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1.- Economic aspects of the preliminary design

2.- Cost Estimates
3.- Capital Investment
4.- Manufacturing cost
5.- Simple measures to estimate earnings and return on investment
6.- Profitability Measures
7.- Further Reading and References

1.- Economic aspects of the preliminary design

Maximum Process
Potential Profit alternatives
(MPP) analysis

Different Based on t, €, * Non-Discounted

estimation levels * Discounted
interest rate
(time value of money)

Maximum Potential Profit

Design using hierarchical levels of decision (Levels of Douglas)

Use of hierarchical levels to estimate the potential profit

1.- Economic aspects of the preliminary design

1st Estimation (PP1):

•Importance of the stoichiometry
[Incomes from product
• Levels 1 and 2 of Douglas decision
sale]-[Annual cost of raw
•Knowledge of PFD

PP1 > 0

2nd Estimation (PP2):

[Incomes from product sale] - •Knowledge of energetic needs
[Annual cost of raw materials] •Levels 1-5 of Douglas decision
– [Manufacturing costs]

PP2 > 0

3rd Estimation (PP3): [Incomes

from product sale] - [Annual
•Capital investment and
cost of raw materials] –
manufacturing cost estimation
[Manufacturing costs]–
[Capital costs]
2.- Cost Estimates: Costs related to the process

•CAPITAL INVESTMENT or CAPITAL COST (Inversion de Capital). [€]

Fixed Capital (Capital Fijo o Inmovilizado)
portion of the total fixed capital that is invested in fixed assets to build the
physical process itself, that stay in the business almost permanently, or at the
very least, for more than one accounting period.
land, buildings, machinery, vehicles and equipment, patents, incidental expenses
(estimation adjustments)

Working Capital (Capital Circulante)

represents funds required to operate the plant due to delays in payment
and maintenance of inventories

the money available to fill the tanks (solvents, catalysts, industrial and configured consumer
products) and meet the initial payroll and expenses

Startup Cost (Coste de Arranque)

•MANUFACTURING COSTS (Costes de fabricacion). [€/t]
Direct Costs (Costes de Fabricación Directos): Vary with the rate of production
Fixed Costs (Costes de Fabricación Fijos): Not affected by the production level
General Expenses (Gastos Generales): Associated with management level and 5
administrative activities not directly related with the manufacturing process.
3.- Capital investment
(CAPITAL INVESTMENT or CAPITAL COST – CTCI-) (Inversion de capital). [€]

A- Guthrie´s modular method, based on individual factors, to preliminary design:

* Updated Bare Module Cost = BMC = UF . BC . (MPF + MF -1)
+ Contingencies and Contractor´s fee = 18% BMC

* CTBM (Total bare-module cost): Σ(BMC) of the process equipment

* CTCI = CTPI + CWC = 1.18 (CTBM + Csite + Cbuildings + Coffsite facilities) + CWC
* CTCI = 1.18 (1.35 CTBM) + CWC

CTBM: Total Bare-module Investment; CTCI: Total Capital Investment; CTPI: Total Permanent Investment;
CWC: Working Capital; Csite: Cost of site preparation = 10%-20% CTBM
Cbuildings: Process and non-process buildings = 10% CTBM and 20% CTBM
Coffsite facilities: Utility plants and pollution control = 5% CTBM

B- Method of Lang, bases on overall factor, to study estimate:

CTCI = 1.05 fLTCI Σ (Ii/Ibi) CPi
• 1.05: to account for delivery of the equipment to the plant site
• fLTCI : Lang Factors in function of the processing plant (solids, solids-fluids, fluids)
∗ Σ (Ii/Ibi) CPi : Total purchase cost as sum of the updated equipment cost data
C- Method based in estimation of the capital cost components 6
3.- Capital investment
C- Method based in estimation of the capital cost components:
Base On-Site Cost Fixed Capital Capital Costs
cost for - Installation 1.8 x (on-site) = TCI = 9.4 x BC
equip- - Supervision 7.2 BC
- Taxes

Manufacturing Capital
BC BC(MF-1); 4 BC Plant startup costs
Equipment life
- Equipment
Indirect Costs 10 years
performance and
-Construction personnel
overhead 0.1 x Fixed Capital Annual Interest
-Own Engineering 15%
0.25 x (on-site + off- Working Capital
site) - Early plant
Annualized Total
Non-- Manufacturing Capital
operation. Cost of
Off-site Cost raw materials and Capital Costs
-Equipment to supply CT/10 (1.15)10 =
value of products
process utilities 4 x BC [€/year]
0.15 x Capital Costs
- Site development,
Auxiliary buildings
Σ= Capital Costs =
0.45 (on-site) 1.3 x Fixed Capital =

Σ= Fixed Capital = 9.4 x BC

1.8x(on-site) = 7.2 BC 7
4.- Manufacturing Cost
•MANUFACTURING COSTS (Costes de fabricacion). [€/t] (COM)

