CHAPTER VI

ECONOMIC ANALYSIS

Economic analysis is the final step of designing a factory. This step is carried out
to find out whether a factory is feasible to be established. For this reason, in this
factory design, an evaluation of the feasibility of the factory is made which is
reviewed based on the evaluation of :
1. Profit on sales
2. Return of investment
3. Pay out time
4. Break even point
5. Shut down point
To evaluate the factors above, it is necessary to calculate several components,
namely :
1. Investment capital determination (Total Capital Investment), consisting
of :
a. Fixed Capital Investment
b. Working Capital Investment
2. Total cost production determination (Total Production Cost), consisting
of :
a. Manufacturing Cost
b. General Expense

6.1 Equipment Price Appraisal

Process equipment prices are adjusted annually to economic conditions. The
current price of equipment can be estimated from last year's price based on
the price index (Chemical Engineering Plant Cost Index).
The index price for 2026 is searched using the least square equation obtained
with index data from 2000 to 2022.
 Table 6.1 Plant Cost Index
Year CEP
2000 390,1
2001 394,3
2002 395,6
2003 402
2004 444,2
2005 468,2
2006 499,6
2007 525,4
2008 575,4
2009 521,9
2010 550,8
2011 585,7
2012 584,6
2013 567,3
2014 576,1
2015 556,8
2016 541,7
2017 567,5
2018 603,1
2019 604,5
2020 596,2
2021 708,8
2022 816
(Source : www.toweringskills.com, May 2022)
Assuming the increase in index is linear, the following equation can be
obtained :
y = 13,276 x – 26138
In this relationship, x is the year, y is the price index. The index value for
2026 can be found as follows:
y = 13,276 (2026) – 26138
y = 759,176
Instruments price at 2026 can be calculated by equation :
Nx
Ex=Ey ×
Ny
(Aries and Newton, 1955)
Notes : Ex = instrument price at 2026
 Ey = instrument price from literature
Nx = index value at 2026
Ny = index value from literature
If an instrument with a certain capacity is not found, then the price of the
instrument can be estimated by comparing it with similar aircraft whose
capacity and price are known through the equation :

( )
0,6
Cb
Eb=Ea ×
Ca
(Aries and Newton, 1955)
Notes : Ea = instrument price with known capacity
Ca = instrument a capacity
Eb = instrument price with calculated capacity
Cb = instrument b capacity
Thus, the price of various process tools can be known.

6.2 Calculation Base

Production capacity : 48000 ton/year
Time operation : 1 year (330 days)
Evaluation year : 2023
Hydrogen price : US$ 0,65 /kg
ZnO price : US$ 5,93 /kg
CoMo Bed price : US$ 4,72 /kg
Currency : Rp 14.936,00/US$

6.3 Production Cost Calculation

6.3.1 Capital Investment
Capital investment is the amount of funds issued to procure production
facilities and to run them. Capital investments include :
a. Fixed Capital Investment
Fixed capital investment is the cost required to set up factory
facilities, which includes namely :
1. Purchased Equipment Cost (PEC)
PEC is the cost of purchasing process equipment, including
import duty taxes, insurance, bank fees, and transportation costs
to the factory location.
2. Installation Cost
Installation cost is the cost required to install process equipment
at the factory location.
3. Piping Cost
Piping cost is the cost incurred for the piping system in the
process and the cost of installing it.
4. Instrumentation Cost
Instrumentation cost is the cost used to complete the process
system with a control system.
5. Insulation Cost
Insulation cost is the cost required for the insulation system in
the production process.
6. Electrical Cost
Electrical cost is the cost used to procure supporting facilities in
supplying or distributing electricity.
7. Building Cost
Building costs are the costs required to construct buildings
within the factory premises, including offices, canteens, places
of worship, laboratories, clean water, and sanitation.
8. Land Cost
Land costs are costs for buying land, improving soil conditions,
making roads to the factory area and paving. If the factory is
built in an industrial area, costs other than buying land will no
longer be borne by the factory because it has already been
provided.
9. Utility Cost
 Utility costs are costs incurred for procuring process support
units, including water supply units, steam, cooling towers and
compressed air.
10. Environmental Cost
Environmental costs are costs for maintaining environmental
sustainability in the factory area and its surroundings.
11. Engineering and Construction Cost
Cost of Engineering and Construction is the cost for design
engineering, field supervisor, temporary construction, and
inspection.
12. Contractor’s Fee
Contractor's fee is the fee used to pay the factory builder
contractor.
13. Contingency
Cost of Contingency is the cost of compensation for unexpected
expenses, process changes, even if they are small, price changes
and estimation errors.
b. Working Capital
Working capital investment is the costs incurred to run a business or
capital and the costs incurred to carry out the operations of a plant
for a certain period of time.
1. Raw Material Inventory
Raw material inventory is the cost required to supply raw
materials, the amount depends on the speed consumption of raw
materials, their value, availability, sources, and storage
requirements.
2. In Process Inventory
In process inventory is the cost that must be borne while the
material is in process, the amount depends on the length of the
process cycle.
3. Product Inventory
 Product inventory is the cost required for storing products
before they are distributed to the market.

