CHEMICAL ENGINEERING

ECONOMICS

6th Semester,
B.Sc. Chemical Engineering
Session 2015

Delivered by:
Dr Usman Ali

Department of Chemical Engineering

University of Engineering & Technology, Lahore
Economics: Branch of knowledge concerned
with the production, consumption, and transfer
of wealth.

Accounting: The process or work of keeping

financial accounts.
 Plant Design and Economics
• A successful chemical engineer needs more than
a knowledge and understanding of the
fundamental sciences and the related
engineering subjects.
• In making their applications, the chemical
engineer must recognize the economic
implications.
• Development of a new plant or process from
concept evaluation to profitable reality is often
an enormously complex problem.
 Plant Design Stages
❖ Inception
❖ Preliminary evaluation of economics and market
❖ Development of data necessary for final design
❖ Final economic evaluation
❖ Detailed engineering design
❖ Procurement
❖ Erection
❖ Startup and trial runs
❖ Production
 Necessary Factors
▪ Plant Location,
▪ Plant Layout,
▪ Materials of Construction,
▪ Structural Design,
▪ Utilities,
▪ Buildings,
▪ Storage,
▪ Materials Handling,
▪ Safety,
▪ Waste Disposal,
▪ Federal, State, and Local Laws or Codes, and
▪ Patents.
 Cost Estimation
• As the final process-design stage is completed, it,
becomes possible to make accurate cost
estimations because detailed equipment
specifications and definite plant-facility
information are available.
• Direct price quotations from manufacturers.
• Costs are considered, and cost estimates should
be made throughout all the early stages of the
design when complete specifications are not
available.
• Evaluation of costs in the preliminary design
phases is sometimes called “guesstimation”
but the appropriate designation is predesign
cost estimation.
• Such estimates should be capable of providing
a basis for company management to decide if
further capital should be invested in the
project.
• The chemical engineer (or cost engineer) must
be certain to consider all possible factors
when making a cost analysis.
• Fixed costs, direct production costs for raw
materials, labor, maintenance, power, and
utilities must all be included along with costs
for plant and administrative overhead,
distribution of the final products, and other
miscellaneous items.
 Factors Affecting Profitability of Investments

• A major function of the directors of a

manufacturing firm is to maximize the long-term
profit to the owners or the stockholders.
• A decision to invest in fixed facilities carries with
it the burden of continuing interest, insurance,
taxes, depreciation, manufacturing costs, etc.,
and also reduces the fluidity of the company’s
future actions.
• Capital-investment decisions, therefore, must be
made with great care.
▪ Money, or any other negotiable type of capital, has a time value.
▪ The amount of return demanded usually depends on the degree of
risk that is assumed.
▪ The risk may depend upon the process used, whether it is well
established or a complete innovation; on the product to be made,
whether it is a staple item or a completely new product; on the
sales forecasts, whether all sales will be outside the company or
whether a significant fraction is internal, etc.
▪ Since means for incorporating different levels of risk into
profitability forecasts are not too well established, the most
common methods are to raise the minimum acceptable rate of
return for the riskier projects.
▪ Modern taxes may amount to a major portion of
a manufacturing firm’s net earnings.
▪ Profitability, therefore, should be based on
income after taxes.
▪ Insurance costs, are normally only a small part of
the total operational expenditure of an industrial
enterprise; however, it is necessary to determine
the insurance requirements to provide adequate
coverage against unpredictable emergencies or
developments.
 Optimum Design
▪ There are several alternative methods which can
be used for any given process or operation.
▪ For example, formaldehyde can be produced by
catalytic dehydrogenation of methanol, by
controlled oxidation of natural gas, or by direct
reaction between CO and H2, under special
conditions of catalyst, temperature, and pressure.
▪ It is the responsibility of the chemical engineer, to
choose the best process which will give the best
results
 Optimum Economic Design

If there are two or more methods for obtaining

exactly equivalent final results, the preferred
method would be the one involving the least
total cost - optimum economic design.
▪ The chemical engineer often selects a final design on
the basis of conditions giving the least total cost.
▪ In many cases, it becomes necessary to consider the
quality of the product or the operation as well as the
total cost.
▪ When the engineer speaks of an optimum economic
design, it ordinarily means the cheapest one selected
from a number of equivalent designs.
▪ For example, it may be desirable to choose a design
which gives the maximum profit per unit of time or the
minimum total cost per unit of production.
 Practical Considerations In Design
▪ The chemical engineer must never lose sight of the
practical limitations involved in a design. It may be possible
to determine an exact pipe diameter for an optimum
economic design, but this does not mean that this exact
size must be used in the final design. Suppose the optimum
diameter were,3.43 in. (8..71 cm).
▪ It would be impractical to have a special pipe fabricated
with an inside diameter of 3.43 in. Instead, the engineer
would choose a standard pipe size which could be
purchased at regular market prices. In this case, the
recommended pipe size would probably be a standard
3$in.-diameter pipe having an inside diameter of 3.55 in.
(9.02 cm).