)
Greater accuracy if a number of factors are used:
(
¸
(

¸

+ +
|
.
|

\
|
+ + + = A E
m
f
p
f f E f
n
C
i
F
I
1
'
( )
|
|
.
|

\
|
+
|
|
.
|

\
|
− − =
' '
'
. . . log . . log
E
f
E
e
E f
v
F
506 0 992 0 001 0 154 0 635 0
( )
|
|
.
|

\
|
+
|
|
.
|

\
|
− − − =
' '
'
. . . log . . log
E
p
E
e
E f
p
556 0 156 0 001 0 014 0 266 0
The three installation costs defined as follows:
( )
|
|
.
|

\
|
+ + =
'
'
. . log . . log
E
t
E f
m
194 1 001 0 033 0 344 0
E’ is the purchased equipment on an f.o.b basis, f
I
is the indirect cost factor (1.4), f
F
is the
cost factor for field labor, f
p
the cost factor for piping materials, f
m
the cost factor for
misellaneous items, E
i
the cost of equipment already installed, A the incremental cost of
corrosion-resistant alloy materials, e the total heat exchanger cost, f
v
the total cost of field-
fabricatd vessels, p the total pump plus driver cost and t the total cost of tower shells.
Methods for Estimating Capital Investment
E: Power factor Applied to
Plant/Capacity ratio
To obtain order-of-magnitude estimates.
Obtained by relating the fixed-capital investment of a new process plant
(C
n
) to the fixed-capital investment of similar previously constructed
plants (C) by an exponential power ratio (x):
x
e n
R f C C × × =
f
e
is the cost index at the time of cost C
n
to that at the time of C.
( ) I DR f C
x
n
+ =
Closer approximation:
f is a lumped cost index factor relative to the original facility cost,
D is the direct cost for previously installed facility
I is the indirect cost for previously installed facility
f is the product of a geographic labor cost index, area labor productivity
index, and a material and equipment cost index:
Check Example (2)
Methods for Estimating Capital Investment
F: Investment cost per unit capacity
Methods for Estimating Capital Investment
G: Turnover ratio
Turnover ratios range from 0.2 to 4 (rule of
thumb for chemical industry: turnover ratio =1)
The reciprocal of this ratio is the so-called
capital ratio or the investment ratio.
investment capital - fixed
sales annual Gross
ratio Turnover =
Instructions for file “EQUIPMENT COSTS” accompanying Plant Design and Economics for Chemical Engineers, 5th
edition, Peters, Timmerhaus, and West
1. The opening sheet of the file EQUIPMENT COSTS is called CALCULATION PAGE. The column at the left lists equipment
types alphabetically. The names used are the same as those on the cost figures in the text. CLICK a name to SELECT an
EQUIPMENT TYPE. This brings up a panel in the upper right of the screen.
2. The upper right panel shows the text Figure # and title for the source of the cost data plus additional equipment
specifications as needed. CLICK to SELECT the APPROPRIATE LINE. This brings up a panel on the lower right.
3. In the lower right panel input REQUIRED DESIGN PARAMETERS, as requested. An equipment number is requested, and
must be supplied by the user in order for results to be transferred to the EQUIPMENT LIST. CLICK appropriate RADIO
BUTTONS, if shown, to select discreet parameters, such as operating pressure and material of construction. When entries are
complete, CLICK on CALCULATE. All calculated values are purchased costs unless otherwise noted.
4. The lower right panel shows the calculated cost of the item in $. "Add value" TRANSFERS the equipment information to the EQUIPMENT LIST. "Display Results" shows the EQUIPMENT LIST, and "Clear Results" deletes all EQUIPMENT LIST entries. The use of the button "Display CSV" is described below. 5. Upon clicking "Display Results," the user will be asked for a date, and then for the value of the Chemical Engineering (CE) Plant Cost Index. The default values are Jan. 2002 and CE index = 390.4 (the basis for the calculated costs). Any appropriate date may be entered; the CE index entered should correspond to that date; the index must be extrapolated for dates beyond the most recently available value. Costs shown on the EQUIPMENT LIST are updated with the index provided. Only one date and CE index may be used per session (the latest entered is applied to all costs). 6. At the top of the EQUIPMENT LIST, the user may enter project identification information. In the last column on the right of the EQUIPMENT LIST, the user may insert additional information about the equipment, such as a dimension or design pressure. 7. Return to the CALCULATION PAGE and continue, by repeating the foregoing steps, adding equipment until project costing is complete. 8. The EQUIPMENT LIST can be PRINTed. WARNING: EQUIPMENT LIST is not saved when the EQUIPMENT COST file is closed. 9. The EQUIPMENT LIST can be transferred to a spreadsheet as follows: a. Open a notepad. b. Click "Display CSV." Copy the resulting page and paste it in the notepad. c. Save the notepad file with a '.csv' extension (without quotes) to a convenient location. d. Open a spreadsheet application. The following instructions are for Excel. e. Click 'Data' -> 'Get External Data -> 'Import Text File.' f. Find and select the .csv file saved in step c. Make sure that you see all file types if it doesn't show up. g. Follow the instructions of the wizard. In step 2, check 'Other' and insert '#' (without quotes) into the box next to Other. 10. To continue with an economic analysis, the total Purchased Equipment Cost may be manually entered into cell H12 on the "Capital Inv." spreadsheet, or copied from the spreadsheet made in step 9. (φ is generally 35% of gross profit) (sj – coj – dj)φ Income taxes (sj – coj – dj)(1-φ) Net profit after taxes dj Depreciation charge (sj – coj – dj) Gross profit sj Total income from sales$

