Industrial Economics 508-Complete Lecture Slides

WHAT IS ECONOMICS?
Industrial Economics
Course No. 508
Dr. SYED IMRAN ALI “The study of how people & society choose to employ
scarce resources that could have alternative uses in order to
produce various commodities and to distribute them for
consumption, now or in the future”
Department of Applied Chemistry & Chemical (Taken from Economics, 12th Ed., McGraw-Hill, New York, 1985)
Technology, University of Karachi
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What is economics... WHAT IS INDUSTRIAL ECONOMICS?

Another definition…… Application of Economic
“The theories, principles & models that deal with how Principles to Engineering &
the market process works. It attempts to explain how
Industrial Problems
wealth is created and distributed in communities, how
Examples:
people allocate resources that are scarce and have
 Calculating capital cost, production cost, investment returns etc.
many alternative uses and other such matters that
 Selecting the best projects among alternatives
arise in dealing with human wants and their
 Comparing costs of alternative capital projects
satisfaction”
 Determining best engineering course from cost aspect
(Taken from The Business Directory)
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WHY STUDY ECONOMICS? WHAT YOU WILL LEARN?
 Industrial activities are aim to gain Profits Course Outcomes
This section of the course has following broad outcomes
 For successful operations, Economics plays a key role
 Economic analysis of chemical processes with emphasis on:
 Theoretical & practical aspects are important, but the fate of a
 Cost estimation (capital, production costs etc.)
process, design or project is determine by its Profitability
 Time value of money
 Evaluation of design changes, procurement, project
alternatives, costing etc. all based on Economic Principles  Depreciation
 Profitability & financial analysis (quantitative

measurements of profitability)
Understanding Industrial Economics is therefore important
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 Selecting among alternatives (decision making)
WHAT YOU NEED? BOOKS COST ESTIMATION

1) PLANT DESIGN AND ECONOMICS FOR CHEMICAL ENGINEERS BY
Max S. Peters & Klaus D. Timmerhaus (Chapter 6)
 Chemical plants are built to make profit
2) CHEMICAL ENGINEERING DESIGN, PRINCIPLES, PRACTICE AND

 To evaluate profitability, estimation of
ECONOMICS OF PLANT AND PROCESS DESIGN, BY Gavin Towler & investment & production cost is a must
Ray Sinnott (Chapter 6)
 Understanding of costing is important to:
3) The topics Time Value of Money and Measure of Profitability are from
 Make cost estimates of projects
OPTIMIZATION OF CHEMICAL PROCESSES By T. F. Edgar, D. M.
Himmelblau & L. S. Lasdon (Chapter 3)  Select best project, process or design among alternatives
 Optimize the projects/designs.
 Monitor the cost and progress of ongoing project
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Why Cost Estimation? Cost Estimation....
Uses of Capital Cost Estimates CAPITAL COST

 Total Capital Cost of a project consists of fixed & working
 To select a business opportunity from alternative proposals capitals plus cost of Land & other non-depreciable items:
 To select a process design from a number of alternatives
Total Capital Fixed Capital Working Land
 To prepare feasibility studies Cost = Cost + Capital + Cost
 To appropriate funds for construction

 Total capital cost includes funds required to purchase
 To present and select engineering bids land, design, purchase and install equipment, buildings &
construction, and money needed to start operations
 To facilitate cost control of a project during implementation
 Each component is further divided in to sub components
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Components of Capital Cost Components of Capital Cost…. FCC
a) ISBL Plant Costs

1) FIXED CAPITAL COST: (FCC)
 battery limits refers to processing facilities and area where
 Cost of designing, equipment, constructing & installing a plant
production takes place.
 It is “fixed” to the land and depreciable part of total capital
 Cost of procuring and installing all the equipment :
investment (Land is not depreciable and not part of FCC)
 ISBL include Direct & Indirect Field Costs:
 FCC has following 4 components:
 Direct Field Costs Include:
a. Inside Battery Limits (ISBL) Cost (cost of plant itself)
1. All the major process equipment ( such as vessels,
b. Outside Battery Limits (OSBL) Cost (modifications &
reactors, columns, heat exchangers, pumps, compressors,
improvements needed to the site infrastructure)
motors, turbines, centrifuges, dryers, etc. including
c. Engineering & Construction Costs fabrication and testing if necessary)
11 d. Contingency Charges. 12
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Components of Capital Cost…. FCC Components of Capital Cost…. FCC
ISBL… ISBL… Indirect field costs…

 Direct field costs… 3. Field expenses & services (such as field canteens,
3. Bulk items (valves, wiring, instruments, structures, specialists’ costs, overtime pay, adverse weather costs)
insulation, paint, lube oils, solvents, catalysts, etc.) 4. Construction insurance
4. Civil works (roads, foundations, piling, buildings, sewers, 5. Labor benefits & burdens (social security, compensation etc.)
ditches etc.)
6. Miscellaneous overhead items (agents’ fees, legal fees,
3. Installation labor & supervision duties, taxes, patent fees & royalties etc.)
 Indirect Field Costs Include:
IMPORTANT
1. Construction costs (construction equipment rent, temporary  It is important to define ISBL carefully as other costs are often
construction, temporary water, power & workshops, etc.) estimated from it.
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b) OSBL Plant Costs (Offsite Costs) OSBL….