Direct Manufacturing Costs (DMC): Vary with production rate

Fixed Manufacturing Costs (FMC): Independent of changes in production rate
General Manufacturing Expenses (GE): Business functions and seldom vary
with production level


COM can be determined when the following costs can be estimated:

1.- Base Module Cost, BMC

2.- Operating Labor, COL
3.- Utilities, CUT
4.- Waste treatment, CWT
5.- Raw Materials, CRM

COM = 0.304 BMC + 2.73 COL + 1.23 (CUT+CWT+CRM)

 The Service Factor need to be known = Nº days in operation during the year / 365 8
4.- Manufacturing Cost
Factor Description of Factor Value
1. Direct Costs (DC) Factors that vary with rate of production = CRM+ CWT + CUT + 1.33COL
+ 0.03COM + 0.069BMC
CRM+ CWT + CUT + 1.33COL + 0.03COM + 0.069BMC
Raw materials Costs of chemical feed stocks. Flow rates from the PDF CRM
Waste treatment Costs of waste treatment CWT
Utilities Gas, oil, coal, electric power, steam, water, air, inert gas, refrigeration, etc. CUT
Operating Labor Cost of personnel for plant operations COL
Direct supervisory Costs of administrative/engineering and support personnel, clerical labor (0.1-0.25)COL
Maintenance & Repairs Costs of labor & materials associated with maintenance (0.02-0.1)BMC
Operating Supplies Costs of miscellaneous supplies that support daily operation not considered (0.1-0.2)BMC
raw materials (chart paper, lubricants, protective clothing, etc.)
Laboratory charges Costs of laboratory tests of quality control (0.1-0.2)COL
Patents and Royalties Costs of using patented or licensed technology (0-0.06)COM
2. Fixed Costs (FC) Factors not affected by the level of production = 0.708COL +
0.708COL + 0.168BMC 0.168BMC
Depreciation Costs associated with the physical plant (buildings, equipments). Legal 0.1BMC
operating expenses for tax purposes
Local taxes and Insurance Based on plant location and severity of the process (0.014-0.05)BMC
Plant Overhead Costs Catch-all costs associated with operation of auxiliary facilities supporting (0.5-0.7)COL+BMC
manufacturing process (fire protection, safety and medical services, etc.)
3. General Expenses Costs associated with management level + administrative 0.177COL+0.009BM
(GE) activities = 0.177COL+0.009BMC+0.16COM C+0.16COM
Administration Costs Salaries and other administration 0.325(COL+(0.02-0.1) BMC

Distribution and Selling Sales and marketing required to sell products. (0.02-0.2)COM 9
Research & Development Costs of R&D activities related to the process 0.05COM 9
4.- Manufacturing Cost
Cost of Raw Materials – CRM
- Price quotations from prospective suppliers of feedstocks
- ICIS Chemical Business Americas (Chemical Market Reporter)

Cost of waste treatment – CWT

- Legal framework, minimization, IPPC, BAT Technologies, BREF Documents.

Utility Cost - CUT

CUT = a x (CE Plant Cost Index) + b x Cs,f

a,b: Coefficient cost for different kind of utilities

CE Plant Cost Index as the effective date of the estimate (Basis, 1958 = 100)
Cs,f.: Price of the fuel use to generate the utility

Cost of Operating Labor - COL

- Annual Operator Salary ($) = 41.600 x (1,03)year-2003
-Operator Requirements for process equipment per shift

* 49 weeks/operator.year x 5 shifts/week = 245 shifts/opeartor.year

* 365 days/year x 3 shifts/day = 1095 shifts/year
* [1095 shifts/year] / [245 shifts/operator.year] = 4.5 operators  COL = (4.5) operators x (Σ
Σnº operators/shift) x €/year

Updated Bare Module Cost = BMC = UF.BC.(MPF + MF -1) 10
5.- Simple Estimate Earnings and Returns
• Earnings
- Pre-tax earnings or Gross earnings or Profit = S - C
S: Annual sales revenue; C: COM, Manufacturing Costs
- After-tax earnings or Net earnings or Profit = Gross earnings - Income taxes on
the gross earnings = (1-t) Gross earnings = 0.6 (S-C)
t: Income tax rate = Cte. in function of the local law.

• Cash Flow (CF) and Depreciation (D)

-Cash flow = Net passage of money into (+) or out of (-) a company due to an
Investment  (-) cash flow After-tax profits+depreciation  (+)cash flow
-Annual CF for any year of the project

CF = 0.6 (S-C) + D – fCTDC – CWC – Cland – Cstartup – Croyal + Sequip

CF plant operation CF plant construction
D: Depreciation, decrease in value of an asset over time (use, obsolescence, old age).
f: fraction of the total depreciable capital (CTDC)
CWC: Working capital; Cland : Cost of land expended during the year of construction
Cstartup : Startup Costs; Croyal : Cost of royalties
Sequip : Salvage value for used equipment
6.- Profitability Measures

Approximate Profitability Measures. Useful in the early stages of

project evaluation. New small projects or revamping.