Operations for complete project

Coj Costs for

Total capital investment (without land)

W, working capital investment for project Ax, nonmanufacturing fixed capital investment for project V, manufacturing fixed capital investment for project

operations (not including depreciation)
Raw materials and labor

sj-coj Gross profit (before

depreciation charge)

Total capital Investment (without land),

T=W+Ax+V

Repayment of borrowed capital Other investments

the project including depreciation charge Aj = (sj – coj – dj)(1-φ) + dj =(sj – coj)(1-φ) + djφ

Aj Net cash flow from

Other capital input Common stock

Capital source and sink
Bonds

Stockholders’ dividends

Loans Preferred stock

Cash flow for industrial operations

Estimation of Capital Investment

Total capital investment (without land)
Total capital investment (without land)
W, working capital investment for project Ax, nonmanufacturing fixed capital investment for project V, manufacturing fixed capital investment for project

Some of the capital investment can occur as a lump sum.
Total capital Investment (without land)

T = W + Ax + V

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.

Fixed capital Investment Ax + V

Cumulative cash position – effects of cash flow over full life cycle of industrial operation (time value of money was neglected)

Here the total capital investment is repaid in 5 years

government regulations and others • Sources of Equipment • Price fluctuations • Company policies • Government policies Direct effect! Must keep up to date with prices and wage fluctuations: Monthly Labor Review (US Bureaus of Labor Statistics) • Operating time and rate of production Major effect on the profits! .Factors Affecting Investment and Production Costs The engineer must be aware of actual prices for raw materials and equipment. company policies.

htm e.htm .gov/oes/current/oes_6640.. Raleigh Durham area: http://www.bls.Occupational Employment and Wage Estimates: http://www.g.bls.gov/oes/oes_data.

depreciation. raw materials and labor costs are usually low. protection. Not producing a product – no producing revenue Downtime should be kept to a necessary minimum (main source of poor profitability in process plants). . HOWEVER. many other costs (fixed costs) like maintenance. continue even though the equipment is not active.If equipment stands idle for an extended period.