5. Air separation plants for nitrogen, nitrogen lines
 Costs of additions needed to the site infrastructure to
accommodate a new plant or to upgrade an existing plant 6. Dryers & blowers for air, air lines
 Offsite investments may include: 7. Pipe bridges, feed and product pipelines
1. Electricity infrastructure, standby generators 8. Loading facilities, conveyors, warehouses, railroads
2. Boilers & steam infrastructure, BFW treatment plant 9. Labs, offices, canteens, changing rooms, control rooms
3. Cooling towers, pumps, piping's, cooling water treatment 10. Workshops & maintenance facilities
4. Water pipes, water demineralization, wastewater treatment 11. Emergency services, firefighting setup, medical facility
plant, site drainage system
12. Site security, fencing, gatehouses, and landscaping.
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OSBL….
c) Engineering Costs
 Also referred to as contractor charges
 Include the costs of design and other engineering services

required for the project:
NOTE:
 Engineering costs are best estimated on project scope basis:
Note:  30% of (ISBL + OSBL) for small projects
 Offsite costs are in the range from 10 to 100% of ISBL  10% of (ISBL + OSBL) for large projects
 40% can used as initial estimate if no site details available

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Components of Capital Cost…. FCC Components of Capital Cost….
d) Contingency Charges 2) WORKING CAPITAL

 Cost estimates are uncertain
 Money required to finance daily operations such as:
 Extra costs added to cover variations in the estimate
 Buy raw materials  Money for payrolls
 Contingency costs cover:
 Store products  Cash for emergencies
 Changes in project scope
 Changes in prices and currency fluctuations  Accounts receivable  Any additional cash
required to operate the
 Labor disputes  Storage of supplies
business
 Other unexpected problems necessary to keep the
plant operating
 Contingency of 10% of (ISBL+OSBL) cost should be used
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We will discussed Working Capital in more detail latter
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Components of Capital Cost…. Components of Capital Cost…. Lets Summarize…
3) LAND COST TOTAL CAPITAL COST
 Small part of Total Capital Investment Fixed Capital Working Land

Cost Capital Cost
 Companies frequently purchase land for future expansions
 Land costs can be obtained from real estate market ISBL OSBL Engineering & Contingency
Construction
 For initial estimates, about 3% of FCC may be used
Delivered Equipment Utilities Engineering & Supervision
Equipment Installation Storage Construction
Electrical Work Service Facilities Contractor Fee
Instrumentation, Controls Waste Treatment Administrative & Overheads
Piping Yard Improvement Project Contingency
Insulation, Painting etc. etc.
etc.
We will discussed Lang Cost in more detail latter
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Costs of Production Costs of Production…
 Production cost is of two types: Variable & Fixed Variable Costs of Production….
Variable Costs of Production d. Effluent disposal
 Costs that vary with production volume. Include: e. Packaging and shipping (drums, bags, tankers, freight
charges)
a. Raw materials
Fixed Costs of Production
b. Utilities (fuel, steam, water, electricity, air, N2 & other
services brought in from elsewhere on the site)  Costs that do not change with the production volume
c. Consumables (solvents, acids, bases, inert materials,  Fixed costs include:

corrosion inhibitors, additives, catalysts & adsorbents that
a. Operating labor
require continuous or frequent replacement)
b. Supervision (usually 25% of operating labor)
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Costs of Production… Costs of Production…
Fixed Costs of Production…. Fixed Costs of Production…

c. Direct salary overhead (usually 40-60% of labor+ supervision)
h. Allocated environmental charges to cover superfund
d. Maintenance (3-5% of ISBL, depending on plant reliability) payments (typically 1% of ISBL + OSBL)
e. Property taxes & insurance (typically 1-2% of ISBL).
i. Running license fees and royalty payments
f. Rent (typically 1-2% of ISBL plus OSBL)
j. Capital charges (interest payments due on any loans)
g. General plant overhead
 Covers corporate overhead functions such as HR, k. Sales and marketing costs (in some cases these are
R&D, IT, finance, etc., considered part of general plant overhead)
 Typically 65% of (labor + supervision + direct overhead

+ maintenance)
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Revenues, Margins, and Profits…

Revenues, Margins & Profits
Revenues Profits
The incomes earned from sales of products & byproducts.  Cash cost of production (CCOP) is the sum of the fixed and
variable production costs: CCOP = VCOP + FCOP
Margins Where: VCOP = Sum of all variable costs of production minus
The Revenues (product and byproduct) minus Raw Material Costs byproduct revenues
is known as the gross margin (or margin). FCOP = Sum of all the fixed costs of production.
Gross margin = Revenues - Raw Materials Costs  Byproduct revenues are subtracted from VCOP to easily
determine cost of producing main product
 The Gross Profit is:
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Gross profit = Main Product Revenue - CCOP
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Revenues, Margins, and Profits…
ESTIMATING CAPITAL COSTS
Profits…
 Profit is usually subject to taxation
 Net Profit is the amount left after taxes:
Net profit = Gross Profit - Taxes
Estimate is an Estimate!!!
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Estimating Capital Costs… Estimating Capital Costs…
Estimation is a scientific way of finding the approximate Why Estimation??

cost of a project before its execution.  Costs Estimation is Vital Because:
 Its more an art than a science!  It can help determining whether to

undertake project, abandon it, do more
 Can be done for new plant or modification in existing plant research or take it to pilot scale
 A project is:
 Estimated cost is the probable cost computed based on plans &
specifications  Economically feasible if it is more profitable than
competing projects
 Good estimate should be within 5-10 % of actual cost
 Financially feasible if sufficient funds are available
 Requires engineering knowledge, cost data, experience,  Even a profitable project may be abandoned due to financial
foresight and judgment constraints
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 Economic evaluation projects proceeds in several steps: Types of Capital Cost Estimates
1. Preparing a process flow diagram  Depending on project stage and
availability of information, estimates
2. Calculating mass & energy flows Engineering
of various accuracies can be
3. Sizing major equipment prepared
4. Estimating capital cost  Accuracy depends on amount of design detail available,

Costing
5. Estimating production cost accuracy of cost data and time spent on preparing estimate
6. Forecasting product sales price  For early stages. only an approximate estimate is sufficient
Economic
7. Estimating return on investment Evaluation
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 Association for Advancement of Cost Engineering (AACE)  Based on accuracy & purpose there are 05 types of estimates:
gives 05 major classes:
1. Order of Magnitude Estimate (OoM)
1. Order of Magnitude Estimate (CLASS 5) (ratio, predesign, ballpark, guesstimate, or class 5 estimate)
2. Study Estimate (CLASS 4)  Based on costs estimates of similar processes
3. Preliminary Estimate (CLASS 3)  Not much design details required, BFD sufficient
4. Definitive estimate (CLASS 2)  Accuracy = ± 30–50%
5. Detailed Estimate (CLASS 1)  Used for initial feasibility studies & screening purposes
Lets have a brief look at them!

