PRODUCTION ENGINEERING (PIC400S)

Dr B. Godongwanaa

(BTech: Chemical Engineering, 2019)

a Department of Chemical Engineering, Cape Peninsula University of Technology, P.O.Box 652, Cape Town
8000, South Africa.
 Overview
1. Introduction
1.1 Economics (scarcity, choice, opportunity costs)
1.2 Theory of the firm (law of diminishing return)

2. Time value of money

2.1 Simple interest
2.2 Compound interest
2.3 Nominal interest vs Effective interest
2.4 Continuous interest
2.5 Annuities

3. Estimation of Capital Investment (Fixed and Working Capital)

4. Estimation of Manufacturing Costs
4. Profitability Analysis (NPV, ROR, DCFRR)
5. Optimisation (introductory parametric optimisation)
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3. Capital Investment
3.1 Fixed Capital

• Total cost of the plant ready for start-up

(e.g. design, equipment and installation, piping and instrumentation)

3.2 Working Capital

• Amount required to start-up the plant

• 5% - 30% of Fixed capital investment

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3. Capital Investment
3.3 Types of Capital Cost Estimate

3.3.1. Order-of-Magnitude Estimate

• +40%, -20% (BFD, Process Modification)

3.3.2. Study Estimate/Major Equipment

• +30%, -20% (PFD, Cost chart)

3.3.3. Preliminary Design (Scope) Estimate

• +25%, -15% (PFD, vessel sketches, equip diagrams)

3.3.4. Definitive (Project Control) Estimate

• +15%, -7% (PFD, P&ID, all vessel sketches, eqip. diagrams)

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3. Capital Investment
3.3 Types of Capital Cost Estimate

3.3.5. Detailed (Firm or Contractors) Estimate

• +6%, - 4% (everything included – ready to go to construction phase)

• Estimate low so actual cost will be high (+)

• Estimate high so actual cost will be low (-)

Why is + # > - #.?

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3. Capital Investment
3.4 Order-of-Magnitude
𝑛
𝐶𝑎 𝐴𝑎
= (3.1)
𝐶𝑏 𝐴𝑏
Cost Exponent

Equipment Cost
Attribute - Size

𝐶𝑎 = 𝐾𝐴𝑛𝑎 (3.2)

where
𝐶𝑏
𝐾= 𝑛
𝐴𝑏

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 3. Capital Investment
3.4 Order-of-Magnitude

• n = 0.4 – 0.8 Typically

• Often n ~ 0.6 and we refer to Eq.(3.1) as the (6/10)’s Rule

• Assume all equipment have n = 0.6 in a process unit and scale-

up using this method for whole processes

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3. Capital Investment
Exercise 3.1

• A New Plant Ordered a Set of Floating Head Heat Exchangers (Area =

100 m2) cost $92,000. What Would Cost be for a Heat Exchanger for
Similar Service if Area = 50 m2 and n = 0.44 ?

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3. Capital Investment
3.4 Effect of Time

• Time increases – cost increases (inflation)

• Inflation is measured by cost indexes

• Chemical Engineering Plant Cost Index (CEPCI)
• Marshall and Swift Process Industry Index

• Numbers based on “basket of goods” typical for construction of

chemical plants.

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3. Capital Investment
3.4 Effect of Time

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3. Capital Investment
3.4 Effect of Time

𝐼2
𝐶2 = 𝐶1
𝐼1 (3.3)

• C = Cost

• I = Value of cost index

• 1,2 = Represents points in time at which costs required or

known and index values known

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3. Capital Investment
Exercise 3.2

• Cost of vessel in 1993 was 25,000, what is estimated cost today (Sept
2007 – CEPCI = 500)?

Solution

 I now   500 
Cnow  C1993 
I 
  25,000   $34,820
 1993   359 

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3. Capital Investment
Exercise 3.3

• 2 heat exchangers, 1 bought in 1990 and the other in 1995 for the
same service

A B
Area (m2) 70 130
Time 1990 1995
Cost R17 000 R24 000
I 358 381

• What was the Cost of a 80 m2 Heat Exchanger in 2007 (I = 500)

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