4. Available Cash
Available cash is the supply of cash to pay for labor, services,
and materials.
5. Extended Credit
Extended credit is a supply of money to cover unpaid sales of
goods.

6.3.2 Manufacturing Cost

Manufacturing Cost is the sum of direct, indirect and fixed
manufacturing costs associated with the product.
a. Direct Manufacturing Cost
Direct manufacturing costs are expenditures concerned specifically
in the manufacture of products, including, namely:
1. Raw Material
Raw material costs include 2 kinds, namely:
 The purchase price arrives at the location of the materials
used in production.
 The price of the catalyst during its lifetime.
2. Labor Cost
Labor cost is the cost to pay workers who are directly involved
in the production process.
3. Maintenance Cost
Maintenance costs are costs incurred for the maintenance of
process equipment.
4. Plant Supplies Cost
Plant supplies cost is the cost required to procure plant supplies,
including lubricants, charts, and gaskets.
5. Royalties and Patents
 Patent costs for production purposes are amortized over the
protection period (if the patent is valid). Royalties are usually
paid based on the speed of production or sales.

6. Cost of Utilities
Cost of Utilities is the cost required to operate the process
support units so that steam, clean water, electricity, and fuel are
produced.
b. Indirect Manufacturing Cost
Indirect Manufacturing costs expenses that are not directly the result
of making a product. Indirect manufacturing costs consist of :
1. Payroll Overhead
Payroll overhead is the company's expenses for pension costs,
contributions paid by the company, insurance, physical
disability due to work and security.
2. Laboratory
Companies must pay for operating the laboratory because the
laboratory is needed to guarantee quality control.
3. Plant Overhead
Plant overhead is the cost for services that are not directly
related to production units, including the costs of health,
recreational facilities, purchasing, warehousing, and engineering
(including safety and protection).
4. Packaging
Packaging costs are needed to pay for the cost of packing and
containerizing the product, the amount depends on the physical
and chemical properties of the product and its value.
5. Shipping
This fee is required to pay for the cost of transporting
production goods to the buyer's place.
c. Fixed Manufacturing Cost
 FMC is an expenditure that has something to do with the initials of
Fixed Capital Investment and the price is fixed, regardless of the
time of production level. Fixed Costs consist of :

1. Depreciation
Depreciation is the cost of depreciating the value of equipment
and buildings, the amount is calculated from the estimated
lifespan of the factory.
2. Property Taxes
Property taxes are property taxes that must be paid by the
factory, the amount depends on the location and situation of the
plant.
3. Insurance
The company has to spend money for the factory insurance
costs, the more dangerous the plant, the higher the insurance
costs.

6.3.3 General Expense

General expense is a variety of expenses related to company functions
outside of manufacturing costs.
a. Administration Cost
Administration cost is the cost required to carry out company
administration, including, namely:
1. Management Salaries
Management salaries are salaries that must be paid to all
company employees other than production workers, including
main managers, managers, secretaries and heads of departments.
2. Office and Communication Equipment
 This fee is used to purchase office equipment such as paper, ink
and others as well as for communication costs within the
company such as telephone and internet.
3. Legal Fee’s and Auditing
Legal fees are fees for legal fees, while auditing fees are fees for
paying public accountants.
b. Sales Expense
Sales expenses are administrative costs required in selling products,
including promotion costs if the product is new.

c. Research and Development

Research costs are needed to support factory development, both
process improvement and product quality improvement.
d. Finance
Finance is spending to pay interest on capital loans.