Breakeven chart for chemical processing plant 0.005 uc rod al p Fixed Costs Loss 0 0 0.1 0.05 0.15 0.020 Dollars $0.010 Gross earnings Tot 0.025 0.2 Rate of Production.015 Breakeven point st t co e m o nc lI ta To ) ts c du o pr ll (a Maximum gross earnings 0. Kg/s . Government Policies Law and regulations that have a direct effct on industrial costs • Export tariff regulations • Depreciation taxes • Income tax rules • Environmental and safety regulations . org/corp00an.itepnet.pdf .See also http://www. nonmanufacturing fixed capital investment for project V. working capital investment for project Ax. Used for example in investment to promote the production of other goods Total capital investment (without land) . manufacturing fixed capital investment for project Total capital Investment (without land) T = W + Ax + V Fixed capital Investment Ax + V Capital: “a stock of accumulated wealth” Capital is savings that may be used.Total Capital Investment (without land) W. Total capital investment (without land) Working capital (WC): The capital necessary for the operation of the plant W. nonmanufacturing fixed capital investment for project V. manufacturing fixed capital investment for project Total capital Investment (TCI) (without land) T = W + Ax + V Fixed capital Investment Ax + V Fixed-capital Investment (FCI): The capital needed to supply the required manufacturing and plant facilities Indirect cost Direct cost (WC/TCI) = varies with different companies Most chemical plants used 10-20% (it may increase to as much as 50% for companies producing products of seasonal demand) . working capital investment for project Ax. supervision expenses. working capital investment for project Ax.Fixed Capital Investment (FCI) Indirect cost: Construction overhead (field office. contractor’s fees. etc) and for all plant components that are not directly related to the process operation: • Processing building • Administrative and other offices • Warehouses • Laboratories • Shops Direct Costs: Capital necessary for the installed process equipment with all components that are needed for complete process operation and also: • Site preparation • Piping • Instruments • Insulation • Foundations • Auxiliary facilities Total capital investment (without land) W. nonmanufacturing fixed capital investment for project V. manufacturing fixed capital investment for project Fixed capital Investment Ax + V . . Finished products in stock 3. Semi-finished products being manufactured 4. wages and raw materials purchases) 6. Raw materials and supplies carried in stock (*) 2. Cash kept on hand for monthly payment of operating expenses (salaries. Accounts receivable 5.Working Capital (WC) Total amount of money invested in: Total capital investment (without land) W. Accounts payable 7. manufacturing fixed capital investment for project Total capital Investment (without land) T = W + Ax + V Fixed capital Investment Ax + V 1. Taxes payable (*) Usually 1-month supplies valued at delivery prices . nonmanufacturing fixed capital investment for project V. working capital investment for project Ax. Preliminary estimate (budget authorization estimate or scope estimate) based on sufficient data to permit the estimate to be budgeted (+/.10%) 5.30%) 3.30%) 2.20%) 4. Study estimate (factored estimate) based on knowledge of major items of equipment (+/.5%) .Types of Capital Cost Estimates 1. Order-of-magnitude estimate (ratio estimate) based on similar previous cost data (+/. Definitive estimate (project control estimate) based on almost complete data but before completion of drawing and specifications (+/. specifications and site surveys (+/. Detailed estimate (contractor’s estimate) based on complete engineering drawings. . index value at present time Present cost = original cost × index value at time original cost was obtained Ok if less than 10 years We can project costs forward by using extrapolated values of an index or an expected inflation rate.Cost Indexes An index value for a given time showing the cost at that time relative to a certain base time. Most common indexes: • Marshall and Swift all-industry • Process-industry equipment indexes • Engineering News-record construction index • Nelson-Farrar refinery construction index • Chemical Engineering plant cost index . 1949 or 1967 • Nelson-Farrar Refinery Construction Cost Index – petroleum industry construction costs – basis . 