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2. Study Estimate 3. Preliminary Estimate
(approximate, feasibility, factored or class 4 estimate) (budget authorization, scope, definitive, control, class 3 estimate)
 Based on limited cost data  Based on sufficient data to permit budgeting of estimate
 List of major equipment, PFD needed (accurate equipment sizes, layout, piping,
instrumentation & electrical requirements, PFD &
 Accuracy typically ± 30%
preliminary PI&D)
 Used to make coarse choices b/w design alternatives
 probable accuracy: ± 20 %
 Used for authorization of funds to proceed to a point

where detailed estimate can be made.
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4. Definitive estimate 5. Detailed Estimate
(project control, class 2 estimate) (contractor’s, Check, tender, as-bid, Class 1 estimate)
 Need completed or near complete process design,  Based on complete engineering drawings of the
correct equipment cost, and detailed breakdown of process and all related off-sites and utilities,
estimated construction cost. specifications, site surveys, completed negotiations on
 Final PFD & preliminary PI&D procurement
 Probable accuracy: ± 10 %  Final PFD and P&ID
 Probable accuracy: ± 5 %
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Accuracy range of different types of estimates Significance of Various Levels of Estimates

 Selection of estimate is based on project stage, available
information and time constrains
 In early stages, an OoM estimate may suffice for screening
 Study Estimates are used for preparing preliminary economics

Cost of Preparing a Capital Cost Estimate
 If results are promising, a Preliminary Estimate is prepared for
requesting authorization to proceed
 Predesign (OoM, study & preliminary) estimates require less

details but are important to determine fate of a project
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Significance of Various Levels of Estimates… Equipment Cost Data

 If project is still promising, a Definitive  Numerous types of equipment are used in chemical plant
Estimate is prepared to seek funds &  Kettles  Heat Exchangers
construction authorization  Tanks  Fluid Transfer.
 Finally, Detailed Estimate is prepared  Vacuum Pans  Mixers
for plant construction & budget control  Agitators  Blenders
 High Shear Mixers  Columns
 Boilers  Etc.
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Estimating Capital Costs… Equipment Cost Data… Estimating Capital Costs… Equipment Cost Data…
 Various types of equipment: Equipment Cost Data: WHY IT IS SO IMPORTANT?

1) Processing equipment
 Equipment Cost Data is the Key of Cost Estimation
2) Raw-materials handling & storage equipment  During cost estimation, different factors & %ages are
applied on equipment cost data to get an estimate of FCC
3) Finished-products handling & storage equipment
 Different types of auxiliary equipment & materials (insulation,  It is thus essential to have reliable equipment cost data
ducts) should also be included
 Engineer need good judgment in selection and use of cost
data
 There are many sources of data listed in the literature
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Handling the Cost Data: Important Points Handling the Cost Data: Important Points…..
 It is essential for the estimator to know:  Most data include its date
 Data source of cost data
 For textbook data, deduct 2 years from publication date
 Basis of data
 Date  Data > 10 years should be avoided
 Potential errors  Prefer recent data since it reflect latest technology

 Range over which the data apply
 Cost indexes may be used to update past data
 Cost data from vendors is most up-to-date but proprietary

information may be compromised in obtaining it.
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Handling the Cost Data: Important Points….. Where to Find Equipment Cost Data??
Equipment Cost data often stated as:
PURCHASED COST: Price of equipment FOB (free on
board) at manufacturer’s plant
DELIVERED COST: Price of equipment + delivery charges to

purchaser’s plant FOB
INSTALLED COST: Total cost incurred when an equipment is Equipment cost can be determine from:
purchased, delivered, uncrated & placed on foundation  Vendor Quote:
 Most accurate
 Does not include piping, electrical, insulation costs
 Based on specific information
 A more accurate term is set-in-place cost  Requires significant engineering
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Where can we find cost data…. Correcting Past Equipment Cost for Inflation
 Past Cost of Similar Equipment & Correct for Time & Size:
COST INDEXES:
 Less accurate  Past costs are adjusted to time using Cost Index (C.I)
 Beware of large extrapolation  CIs are dimensionless numbers assigned to each year based
 Beware of foreign currency on changes in value of money due to inflation or deflation
 Use Cost Estimating Charts & Scale for Time:  If cost at some time is known, cost at another time can be
obtained as:
 Reasonably accurate
𝑪. 𝑰 𝒐𝒇 𝒀𝒆𝒂𝒓𝟐
 Convenient 𝑪𝒐𝒔𝒕 𝒂𝒕 𝒀𝒆𝒂𝒓𝟐 = 𝑪𝒐𝒔𝒕 𝒂𝒕 𝒀𝒆𝒂𝒓𝟏
𝑪. 𝑰 𝒐𝒇 𝒀𝒆𝒂𝒓𝟏
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COST INDEXES…
Some Common Cost Indexes

 Engg. News Record Construction & Building Indexes
 Marshall & Swift Installed Equipment Index
 Nelson Refinery Construction Index
 Chemical Engineering Index
 Wholesale Price Index (US Department of Commerce)
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Estimating Capital Costs… Equipment Cost Data…

Estimating Capital Costs… Equipment Cost Data…
Cost Indexes…
Which Index is Better for Me?

