Plant Design and Economics Overview

Goals for engineers in Chemical and Biological fields

• To design, create and optimize systems and

equipment used in chemical, biological,
environmental and other processes.

• To design and produce artifacts (chemicals,

fuels, fertilizers, batteries, processed food,
drinks, polymers and pharmaceuticals,
etc.) in a safe and profitable way.
 You have developed a NOVEL chemical product

• Congrats! Now what?

• Can it be just produced at home or in a lab?

• We have to build the plant to produce them in a

large scale!

• Many things to be considered: design, simulation,

efficiency, productivity, quality, safety, economics,
etc.
Course Overview

Process Process
Economics Safety
 What is Process Economics?
When you design a plant, try to When you operate a plant, try to make
make it financially viable by it more profitable by considering
considering • Operating costs
• Location & layout • Materials, labor and utilities
• Capital needed • Depreciation
• Financing, taxes, insurance
• Time value of money
• Plant overhead costs
• Other resources including manpower,
• General expenses
energy, electricity, water.
• Revenue
• Return on investment, payback period
• Productivity
• Alternative investment
• Sales price
• Government policy
• Marketing plan
• etc. • Replacement of equipment
 Process Economics in the plant design
1. Inception (Idea generation)
9. Production

8. Start-up
and Trial Runs
2. Economic Possibility
Analysis (accuracy ±30%)
7. Construction
3. Development of and installation
Data for design
6. Procurement
4. Final Economic Evaluation 5. Engineering (Purchase)
(accuracy ±10%) Design
Process Economics

Capital & Cost Estimation

Product Cost & Revenue

Project Economic Evaluation

 Summary of Process Economics
1. A Plant Design must produce a product that is profitable!
2. Process Economics is to perform a financial analysis
• during the design of a new process or revision of an existing process.
• during the operation of an existing process.

After the study you should be able to answer:

• How much is needed to start a new chemical plant/project?
• How much is needed to operate a chemical plant?
• How to know that a chemical plant is profitable?
• What is the time value of money?
• What is the current standing of a company based on their financial statement?
• How to select a “best” project from competing alternatives?
• Should an existing equipment be replaced?
• etc.
Process Economics

Types of Capital Investment

Chapter 1:
Estimation of Capital
Capital & Cost Estimation Investment

Chapter 2:
Estimation of Equipment Cost
Product Cost & Revenue

Chapter 3:
Project Economic Evaluation
 Chapter 1: Capital and Cost Estimation

How much do you need to build a plant?

How to estimate the cost of an equipment?

Goals:
• List the components of Fixed Capital and Working Capital.
• Estimate the capital investment using various methods
• Estimate the equipment cost after adjusting time and capacity
Types of Capital Investment
 Overview: Types of Capital Investment
Capital Investment is the procurement of money to further a company’s
business goals.
 What costs do you need to build a plant?
 What costs do you need to operate a plant?

Key points:
• Types of various capital investment
• Fixed Capital Investment (FCI)
• Working Capital Investment (WCI)
• The components of each capital investment
 Why do we need capital investment?
Firm Type:
• Profitability:
Profit or Non-Profit
• Business nature:
Manufacturing, Trading, Service

Resources: Before operation, we need a lot of money!!!

Money Land
Materials Building Total Capital Investment (TCI)
Labor Equipment
TCI = Fixed Capital Investment (FCI) + Working Capital Investment (WCI)
Utilities
 Components of Capital Investment

Fixed Capital Investments (FCI)

Direct Indirect
Equipment Buildings/Offices/Shops
Piping Warehouses/Labs
Plant
Components
Instruments Shipping/Receiving/Utilities
Foundation Supervision/Engineering
Insulation Construction/Contractors
Construction
Overhead
Site preparation Contingencies
 Components of Capital Investment

Fixed Capital Investment (FCI) Working Capital Investment (WCI)

Direct Indirect • Funds to pay the expenses involved in the plant
Equipment Buildings/Offices/Shops operation before sales revenue becomes available.
• It is normally calculated for 1-month operation.
Piping Warehouses/Labs
• It includes
Instruments Shipping/Receiving/Utilities 1) Raw materials / Supplies in stock
2) Finished products in stock
Foundation Supervision/Engineering
3) Semi-finished in the manufacturing process
Insulation Construction/Contractors 4) Accounts receivable/payable
Site preparation Contingencies 5) Cash for operating expenses (salary, materials)
6) Taxes

• Ratio of WCI/TCI varies with the nature of companies.