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. tools.arithmetic average of indexes for 47 different types of industrial. and minor equipment • Engineering News-Record Construction Cost Index – indicates variance in labor rates and materials costs for industrial construction – one of three basis’ used: 100 for 1913.100 for 1946 . fixtures. office. commercial.Cost Indices • Marshall & Swift Equipment Cost Indexes – all-industry equipment index . 22%. and labor. 5%. insulation and paint.100 for 1957-1959 . machinery and supports. 7%. erection and installation labor. electrical equipment and materials. Engr.Cost Indices Chem. buildings. materials. pumps and compressors. engineering and supervision. structural supports. 10% • major components subdivided as: fabricated equipment. valves. 14%. Plant Cost Index (CEPCI) • construction costs for chemical plants • equipment. pipe. process machinery. 10% • basis . 7%. 37%. 61%. process instruments and controls. 20%. 7%. and fittings. Engr. Plant Cost Index (CEPCI) .Cost Indices Chem. total module. .CAPCOST® • CAPCOST® is a Microsoft Excel program for estimating bare module. and grass roots costs of complex chemical plants. . CHEMICAL ENGINEERING WWW.COM JANUARY 2006 .CHE. CHEMICAL ENGINEERING . CHE.COM JANUARY 2006 .CHEMICAL ENGINEERING WWW. 5 355.738x4 .7 444.9 322.9933 1950 1960 1970 1980 1990 2000 2010 YEAR 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 CEI 261.35882x3 + 5E+07x2 .2 468.0.2 359.6 394.3 318.8 342.2 368.5 389.7 386.4 357.0028x5 + 13.3 395.6 361.4 323.2 .6 401.1 381.5 390.Chemical Engineering Plant Cost Index from 1950 to 2005 500 450 400 350 300 250 200 150 100 50 0 1940 y = 2E-07x6 .1 381.1 394.4E+10x + 1E+13 R2 = 0.2 297 314 316.7 325.3 358. 9 475.2 637. valves and fittings Process Instruments Pumps and Compressors Electrical Equipment Structural Supports & Misc.3 414.2 351. Construction Labour Buildings Engineering & Supervision 510 CEPCI 602.7 312.CHEMICAL ENGINEERING PLANT COST INDEX Aug 2006 Detailed breakdown for Aug 2006 (final) Equipment Heat Exchangers and Tanks Process Machinery Pipe.3 560.2 731.Update Aug 2006 Final .9 .2 788.7 437.9 556. bls.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. (PDF 624K).gov/opub/mlr/mlrhome. -------------------------------------------------------------------------------Employment and Unemployment Tables Historical Data for the "A" Tables of the Employment Situation Release (Household/CPS data) Historical Data for the "B" Tables of the Employment Situation Release (Establishment/CES data) Tables from Employment and Earnings (Household/CPS data) Annual average data Monthly data Quarterly data Tables from Employment and Earnings (Establishment/CES data) Monthly data Occupational Employment and Wage Data Employment Projections Tables . These tables can be downloaded and printed for reference.htm Current Labor Statistics "Current Labor Statistics" from the print edition of Monthly Labor Review Pre-formatted data tables BLS data for use in databases and spreadsheets "Current Labor Statistics" from the print edition of Monthly Labor Review The print edition of Monthly Labor Review regularly features 56 tables of current labor statistics. occupations Prices and Living Conditions Tables Consumer Price Index for All Urban Consumers (CPI-U). Indexes and Annual Percent Changes from 1913 to the present International Price Indexes—Historical Tables Consumer Expenditure Survey data Standard Bulletin (e. Income before taxes) Cross-tabulated Bulletin (e.g.htm Occupational Labor force (demographic) Education and training Earnings. All Items. Historical Listing (TXT) (PDF 500K) National Compensation Surveys Productivity Tables Industry Labor Productivity Data Tables Industry Multifactor Productivity Data Tables Foreign Labor Statistics Tables International Comparisons of Foreign Labor Statistics International Price Indexes—Historical Tables .g.bls. Age of reference person.http://www.gov/opub/mlr/mlrhome. Age of reference person by income before taxes) Metropolitan Statistical Areas (MSAs) All Consumer Units Compensation and Working Conditions Tables Employment Cost Index. dor.nc.Cost Index and Depreciation Schedules http://www.us/publications/cost_archive/99archive/costindex.state.html . Cost Components in Capital Investment Capital investment 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. . Do not include land.Example 6-1: 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 (Table 6-3) for a process plant handling both solids and fluids with a high degree of automatic controls and essential outdoor operation.