 Choice is based upon the industry
 For general construction, ENR Index is best
 For petroleum/petrochemical NF Index is suitable
 For chemical process industries, CE or M&S are good
 Companies also have their preferences
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Cost Indexes… Cost Indexes…

 Often, future cost index has to be predicted by extrapolating
 For best estimates: published cost indices:
 Each Job must be broken into components
Index Value
 Separate indices should be used for labor and materials
 For Process Industry Chem. Engg. Plant Cost Index (CEPCI or

CE) and M&S index are often used
Year
 Both publish in Journal Chemical Engineering
Variation of Major Cost Indices
EXAMPLE: EXAMPLE:
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Predicting Future Cost EXAMPLE:
Effect of Inflation & Escalation:

 To estimate future profitability, it is often necessary to estimate
future investment and operating costs
 Future cost can be obtained using:
where f‘, f’’, f ‘’’ are inflation rates for three consecutive years.
 Rates can be found from newspapers, economic reports,

banks, investment houses, etc.
 Projection of future costs is a highly speculative!!!
EXAMPLE: EXAMPLE:
Cost of a vessel in 1993 was 25,000, what is the estimated cost
on Sept 2003?
SOLUTION
CEPCI in 1993= 359

CEPCI in 2003= 402
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Estimating Capital Costs… Equipment Cost Data… Order of Magnitude Estimates (OOM)
EXAMPLE: Estimation of fixed-capital investment using  Simplest but least accurate
ranges of process-plant component costs. Make a study
estimate of the fixed-capital investment for a process plant if the  Only initial design concept or idea needed
purchased-equipment cost is $100,000. Use the ranges of
 What would be the cost of a 50,000 ton
process-plant component cost outlined in Table 4 for a process
per year acetic acid plant?
plant handling both solids and fluids with a high degree of
automatic controls and essentially outdoor operation.
 No engineering done, only idea of
project exists
EXAMPLE 1 from Max S. Peters & Klaus D. Timmerhaus,
Chapter 6  There are many OOM methods
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Estimating Capital Costs… OOM Estimates…. Estimating Capital Costs… OOM Estimates….
𝒏
1) ESTIMATING COSTS BY SCALING Can also be written as: 𝑪𝟐 𝑺𝟐
=
 Very useful relationships in cost engineering 𝑪𝟏 𝑺𝟏
Where C1 , C2 are base and required costs, S1 , S2 are their
 Log-log plot cost vs capacity of items with
capacities, n is the cost exponent. Rearranging gives:
same features is straight line:
𝑪𝟏 𝑪𝟏
𝒏 𝑪𝟐 = 𝑺𝒏 where = Constant = a
𝑪𝒐𝒔𝒕𝒔𝒊𝒛𝒆 𝟐 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚𝒔𝒊𝒛𝒆 𝟐 𝑺𝟏𝒏 𝟐 𝑺𝟏𝒏
= (Eq. 1)
𝑪𝒐𝒔𝒕𝒔𝒊𝒛𝒆 𝟏 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚𝒔𝒊𝒛𝒆 𝟏
Log Cost
𝑪𝟐 = 𝒂 𝑺𝟐𝒏
(COST CAPACITY
Where n is the size exponent RELATION) Taking log: 𝒍𝒐𝒈𝑪𝟐 = 𝒏𝒍𝒐𝒈𝑺𝟐 + 𝒍𝒐𝒈𝒂
Log Capacity
 Cost-capacity relation is used for OOM estimate of equipment
log-log plot of capacity vs equipment cost for a given type of
cost using known cost of a similar equipment of different size
equipment
68 should be a straight line with a slope equal to n
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Plot of Cost-Capacity Data for Heat Exchanger Cost-Capacity Relation: Important Points
Max S.  Valid for equipment, plant and processes
Peters &
 Value of n is a function of type of plant, process, or equipment

Klaus D.
Timmerhaus
n can be obtained by plotting cost-capacity data

 If no sufficient data given use 0.67 for plant & 0.6 for equipment
 Should not be used beyond tenfold range of capacity
 Only valid for items of similar type of construction, materials of

construction, temperature. pressure and other variables.
 If n = 0.6 is used, eq. 1 is referred to as ‘‘Six-Teenths Rule.’’
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EXAMPLE: Recently a cast iron pressure filter with 100 ft2 was
EXAMPLE: If a 100-ton per year plant cost $32.9M, what would
purchased for clarifying an inorganic liquid stream for $15,000.
a 150-ton per year plant cost?
In a similar application, the company will need a 450 ft2 cast iron
SOLUTION: As size exponent is not known, we use 0.67 leaf pressure filter. The size exponent for this type filter is 0.6.
Estimate the purchased price of the 450 ft2 unit.
SOLUTION:
Note the economy of scale!