• Most chemical plants have a ratio around 10-20%, with a default value 15%.
• The ratio may increase to as much as 50% for companies producing seasonal products.
Summary of Capital Investments

Takeaway:
• Capital investment is needed to build and operate a plant!
• FCI is used for machinery and infrastructure, covering the majority of TCI.
• WCI is related to operation, before sales revenue is available, and it will
be recovered later.
• Ratio of WCI/TCI varies and a typical percentage for most chemical plants
is 15%.
Estimation of Capital Investment
Overview: Estimation of Capital Investment
Whether to proceed with a new project proposal depends on the money needed.
Questions to be answered
• How to estimate the investment to build a plant?
• How to compromise between accuracy and convenience on estimation?

Key points:
• List the detailed components in capital investment
• Apply common methods to estimate capital investment
• Understand factors affecting the accuracy and convenience of estimation
 Major Components of Capital Investments
• What do you need to consider for your plant:
 type of equipment
 size of equipment
 construction material
 approximate purchase price of each equipment from a supplier, a reference, or past-
experience

• Choice of methods is determined by

• development stage of the project, from conception, definition to execution
• detailed information available
• accuracy desired
• time needed
 Capital Investment Estimate Methods - A
• Many methods and best method is chosen by:
• balancing time needed, information given and accuracy desired
• Three common methods:
A. Percentage of Delivered Equipment Cost
(Less time, accurate enough)
Preliminary estimate (less time needed), accuracy ±20-30%
Cn =  (E + f1E + f2E + f3E + ... + fnE)
Estimate based on (1) delivered equipment cost (E)
= E  (1 + f1 + f2 + f3 + ... + fn)
+ (2) other items in TCI (% of E)
Where,
Factors determined based on types of process, design
complexity, materials of construction, location, Cn: total capital investment
past-experience, etc. E: delivered equipment cost
More accurate if equipment cost is based on similar, f1, f2 …: multiplying factors for piping,
recently constructed projects electrical, instrumentation, etc.
 Capital Investment Estimate Method - B
• Many methods and best method is chosen by:
• balancing time needed, information given and accuracy desired
• Three common methods: Items of Fixed Capital Investment for a chemical process

B. Detailed-item Estimate (Longer time, more accurate)

Comprehensive and accurate estimate (accuracy ±5%)
Factors determined from
• extensive data, completed drawings and desired specifications
• price coming from either current cost data or delivered
quotations
• requiring large amounts of engineering time

Widely used by contractors bidding on lump-sum work.

Requires longer time and more accurate because of the level
of detail
 Capital Investment Estimate Method - C
• Many methods and best method is chosen by:
• balancing time needed, information given and accuracy desired
• Three common methods:

C. Turnover Ratio (Fast, but rough estimate) 𝐺𝑟𝑜𝑠𝑠 𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠

Turnover ratio =
𝐹𝑖𝑥𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
A rapid evaluation method suitable for order-of-magnitude
estimate (can have high error)
Turnover ratio varies within 0.2~4, and the typical number
for chemical industry is 0.5. Turnover
FCI TCI
The reciprocal of Turnover ratio is called the Capital ratio Ratio
or Investment ratio.
Sample for Method A: Percentage of Delivered Equipment Cost

Cn = E  (1 + f1 + f2 + f3 + ... + fn)
Where E = delivered equipment cost, f1, f2,…= multiplying factors for piping, electrical, instrumentation, etc.