Processing equipment 2. Finished-products handling and storage equipment. Raw materials handling and storage equipment 3. Second best: cost values from the file of past purchase orders (must be corrected with the appropriate cost index ratio) . Equipment: 1. Sizes and specifications determined from equipment parameters fixed or calculated along with the material and energy balances Most accurate method: obtain firm bids from fabricators and suppliers.Purchased Equipment The cost of purchased equipment is the basis of several predesign methods for estimating capital investment.

o. prices! Use only in the absence of other information.o.b. Pre-design estimates od delivery allowance: 10% of the purchasedequipment cost is recommended Check Example . meaning that the purchaser pays the freight).b. Do not use beyond 10-fold range of capacity Purchased-equipment prices are usually quoted as f. (free on board.Estimating Equipment Cost by Scaling Predictions can be made using the six-tenths factor rule Cost of equipment a = Cost of equipment b × X 0.6 Capacity of equipment a X = Capacity of equipment b f.

The six-tenths factor rule .

Typical exponents in the six-tenths factor rule .

etc. There is wide variations of installation labor cost depending on equipment size. supports. foundations. construction expenses.Purchased-Equipment Installation (25-55%!!!) Involves costs for labor. platforms. .

pipe. etc.Instrumentation and Controls 8-50 % of the total delivered cost (taking 26%. . support. valves. fitting. Piping Includes labor. Can run as high as 80% of the total delivered cost (about 20 % of the total fixed capital investment). this is about 5% of the total capital investment).

Yard Improvements Fencing. consist of labor. roads. sidewalks. landscaping: 10-20% of the delivered purchased equipment cost (2-5 % of fixed capital investment) . materials and supplies.Electrical Systems 15-30% of the delivered purchased equipment cost (4-8 % of fixed capital investment) Buildings Buildings Including services. Plumbing. railroad sidings. ventilation are included. grading. heating.

first aid.14% avg . Also includes shop. compressed air and fuel. cafeteria.. This is equivalent to 8-20 % . power.30-80% of the delivered purchased equipment cost (55% on average for plant handling solid/liquids). water..of fixed capital investment) .Service Facilities Utilities for supplying steam.

cost investment – approx. Safety.Health. Engineering and Supervision Considered as an indirect capital. land cost cannot be depreciated – not included in the fixed-capital investment. and environmental Functions See previous table. Average land cost for industrial plants amount to 4-8% of the delivered purchased equipment cost (1-2 % of fixed capital investment) By law. 30% of the delivered purchased equipment cost (8 % of fixed capital investment) Legal Expenses 1-3 % of fixed capital investment . 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. This is an increasingly important issue.

etc. and other construction overhead. 8-10 % of fixed capital investment. construction tools and rentals. floods.Construction expenses Indirect cost associated to temporary construction.5-6% of fixed capital investment Contingencies Unexpected events and changes (storms.) 5-15 % of fixed capital investment (8 % average) . Contractor’s Fee 2-8% of direct plant cost or 1. taxes and insurance. and operation. home office personnel. construction payroll. strikes. travel and living.

Methods for Estimating Capital Investment A: Detailed-Item Estimate B: Unit Cost Estimate C: Percentage of Delivered-Equipment Cost Less detailed information required! Less preparation time! D: Lang Factors for Approximation of Capital Investment Degree of accuracy decreases! E: Power factor Applied to Plant/Capacity ratio F: Investment cost per unit capacity G: Turnover ratio .

5% .Methods for Estimating Capital Investment A: Detailed-Item Estimate Accuracy of +/.

Engineering hour for the employeehour specific material unit cost for drawings or specifications Construction / field expense factor (>1) ( ) number of drawings or specifications .Methods for Estimating Capital Investment B: Unit Cost Estimate For preparing definitive and preliminary estimates. requires detailed estimates of purchased price (quotation or index-corrected costs and published data) 10-20% accuracy delivered purchasednew equipment capital cost investment   ' Cn =  ∑ E + E L + ∑  f x M x + f y M L  + ∑ f e H e + ∑ f d d n  f F       specific deliveredequipment labor cost specific material unit cost material labor unit cost per employeehours specific material quantity unit cost for engineering labor employee.