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Example: (Estimating cost of equipment using scaling

factors and cost index) The purchased cost of a 50-gal glass-
lined, jacketed reactor (without drive) was $8350 in 1981.
Estimate the purchased cost of a similar 300-gal, glass-lined,
jacketed reactor (without drive) in 1986. Use the annual average
Marshall and Swift equipment-cost index (all industry) to update
the purchase cost of the reactor. (Max S. Peters & Klaus D. Timmerhaus) Example: You have recent quotes for two fixed tube sheet heat
exchangers:
Solution. Area Cost
Marshall & Swift equipment-cost index (all industry) 500 ft2 $ 9,450
2000 ft2 $ 20,000
(From Table 3) For 1981 721 Using this data, estimate the cost of a 900-ft2 fixed tube sheet
heat exchanger
(From Table 3) For 1986 798
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Solution:
Taking log of both side and rearranging gives:

Using this value of n we can now calculate the cost of 900 ft2 HE
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Estimating Capital Costs… OOM Estimates….
Max S. Peters & Klaus D. Timmerhaus
Max S. Peters & Klaus D. Timmerhaus

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EXAMPLE: Two heat exchangers, one bought in 1990 and the

other in 1995 for the same service
A B
Area = 70 m2 Area = 130 m2
Time = 1990 Time = 1995
Cost = 17 K Cost = 24 K
I = 358 I = 381
What is the Cost of a 80 m2 Heat Exchanger Today? (I = 402)
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SOLUTION: First Bring Costs to a Common Time: Applying the power law,
𝑪𝒂 𝑺𝒂 𝒏
For A= 70 m2, =
𝑪𝒃 𝑺𝒃
𝒏
𝑺𝒂
For A= 130 m2, 𝑪𝒂 = 𝑪𝒃
𝑺𝒃
𝟎.𝟒𝟓𝟔𝟓
𝟖𝟎
Using these two points, we can calculate value of exponent n, 𝑪𝒂 = 𝟏𝟗. 𝟎𝟖𝟗
𝟕𝟎
𝑪𝒂 = $ 𝟐𝟎. 𝟐𝟖𝟖 𝑲
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Extending Cost-Capacity Relation for Chemical Plants Cost-Capacity Relation for Chemical Plants: Important Points
 Capital Cost of a chemical plant can be obtained by scaling  For chemical plants, n vary from < 0.2 to >1
from a known cost of an earlier plant with same technology
 n is typically:
 No design info except production rate
 0.8-0.9 for plants with lot of mechanical work or gas
𝒏 compression (methanol, pulp & paper, solid-handling)
𝑺𝟐
𝑪𝟐 = 𝑪𝟏  ~ 0.7 for typical petrochemical processes
𝑺𝟏
 0.4-0.5 for small-scale, highly instrumented processes
Where,
C2 = ISBL capital cost of plant with capacity S2  Averaged value of 0.7 is often used (‘‘Seventeenths Rule’’)
C1 = ISBL capital cost of plant with capacity S1  For many known processes, values of n are tabulated
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EXAMPLE: A company is considering the manufacture of

ethylene oxide as an intermediate for its polymer division. The
process to be used is the direct oxidation of ethylene. The
company built a similar unit in 1997 that had a rated capacity of
100,000 tons annually for $ 66,000,000. The projected
production of the new facility is to be 150,000 tons annually.
Estimate the fixed capital investment in late 2001 dollars to
produce the required ethylene oxide.
SOLUTION:
CE Index for 1997 = 386:5
CE Index for late 2001 = 396:8
Values of n for some known processes Process Cost Correlation:

 A useful extension can be derived from cost capacity relation:
𝒏
𝑪𝟐 𝑺𝟐
=
𝑪𝟏 𝑺𝟏
𝑪𝟏 𝑪𝟏
𝑪𝟐 = 𝑺 𝒏 = Constant = a
𝑺𝟏 𝒏 𝟐 𝑺𝟏 𝒏
𝑪𝟐 = 𝒂 𝑺𝟐𝒏
 These values may be used if sufficient data are unavailable  Values of a and n for many processes are tabulated in literature
 If sufficient data available used, find n from plot 88
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Values of a and n Values of a and n
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91 92
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2) STEP COUNT METHOD Where, C = ISBL capital cost in $, U.S. Gulf Coast, 2000 basis;
 If cost of similar process is not available, an alternative Q = Plant capacity (metric tons/year)
approach is Bridgewater’s method S = Reactor conversion (mass of product/mass of feed)
 It correlates plant cost with the number of processing steps N = Number of functional units.
NOTE:
 For plants primarily processing liquids and solids:
 Functional unit includes all equipment & ancillaries needed for
a significant process step (major unit operation/process such as
reaction, separation etc.)
 Pumping & heating are not considered as functional units

unless they have substantial cost (e.g. compressors,
refrigeration systems, or process furnaces)
95 96
24
NOTE… EXAMPLE: The process for making cyclohexane by saturation of

benzene consists of a feed effluent heat exchanger, a saturation
 Step-count methods were developed for chemical plants and do
reactor, and a product stabilizer column. Estimate the cost of a
not extend well to other types of manufacturing.
plant that produces 200,000 metric tons per year (200 kMTA) of
 For large-scale production (>500,000 pieces/year) a rule of CH using the correlation in Table 6.2 and Bridgewater’s method.
thumb is: TCOP = 2 x materials cost
 This equation can be used for very approximate estimate of EXAMPLE 6.1 from,
CHEMICAL ENGINEERING DESIGN, Principles, Practice and Economics of
plant cost if fixed costs and utilities can be estimated Plant and Process Design,
By GAVIN TOWLER and RAY SINNOTT
97 98
A) Using cost correlation: B) Using Bridgewater’s method:
𝐶 = 𝑎 𝑆2 𝑛 Plant has 2 functional units, reactor & product Stabilizer.