f as percent for plant processing

Items
Solid Solid-fluid Fluid
Direct Costs
Purchased Equipment Delivered 100 100 100
E
Purchased Equipment Installation 45 39 47
Instrumentation & Controls (installed) 18 26 36
Piping (installed) 16 31 68
Electrical (installed) 10 10 11
Buildings (including services) 25 29 18
Yard Improvements 15 12 10 Note
Service Facilities (installed) 40 55 70 Land: 6 if purchase is required
Direct Costs 269 302 360 0 otherwise
Sample for Method A: Percentage of Delivered Equipment Cost

f as percent for plant processing

Items
Solid Solid-fluid Fluid
Indirect Costs
Engineering and Supervision 33 32 33
Construction Expenses 39 34 41
Legal 4 4 4
Subtotal (Direct and indirect costs) 345 372 438
~5% of Subtotal Contractor’s Fee 17 19 22
~10% of Subtotal Contingency 35 37 44
Fixed Capital Investment 397 428 504
𝑊𝐶𝐼 15
= Working Capital Investment 70 75 89
𝐹𝐶𝐼 85
Total Capital Investment 467 503 593
 Summary of Estimation of Capital Investment
• Methods used for capital investment estimation depend on
• information available, accuracy desired, and time needed

• Three methods are introduced:

A. Percentage of Delivered Equipment Cost (Less time, accurate if based on similar project)
B. Detailed Item Estimate (Much longer time, more accurate)
C. Turnover Ratio (Very rapid but rough estimation)

• For method A & B, if the costs of major equipment are given, you should estimate
the total capital investment to build a plant.
• The question is how to obtain the cost for major equipment, since they
o may not be easily ready from suppliers, and
o may change with size, time, and other conditions
Estimation of Equipment Cost
Overview: Estimation of Equipment Cost

How much money is needed to purchase major equipment?

Key points:
• Understand that the cost of purchased equipment is the basis of several methods for
estimating capital investment.
• Select a suitable method to estimate equipment cost for different situations
A. Vender price quotes
B. Summary graphs
C. Past cost data
• Incorporate time and capacity effect into the cost estimation
 Methods to estimate equipment cost

A. Vender Price Quotes

Current cost of equipment
Most accurate method
 Methods to estimate equipment cost

A. Vender Price Quotes

Current cost of equipment
Most accurate method

B. Summary Graphs
Study most common equipment
Preliminary cost estimation
 Methods to estimate equipment cost
A. Vender Price Quotes
Current cost of equipment
Most accurate method
B. Summary Graphs
Study most common equipment
Preliminary cost estimation
C. Past Cost Data
Previous cost of equipment
Second best method
NOTE: Common indices are fairly accurate if period is less than 10 years.
 Prices may change due to economic conditions
and technology advancement
 Cost Index:
• A value for a given point of time showing the
Adjust for difference in cost at that time relative to a certain base time.
1. Elapsed time • If the cost at a point of past time is given, the
2. Unit capacity equivalent cost at the present time can be
determined by the equation:
Cost indices as annual averages

• The index uses different base time.

• The index has different components (labor,
construction, materials, etc.) and weightings.
• The index is selected for specialized purpose.

Published in Chemical
Engineering monthly
 Cost index: scaling factor

C. Past Cost Data Adjust for difference in

Previous cost of equipment 1. elapsed time – cost indexes
2. unit capacity – scaling factor
Second best method

• When no cost data is available for the particular size, estimates can be obtained by
using the six-tenths-factor rule.

• If the cost of another capacity of the same type equipment B is available, thus:
0.6
𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑜𝑓 𝐴
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐵
𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑜𝑓 𝐵
 Cost index: scaling factor

C. Past Cost Data Adjust for difference in

Previous cost of equipment 1. elapsed time – cost indexes
2. unit capacity – scaling factor
Second best method

0.6
𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑜𝑓 𝐴
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐵
𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑜𝑓 𝐵