. + f      1 2 3 n  1 2 3 n   E is the delivered purchased-equipment cost fi are multiplying factors for piping... + f E  = E ∑ 1 + f + f + f + . (average % values presented in next table) see next table and textbook spreadsheet . indirect costs. electrical. etc..Methods for Estimating Capital Investment C: Percentage of Delivered-Equipment Cost Requires determination of delivered equipment cost 20-30% accuracy Cn = ∑  E + f E + f E + f E + .

Percentage of Delivered-Equipment Cost (cont’d) Check Example .

Percentage of Delivered-Equipment Cost (cont’d) .

insert columns as needed and copy from an existing year column into the new columns. For the proposed plant type. The sheets are intended for use in the sequence presented. To make evaluations for periods of less than 10 years. In particular. 8. and entered manually into cell H12 on the Capital Inv.Cost & Evaluation Workbook accompanying Plant Design and Economics for Chemical Engineers. 3. The user may change defaults or enter preferred values. The 'Depreciation' sheet is used only if the user wishes to change the default (5-year MACRS) depreciation method. The total annual utilities cost is transferred to sheet 'Annual TPC'. On the sheet 'Materials & Labor' enter the product prices and flowrates. On the sheet 'Utilities' the quantity of each utility needed annually must be entered in appropriate units. also is included. This method is considered to reflect more realistically the effect of inflation on the profitability measures.' enter the estimated current total purchased cost of the process equipment. inflated) dollars. 2. 5th edition The basis for all costs is Jan. A second evaluation sheet. However. enter constant annual (straight line) value into depreciation row of those sheets. Inflation adjustments are made from the time of the estimates. 4. 5. On the 'Annual TPC' sheet. To make a change. all values are calculated from information available on other sheets. the user may change the default inflation rates in order to study their effects on profitability. On the sheet 'Capital Inv. the raw materials prices and flow rates. The user may change defaults. or enter desired values into the sheet. The calculated annual TPC is transferred to 'Evaluation'. The sheet 'Evaluation' uses values from other sheets to calculate the common profitability measures. copy the appropriate MACRS row to the 'Annual depreciation" row of sheets 'Evaluation' and 'Year-0 $'. and the labor requirements and current ENR labor index. except that all the inflated$ values are converted to constant. leave unneeded columns blank. All calculations in 'Evaluation' are made in current (i. Default values may be replaced by the user. any sheet may be by-passed so long as the information skipped is input manually where needed in subsequent sheets. 6. 2002. 1.e. Purchased Equipment Costs may be obtained from the file "Equipment Costs. year-0 dollars (as discussed in the text). copy the corresponding "Fraction of calculates and transfers results to appropriate subsequent sheets. The user may change the default inflation rates in order to study their impacts on profitability. Check equations for correct cell references. For periods greater than 10 years. . 'Year-0 $'.' spreadsheet. 9.“ the graphs in the text. or. It is the same as sheet 'Evaluation'. 7. or otherwise. Methods for Estimating Capital Investment D: Lang Factors for Approximation of Capital Investment To obtain order-of-magnitude estimates. Obtained by multiplying the equipment cost by some factor to approximate the fixed or total capital investment. . 194  '    E  E’ is the purchased equipment on an f. fI is the indirect cost factor (1.o.033 log 0 . A the incremental cost of corrosion-resistant alloy materials.506  v'      E  E   e   p  log f p = − 0 .154 log 0 .156  '  + 0 . fp the cost factor for piping materials.992  '  + 0. e the total heat exchanger cost.556  '      E  E  ( ) ( )  t  log f m = 0 .b basis.266 − 0 . fm the cost factor for misellaneous items.635 − 0.D: Lang Factors for Approximation of Capital Investment (cont’d) Greater accuracy if a number of factors are used:  E ' 1 + f + f + f  + E + A Cn = f I   i p m  F     The three installation costs defined as follows:  e   f  log f F = 0.001 E ' − 0 .344 + 0 . ( ) . p the total pump plus driver cost and t the total cost of tower shells.001 E ' + 1 .001 E ' − 0.014 log 0 . Ei the cost of equipment already installed.4). fF is the cost factor for field labor. fv the total cost of