 Non-Discounted Techniques (Time value of money is ignored

and straight-line depreciation is used )

- Return of investment (ROI), Payback period (PBP), venture profit

(VP), Annualized cost (AC)

Rigorous Profitability Measures: Useful before a final decision is made

on whether to proceed with a new venture

 Discounted Techniques (involve the time value of money in

terms of discounted cash flows)

- Net Present Value (NPV), Investor´s rate of return (IRR) or

discounted cash flow rate of return (DCFRR)
6.- Profitability Measures
Non-discounted criteria
Based on time
Payback, Payout, Payoff period (PBP) / (Periodo de Retorno )

Time required for the annual earnings to equal the original investment
PBP (years) = Total Depreciable Capital (€)/ Net earnings + annual
depreciation (€/year) = CTDC/ (1-t) (S-C) + D

PBP < 3-4 y  Profitable; 4< PBP < 10 y  Additional assess; PBP > 10 y  Non profitable

”useful in early evaluations to compare alternatives”

Based on interest rate

Return of Investment (ROI) / (Retorno de la Inversión )

Annual interest rate made by the profits on the original investment

ROI (%) = Net earnings / Total Capital Investment = (1-t) (S-C)/ CTCI
ROI > 15%  Profitable
”provides a snapshot view of the profitability of the plant”
6.- Profitability Measures
Non-discounted criteria

Taking into account the size of the project

Venture profit (VP)

Annual net earnings in excess of a minimum acceptable return of

investment, imin (20%)

VP = (1-t) (S-C) – iminCTCI = net earnings - iminCTCI

”preliminary estimates when comparing alternative flowsheets during process synthesis”

Based on interest rate

Annualized Costs (CA)

Sum of the production cost and a reasonable return on the original

capital investment where the reasonable return on investment, imin is 0.2.

CA = C + iminCTCI
”useful to comparing alternative items of equipment in a process or alternative
replacements for existing equipment”
6.- Profitability Measures
Discounted criteria
The “time value of money” recognised that an amount of money at the current
time, Present amount, P, that is invested at an interest rate, i, and the interest is
added to P, the amount of money at the future date will be a Future amount, F, ≠ P

F= P (1+i)n
The change of the time value of money are due to:
- INTEREST, annual rate at which money is returned to investors for use of their capital
- RETURNS of competitor investments; thus the actual inversion must compensate the
lost investments opportunities in other business
- INFLATION or change in the value of a currency over time
Net Present Value (NPV) / Valor Actual Neto (VAN)

Sum of all the discounted cash flows computed for each year of the
projected lifetime (n) of the plant, including construction + startup phases

NPV = [Gross earnings x (1-(1+i)-n) / i ] – Capital investment

”provides a quantitative measure for comparing the capital required for competing
processes in current terms” is an indicator of the value or magnitude of an investment
6.- Profitability Measures
Discounted criteria

Investor´s Rate of Return (IRR) or Discounted Cash Flow Rate of Return


Interest rate that gives a net present value of zero. Interest rate that can
be compared with a competing investment.

NPV {i} = [Gross earnings x (1-(1+i)-n) / i ] – Capital investment = 0

Used to evaluate the desirability of investments or projects. It is an indicator of the

efficiency, quality, or yield of an investment. An investment is considered acceptable if
its IRR is greater than an established minimum acceptable rate of return or cost of
capital. The largest IRR is the most desirable.

“NPV and IRR are effective measures especially when the alternatives have widely
disparate investments”.

Technical Assessment
6.- Profitability Measures Technical Assessment

Environmental Assessment
Environmental Assessment

Economic Assessment
Economic Assessment
Design of wastes minimization
alternatives: Application of criteria
(Viguri et al., 2000) Cash Flow

Viguri, J., 2000, “ Environmental situation of the SME in Cantabria:

Minimization of the environmental impact ” Final Inform. Project from
Payback Period -
the enterprise development initiative. Santander, Spain, Sep. 2000 Payback Period -
<3 years PBP >10 years

3-10 years
NPV and IRR Intangible aspects
NPV and IRR Intangible aspects

Combined Analysis

Figure 7. Suitability analysis of the minimization options

Memo 3 are to size the equipment of the flowsheet, perform

heat integration, and an economic evaluation
7.- Further Reading and References

• Biegler, L., Grossmann, I., Westerberg , A., 1997, Systematic Methods of Chemical
Process Design, Prentice Hall.

• Douglas, J.M., 1988, Conceptual Design of Chemical Processes. McGraw-Hill.

• Peter, M., Timmerhaus, K., West, R., 2005, Plant Design and Economics for
Chemical Engineers, 5ª Ed., McGraw-Hill.

• Seider, W., Seader, J., Lewin, D., Widagdo, S., 2010, Product and Process Design
Principles. Synthesis, Analysis and Evaluation. 3rd Ed. John Wiley & Sons.

• Turton, R., Bailie, R., Whiting, W., Shaeiwitz, J., 2003, Analysis, Synthesis and
Design of Chemical Processes, Prentice Hall