Notes:
• Applicable for similar equipment with regard to type, materials, temperature and pressure range, etc.
• In general, this concept should NOT be used beyond a tenfold range of capacity.
• The 0.6 factor should only be used in the absence of other information.
• The 0.6 rule for most equipment is oversimplified since the actual values vary.
 Typical exponents for equipment cost as a function of capacity
Equipment Size range Exponent “n”
Blower, centrifugal 0.5-4.7 m3/s 0.59
𝒏 Centrifuge, solid bowl, carbon steel 7.5-75 kW drive 0.67
𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑜𝑓 𝐴
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐵
𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑜𝑓 𝐵
Compressor, reciprocating, Air-cooled, two- 0.005-0.19 m3 0.69
stage, 1035 kPa discharge
Evaporator (installed), horizontal tank 10-1000 m2 0.54
Heat Exchanger, shell-and-tube, fixed sheet, 10-40 m2 0.44
NOTE: carbon steel
Sizes for both equipment should locate in the Pump, centrifugal, horizontal, cast steel 4-40 m3/s-kPa 0.34
range given in this table.
Reactor, glass-lined, jacketed (without 0.2-2.2 m3 0.54
drive)
Reactor, stainless steel, 2070-kPa 0.4-4.0 m3 0.56
Separator, centrifugal, carbon steel 1.5-7 m3 0.49
Tank, carbon steel, glass-lined 0.4-4.0 m3 0.49
Tower, carbon steel 5×102-106 kg 0.62
 Summary: Estimation of equipment cost

• Three common methods to estimate equipment cost

A. Vender Price Quotes B. Summary Graphs C. Past Cost Data
Current cost of equipment Study most common equipment Previous cost of equipment
Most accurate method Preliminary cost estimation Second best method
Adjust for elapsed time & unit capacity

• Now you know the cost estimation for major equipment, then you can also
estimate capital investment using the relevant methods.
Summary of Chapter 1: Capital & Cost Estimation

Types of Capital Investment

Capital & Cost Estimation Estimation of Capital

Investment

Product Cost & Revenue Estimation of Equipment Cost

Project Economic Evaluation

 Summary of Capital and Cost Estimation
Segment 1: Types of Capital Investment
• FCI and WCI are needed to build and operate a plant!
• Typical ratio of WCI/TCI for most chemical plants is 15%.
Fixed Capital Investment (FCI) Working Capital Investment (WCI)
Direct Indirect • Funds to pay the expenses involved in the plant
Equipment Buildings/Offices/Shops operation before sales revenue becomes available.
• It is normally calculated for 1-month operation.
Piping Warehouses/Labs
• It includes
Instruments Shipping/Receiving/Utilities 1) Raw materials / Supplies in stock
2) Finished products in stock
Foundation Supervision/Engineering
3) Semi-finished in the manufacturing process
Insulation Construction/Contractors 4) Accounts receivable/payable
Site preparation Contingencies 5) Cash for operating expenses (salary, materials)
6) Taxes
 Summary of Capital and Cost Estimation
Segment 1: Types of Capital Investment
• FCI and WCI are needed to build and operate a plant!
• Typical ratio of WCI/TCI for most chemical plants is 15%.

Segment 2: Estimation of Capital Investment

• Three methods are introduced :
A. Percentage of Delivered Equipment Cost (Less time, accurate if based on similar project)
B. Detailed Item Estimate (Much longer time, more accurate)
C. Turnover Ratio (Very rapid but rough estimation)
• For method A & B, we need to know the costs of major equipment first.
 Summary of Capital and Cost Estimation
Segment 1: Types of Capital Investment
Segment 2: Estimation of Capital Investment
• Three methods are introduced to estimate capital investment:
A. Percentage of Delivered Equipment Cost (Less time, accurate if based on similar project)
B. Detailed Item Estimate (Much longer time, more accurate)
C. Turnover Ratio (Very rapid but rough estimation)
• For method A & B, we need to know the costs of major equipment first.
Segment 3: Estimation of equipment cost
A. Vender Price Quotes B. Summary Graphs C. Past Cost Data
Adjust for elapsed time & unit capacity

 Now, you are able to estimate the capital needed for building a plant.
 Next, we will calculate the product cost when we operate a plant and if the plant is profitable.