Assuming conversion to be 1.0, we can write:
Values of a and n for the Axens Process for Benzene Saturation
can be found in Table, So we can write:
99 100
25
Reasons for the inconsistency in the answers: 3) TURNOVER RATIO

Two very different answers can be explained as follows:  Simple way to estimate FCI, but very inaccurate
 Bridgewater’s method is a rough approximation and cost  Turnover ratio is defined as:
correlations data of Table 6.2 is from technology vendors
which is somewhat understated. 𝑨𝒏𝒏𝒖𝒂𝒍 𝑮𝒓𝒐𝒔𝒔 𝑺𝒂𝒍𝒆𝒔
𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 𝑻𝑶𝑹 =
𝑭𝒊𝒙𝒆𝒅 𝑪𝒂𝒑𝒊𝒕𝒂𝒏 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
 The costs are not on the same time basis
 With the level of information available, it is better to say that Annual gross sales=Annual production rate x price per unit
the estimated cost is in the range $10MM to $20MM.
 Basic Assumption = ALL PRODUCT MADE IS SOLD
101 102
Value of TOR:
 TOR vary from 0.2 to 5.0
 For processes near ambient conditions, TOR ≈1.0
 For large, capital-intensive industries, TOR < 1.0
 For processes with a small number of equipment TOR >1
 Value affected by temperature, pressure, construction

materials, no. of equipment, production rate, inflation etc.
 Reciprocal of TOR called Capital Ratio, is used by financial

analysts to compare companies in same business
103
26
EXAMPLE: Estimate the fixed capital investment for a 1500

ton/day ammonia plant using the turnover ratio. The current
gross selling price of ammonia is $150/ton. The plant will
operate at a 95% stream time.
SOLUTION
EXAMPLE: You read recently in a trade journal that FFC, a EXAMPLE: The purchased price of glass–lined vessels with
competitor of your company in the fertilizer business, plans a agitator, baffle, and thermwell is as follows:
$20MM expansion of their existing urea facilities. The article did
not mention how much this expansion would increase production.
Your supervisor asks you to estimate the increase in annual
production assuming that urea is selling for $0.05/lb.
a) Draw a logarithmic plot of purchased price vs capacity

b) Determine whether the six-tenths rule applies
Expected capital investment is given. So using TOR for fertilizer
c) Derive equation of purchased price as a function of vessel size
plant we can calculate annual sales and then annual production
27
Estimating Capital Costs… OOM Estimates…. Study Estimates
Order of Magnitude Methods: Concluding Remarks Accuracy 30%
 Several OOM methods
Some design info needed
available
(much more than OOM
 Based on assumptions, estimates!)
thus not very accurate.
 At a minimum, we need,
 Useful in a pre-design
 Block flow diagrams
stage
 Preliminary material & energy balance
 A better approach is to calculate/collect some more data and
go for “Study Estimate”.
 Environmental risk review
110
Estimating Capital Costs… Study Estimates…. Estimating Capital Costs… Study Estimates….
Required information may include FACTORIAL METHODS OF COST ESTIMATION

 Project scope  Study Estimates are mostly based on Factorial Methods
 Preliminary material & energy balances  Main assumption: If cost of major equipment is known, all
other costs can be estimated as its Factors
 Block flow diagrams/flow sheets
 Very simple approach:
 Rough sizes & specifications of major equipment
1. Purchase Costs of equipment are estimated using their
 Rough utilities & packaging requirements specifications
 Rough sizes of buildings & structures 2. Purchase Costs are then multiplied by appropriate factors
to incorporate all other expanses
 Environmental assessment & equipment
111 112
28
FACTORIAL METHODS OF COST ESTIMATION…..

Total Capital Fixed Capital Working Capital Land
 Accuracy depends on design details and reliable cost data = + Cost
+
Cost Cost Cost
 If detailed equipment specifications and reliable prices are
available, a relatively accurate estimation can be made
 Two types of factor methods reported: ISBL

Cost
 Average factor methods
Contingency
OSBL Engg.
 Individual or detail factor methods
Cost Cost
113
COMPONENTS OF FIXED CAPITAL COST OF PLANT

Estimating Capital Costs… Study Estimates…. Major Equipment, Spare Parts, Surplus Equipment, Freight Charges,
Equipment
Taxes, Insurance, Duties, Startup- Allowance
Understanding the Factors: Components of FCC Placing Equipment, Paint, Foundations, Insulation, Structural Steel Equipment Installation
DIRECT COSTS
Purchase, Calibration, Installation Instrumentation
DELIVERED EQUIPMENT
Process piping, Pipe Hangers, Fittings, Valves, Insulation Piping
+ Equipment placing
Electrical Equipment, Materials, Installation Electrical
+ Piping & connections ISBL
Direct & Process Buildings, Maintenance Shops, Buildings for Services,
+ Electrical equipment & wiring Indirect Warehouses, Garages, Steel Structures, Labs, Medical, Cafeteria
Buildings
+ Instrumentation & controls Costs Utilities, Waste Treatment, Receiving, Shipping, Packaging, Storage,
Auxiliary Facilities
Lighting, Communications
FCC + Buildings
OSBL Administration, Process Design, General Engineering, Cost
INDIRECT COSTS
+ Auxiliary facilities (off-site) Engineering, Drafting, Purchasing, Expediting, Inspection, Engineering

Supervision, Reproduction, Communications, Travel
+ Engineering Operation & Maintenance of Temporary Facilities, Offices, Roads,
Engg Cost Parkings, Railroads, Electrical, Piping, Communications, Fencing,
+ Construction contractor's fee Supervision, Accounting, Purchasing, Timekeeping, Expediting, Construction
Warehouse Personnel & Expenses, Guards, Safety, Medical, Fringe
+ Contingency Contingency Benefits, Field Tests, Special Licences, Taxes, Insurance, Interest
Contractors Fee
Contingency
29
THE PROCESS AREA & AUXILIARY FACILITIES OF A CHEMICAL PLANT.
Estimating Capital Costs… Study Estimates….
Utilities
1) Lang Factors Method
 Proposed by Hans J. Lang (1947)
 Total Capital Cost can be estimated by multiplying the total cost

of equipment by certain factor:
Storage, Receiving & Shipping Process Area (BATTERY LIMIT)
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐂𝐨𝐬𝐭 = 𝐄𝐪𝐮𝐢𝐩𝐦𝐞𝐧𝐭 𝐩𝐮𝐫𝐜𝐡𝐚𝐬𝐞 𝐜𝐨𝐬𝐭 × 𝐋𝐚𝐧𝐠 𝐅𝐚𝐜𝐭𝐨𝐫
 Equipment include: reactors, tanks, columns, heat