fieldfabricatd vessels. Methods for Estimating Capital Investment E: Power factor Applied to Plant/Capacity ratio To obtain order-of-magnitude estimates. Obtained by relating the fixed-capital investment of a new process plant (Cn) to the fixed-capital investment of similar previously constructed plants (C) by an exponential power ratio (x): Cn = C × f e × R x fe is the cost index at the time of cost Cn to that at the time of C. . and a material and equipment cost index: Check Example (2) . area labor productivity index.Closer approximation: Cn = f DR + I ( x ) f is a lumped cost index factor relative to the original facility cost. D is the direct cost for previously installed facility I is the indirect cost for previously installed facility f is the product of a geographic labor cost index. Methods for Estimating Capital Investment F: Investment cost per unit capacity . capital investment Turnover ratios range from 0.Methods for Estimating Capital Investment G: Turnover ratio Gross annual sales Turnover ratio = fixed .2 to 4 (rule of thumb for chemical industry: turnover ratio =1) The reciprocal of this ratio is the so-called capital ratio or the investment ratio. . e. by repeating the foregoing steps. CLICK a name to SELECT an EQUIPMENT TYPE." Copy the resulting page and paste it in the notepad. to select discreet parameters. b. Open a spreadsheet application. g. Click "Display CSV. check 'Other' and insert '#' (without quotes) into the box next to Other. An equipment number is requested. 3. The column at the left lists equipment types alphabetically. CLICK to SELECT the APPROPRIATE LINE. 5. Make sure that you see all file types if it doesn't show up. and then for the value of the Chemical Engineering (CE) Plant Cost Index. The EQUIPMENT LIST can be transferred to a spreadsheet as follows: a. The following instructions are for Excel. Costs shown on the EQUIPMENT LIST are updated with the index provided. and "Clear Results" deletes all EQUIPMENT LIST entries. The EQUIPMENT LIST can be PRINTed. The names used are the same as those on the cost figures in the text. To continue with an economic analysis." spreadsheet. the user may insert additional information about the equipment. the total Purchased Equipment Cost may be manually entered into cell H12 on the "Capital Inv.csv file saved in step c. c. The upper right panel shows the text Figure # and title for the source of the cost data plus additional equipment specifications as needed." the user will be asked for a date. Peters. Open a notepad. The use of the button "Display CSV" is described below. 9. "Display Results" shows the EQUIPMENT LIST.4 (the basis for the calculated costs). or copied from the spreadsheet made in step 9. At the top of the EQUIPMENT LIST. such as operating pressure and material of construction. This brings up a panel in the upper right of the screen.csv' extension (without quotes) to a convenient location. "Add value" TRANSFERS the equipment information to the EQUIPMENT LIST. and must be supplied by the user in order for results to be transferred to the EQUIPMENT LIST. the user may enter project identification information. WARNING: EQUIPMENT LIST is not saved when the EQUIPMENT COST file is closed. Save the notepad file with a '. 5th edition. 6. 10.' f. The opening sheet of the file EQUIPMENT COSTS is called CALCULATION PAGE. as requested. The lower right panel shows the calculated cost of the item in$. All calculated values are purchased costs unless otherwise noted. 2. Find and select the . 8. the CE index entered should correspond to that date. and West 1. Only one date and CE index may be used per session (the latest entered is applied to all costs). Click 'Data' -> 'Get External Data -> 'Import Text File. such as a dimension or design pressure. 2002 and CE index = 390.Instructions for file “EQUIPMENT COSTS” accompanying Plant Design and Economics for Chemical Engineers. When entries are complete. This brings up a panel on the lower right. Timmerhaus. the index must be extrapolated for dates beyond the most recently available value. CLICK on CALCULATE. adding equipment until project costing is complete. Return to the CALCULATION PAGE and continue. Any appropriate date may be entered. In the lower right panel input REQUIRED DESIGN PARAMETERS. 7. 4. The default values are Jan. d. CLICK appropriate RADIO BUTTONS. In step 2. if shown. In the last column on the right of the EQUIPMENT LIST. Follow the instructions of the wizard. . Upon clicking "Display Results.