6.3.4 Feasibility Analysis

To be able to know the feasibility of a factory can be seen from its
profitability. If the profitability is high then the factory is potential to
be built. To analyse whether the factory has the potential to be
established or not, a feasibility analysis or evaluation is carried out.
Some ways of feasibility analysis are :
a. Percent Profit on Sales (POS)
Profit on sales is the amount of gross profit from each unit of
product sold.
Profit
POS = x 100 %
Sales
b. Percent Return of Investment (ROI)
Return of Investment is an estimate of the profit that can be
obtained every year based on the rate of return on the fixed capital
invested.
Profit
ROI = x 100 %
¿ Capital Investment
 c. Pay Out Time (POT)
Pay Out Time is the payback time generated based on the profits
achieved. This advantage is needed to know that in a few years the
investment that has been made will return for the return of capital
investment with profit before deducting depreciation. POT can be
searched by analysing cumulative cash flow and interpolating
CCF and time graphs.
d. Break Even Point (BEP)
Break Even Point is the break even point which shows at what
level costs and income are the same. With this BEP, we can
determine the selling price level and the minimum number of units
that must be sold and at what price and sales units that must be
achieved in order to make a profit.
Fa+ 0,3 Ra
BEP = x 100 %
Sa−Va−0,7 Ra
notes : Fa = Fixed manufacturing cost
Ra = Regulated Cost
Va = Variable Cost
Sa = Sales
e. Shut Down Point (SDP)
Shut down point is the point or time when a production activity
must be stopped. The causes include because the Variable Cost is
too high or it could also be due to management decisions due to
the uneconomical nature of a production activity (not making a
profit).
0,3 Ra
SDP = x 100 %
Sa−Va−0,7 Ra

6.4 Calculation Results

6.4.1 Capital Investment
a. Fixed Capital Investment
Table 6.2 Physical Plant Cost
 No PPC Type Cost ($)
1 PEC 3.976.338,86
2 Installation 2.425.566,18
3 piping 3.419.650,68
instrumentatio
4 n 1.006.569,24
5 insulation 318107,04
6 electrical 596450,7
7 building 1789352,1
8 land 3.012.854
9 utility 994084,5
10 enviromental 397633,8
Total 17.936.607,10

Table 6.3 Direct Plant Cost

No Direct Plant Cost Cost ($)
1 PPC 17.936.607,10
2 Engineering & Construction 3.587.321,42
Total 21.523.928,52

Table 6.4 Fixed Capital Investment

No Type Cost ($)
1 Direct Plant Cost 21.523.928,52
2 Contractor's Fee 2.152.392
3 Contingency 3.228.589
Total 26.904.909,80

b. Working Capital Investment

 Table 6.5 Working Capital Investment

No Working Capital Investment Cost ($)

1 Raw Material Inventory 697326
2 In Process Inventory 28470,62
3 Product Inventory 13665901,45
4 Available Cash 12527076,33
5 Extend Credit 27331802,91
Total 54.250.577

c. Total Capital Investment

Table 6.6 Total Capital Investment
No Capital Investment Cost ($)
1 Fixed Capital Investment 26.904.910
2 Working Capital Investment 54.250.577
Total 81.425.487

6.4.2 Production Cost

a. Manufacturing Cost
Table 6.7 Direct Manufacturing Cost
No Direct Manufacturing Cost Cost ($)
1 raw material 51,424,547.57
2 salaries 457,953.9368
3 maintenance 1,614,294,588
4 plant supplies 242,144,1882
5 royalties and patent 1,920,000
6 utilities 1,254,485,345
total 51.424.547,6

Table 6.8 Indirect Manufacturing Cost

No Indirect Manufacturing Cost Cost ($)
1 Payroll Overhead Cost 68,693.0905
 2 Laboratory Cost 6,869.30905
3 Plant Overhead Cost 228,976.968
4 Packaging/Shipping Cost 7,680,000
7,984,539.3
Total 7

Table 6.9 Fixed Manufacturing Cost

No Fixed Manufacturing Cost Cost ($)
1 Depreciation 2,421,441.00
2 Property Taxes 538,098.2
3 Insurance 269,049.1
Total 3,228,588.3
Table 6.10 Total Manufacturing Cost
No Manufacturing Cost Cost ($)
1 Direct Manufacturing Cost 56,913,425.7
2 Indirect Manufacturing Cost 7,984,539.37
3 Fixed Manufacturing Cost 3,228,589.18
Total 68,126,554.3

b. General Expense
Table 6.11 General Expense
No General Expense Cost (US$)
1 Administration 200,379.4252
2 Sales Expense 6,812,655.427
3 Research and Development 1,920,000.00
4 Finance 8,142,548.68
Total General Expense 17,075,583.53

c. Total Production Cost

Table 6.12 Total Production Cost
No Production Cost Cost
 1 Manufacturing Cost 68,126,554.3
2 General Expense 17,075,583.53
Total Production Cost 177,565,782.00

6.4.3 Feasibility Analysis

a. Profit
Profit before tax = US$ 10.797.862,2
Profit after tax = US$ 7.7558.503,54
b. Percent Profit on Sales (POS)
POS before tax = 11,247%
POS after tax = 7,873%
c. Percent Return on Investment (ROI)
ROI before tax = 40 ,133 %
ROI after tax = 29,0933 %
d. Pay Out Time (POT)
POT = 3,209 years
e. Break Even Point (BEP)
BEP = 45,83%
f. Shut Down Point (SDP)
SDP = 29,63%