Services
exchangers, furnaces, etc.
Value of Lang Factors EXAMPLE: A small fluid processing plant is considered for
construction adjacent to a larger operating unit at a large plant
 Lang developed factors for battery limit FCI of 03 types of plants
site. The present delivered equipment costs are as follows:
in Carbon Steel construction:
F = 3.10 For solids processing plant;

F = 3.63 For mixed fluids-solids processing plant
F = 4.74 For fluids processing plant;
 LFs include equipment erection, instrumentation & automatic

control, piping, insulation, electrical, engineering costs etc.,
but do not include a contingency factor
Estimate the battery-limits fixed capital investment, assuming a
 Lang method has a tendency to produce high results 15% contingency factor.
119
30
SOLUTION:  Lang Method can be used for estimating:
Sum of the delivered equipment cost = $ 2,715,000  Total Direct Plant Cost
 Fixed-capital Investment
for fluid processing plant, LF = 4.74
 Total Capital Investment
Thus,
 LFs vary with the type of plant
ISBL fixed capital investment = ($ 2,715,000)(4:74) = $12869100
 Lang method should be used only in the early stages of
Adding 15% contingency: process design in the absence of detailed design info.
ISBL fixed capital investment = ($12869100 )(1.15)  Most estimators use LF of 3, 4, or 5, depending on the plant
scale (larger plant = smaller LF) and type
= $14,799,000, or $14,800,000
121 122
b) Hand Factor Method

 Lang method use same factor for all equipment types
 Not all equipment requires same installation work (foundations,

piping, electrical, insulation, etc.)
 W.E. Hand proposed that better results can be obtained by

using different factors for different equipment types
 He introduced factors for 8 equipment types in CS construction
 Purchase cost* of each equipment is multiplied separately by its

These factors include costs for land and contractor’s fees. factor and the results are sum up to get the Total Capital Cost
123 124 * purchased equipment costs, FOB at the factory
31
Value of Hand Factors Important Points About Hand Factors

 Flow sheet & sizes of major items are needed to produce
battery limits fixed capital investment
 HFs does not include contingency, so appropriate amount

must be added
 For material other than Carbon Steel, LFs & HFs need
correction using material factor (see Brown’s Method)
 For better accuracy, factors must be derived from recent

installations data
 These factor are valid for Carbon Steel equipment only
125  HF method produce somewhat lower results than LF method
126
EXAMPLE: A small fluid processing plant is considered for SOLUTION: Multiplying by Hand factor for each items:
construction adjacent to a larger operating unit at a large plant
site. The present delivered equipment costs are as follows:
935,000
*Note:
As no information given to indicate that Receivers & Accumulator
Drum were pressure vessels, so we treat them as noted. Had they
been pressure vessels, a factor of 4.0 might be used
Estimate the battery-limits fixed capital investment, assuming a
15% contingency factor. 128
32
In case if Receivers & Accumulator Drum were pressure vessels: 3) Brown’s Method
 Brown introduced correction factors for LF & HF methods:
a) Material Factor (FM)
 LF & HF were developed for carbon steel equipment
 For other metals, these factors must be corrected because

site, buildings, engineering, construction and few equipment-
related costs are independent of metal used.
Therefore, $9,583,000 + $480,000 + $262,000 = $10,950,000
 Only pipings, ducts, few instruments, safety devices and some
With 15 % contingency, the battery-limits fixed capital investment
contingency costs increase with metallurgy upgrade
is $10,950,000 X 1.15 = $12,184,000, or $12,200,000
 Correction is done using Materials Factor (Fm)
129 130
 Fm is determined from the plot of Fm vs Material Cost Ratio EXAMPLE: The Hand factor for heat exchangers is 3.5. What
would be the adjusted Hand factor for a U-tube heat exchanger
with titanium tubes and CS shell? Assume material cost ratio is
2.6.
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑨𝒍𝒍𝒐𝒚
𝑴𝒂𝒕𝒆𝒓𝒐𝒍 𝑪𝒐𝒔𝒕 𝑹𝒂𝒕𝒊𝒐 = SOLUTION: Using Fm vs Material Cost Ratio Plot for a material
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑪𝑺
cost ratio of 2.6. we find Fm = 0.63
Fm
The adjusted Hand factor = 3.5 (0.63) = 2.2
131 Material Cost Ratio, alloy /carbon steel 132
33
b) Instrumentation Factors (Fi) c) Building Factors (Fb) (Only for Hand Factors)
 Fi depends on amount of instrumentation in a process or plant  HFs include almost no building costs, so the estimate must be
corrected to account for building costs
Fi Values
 This is done using a building factor (Fb)
 Local controls 1.15 New Plant/ New Unit at Expansion at
Type of Plant New Site Existing Site Existing Site
 A typical chemical or processing plant 1.35
Solid Processing 1.68 1.25 1.15
 Extensive controls, central control, computerization 1.55 Solid & Fluid 1.47 1.29 1.07
Processing
Fluid Processing 1.45 1.11 1.06
133 134
Place Factors
d) Location or Place Factors (Fp)
 If plant is built outside US, cost is adjusted using Place Factor
 As economic conditions in countries always changing, place factors are not

reliable for more than one or two years.
 Differences in values of Fps calculated by different estimators are expected

135 136
34
Lang & Hand Methods in Final Form Creating Your Own Factors
 If recent data available, it better to calculate own factors:
The Lang equation:
The Hand equation:
137 138
Hand Factors Estimating Structure (Read Carefully!)

4) Garrett’s Module Factors

 This method use factors for different equipment modules:
139 This chart gives you an idea how factor methods works! 140
35
Garrett’s Module Factors…. Garrett’s Module Factors….
141 142
EXAMPLE: Estimate the capital cost, in mid-2000 dollars, of an

upgrade to a fatty acid separation process using the equipment
list and prices in given table (see next slide). Prices are for the
year 2000.
The process will be automated as is typical for a chemical plant
and will be in the U.S.
SOLUTION:
We will solve this problem using modified Lang Factor and

modified Hand Factor methods
143 144
36
To find Fm we first calculate the weight average alloy/CS cost
ratio for the 11 material equipment:
Average Ratio = [($26.1K + $50.7K + $54K)(3.5) + ($1.9K + $55K +

$1.6K)(1.7) + ($9.9K + $12.8K + $4K + $6K +
$124.3K)(2)] / $346.3K = 2.5
The Lang Method
Using Fm vs Alloy Cost Ratio Plot, for Material Cost Ratio of 2.5,
we find, Fm = 0.63
Sum of equipment purchase cost = $346.3K
Fi = 1.35 (As the process is fully automated)
Lang Factor = 4.1 (plant is fluid processing & added to an
existing site) Fp = 1.0 (As the process will be in U.S)
We now need to find the factors Fm, Fi and Fp. Total capital cost ($) = ($346.3K)(4.1)(0.63)(1.35)(1) = $1.208M
145 146
Now lets solve the same problem using Hand Method (modified)
The Hand Method
First we need to find, Ʃ[Equipment purchase cost] x (HF x Fm)

for each of the given equipment.
Then we will find out Total Equipment Cost
147 148
37
Finally using,
How to Use Factor Methods for Spare & Used Equipment
Fi = 1.35 (process is fully automated)
 LFs & HFs are valid for full-price equipment and cannot be
Fb = 1.06 (process is upgrade to an existing plant) used for spare & used equipment which cost much less
Fp = 1.0 (process will be in the U.S)
 To address this problem, calculation is done using the price of
We calculate the capital cost as: new equipment
The capital cost ($) = ($726.4K)(1.35)(1.06) (1) = $1.039M
 The answer is adjusted by subtracting the extra cost of new
OBSERVATIONS: equipment
 Result of Lang method is 16% higher than Hand method
(still within the accuracy range the methods)
 Five major pieces of equipment (whose purchase cost is
more than $25K) account for about 88% of the capital cost!
149 150
EXAMPLE: As part of a plant upgrade project, you plan to use a To find Fm we use alloy/CS ratio to be 1.7 (Appendix 4)
spare 1000 ft2 U-tube heat exchanger (HE) rated at 150 psig
and built with a carbon steel shell and stainless steel tubes. The From the graph of Fm vs alloy/CS ratio, we find Fm = 0.8
plant will charge you $2000 for the exchanger. Assume the
instrumentation will be typical for a processing plant and that Fi = 1.35 (for typical controls)
your plant is in the U.S. What is the capital cost of this
Fb = 1.06 (expansion of fluid processing at an existing site)
exchanger?
SOLUTION: Fp = 1.0 (construction is in the U.S)

First, we need price of new HE. Lets assume it to be $20K.
The Capital cost $ = ($20K)(3.5)(0.8)(1.35)(1.06)(1) – ($20K –2K)
Hand Factor for HE is 3.5 but we need to correct using Fm for = $ 62.1K
stainless steel tubes extra cost is
151 152
deducted
38
Preliminary Estimates
 Accuracy 15 to 25% Information
guide for capital
 More info needed than Study
cost estimates
Estimates (see chart on next slide)
 Use for fund appropriation request
 > 25 methods reported, all fall in 02 groups
1. Factored methods
2. Functional units or step-counting methods
 Great judgment needed in using factors or defining

modules
153 154
Estimating Capital Costs… Preliminary Estimates… Estimating Capital Costs… Preliminary Estimates…
1) Chilton Method Chilton Method…

 It is a factor method based on multiple factors for various cost  These equipment related costs are then added to the total
incurred during plant erection installed equipment cost to give TOTAL PHYSICAL PLANT
 If TOTAL INSTALLED EQUIPMENT COST is known, following COSTS (TPPC)
equipment related costs are calculated by multiplying it with  Following costs are then calculated as factors of TPPC:
various factors:
 Engineering and construction,
 Piping,
 Contingency
 Instrumentation
 Building & site development  Size factor
 Auxiliaries  These costs are then added to the Total fixed plant costs to
 Outside lines give TOTAL FIXED PLANT COSTS
 Equipment related costs are then added to the total installed
155
equipment cost to give TOTAL PHYSICAL PLANT COSTS 156
39
Chilton Method: Important Points: Chilton Method: Important Points….

 Once total Installed equipment cost is known, other equipment
 If purchased equipment costs are given, delivery charge is
related costs are calculated by multiplying it with factors:
added to get delivered equipment cost
PROCESS PIPING COST: (Factor of IEC)
 Delivered equipment cost is then multiplied by factor 1.43 to
give installed equipment cost  Process piping includes piping, valves & fittings associated
with process equipment, including lines for utility & process
 Installation costs vary from 35-100% of the delivered materials. Value of factor is 0.3 to 0.6
equipment costs, 43% can be use as an average value
 For very high pressure and corrosive or erosive conditions in
 Installation costs of all the equipment are added to give Total fluid processing plant, the factor 0.6 may increased to 1.0.
Installed Equipment Cost (IEC)
 Costs of service piping (heating steam, drinking water, etc.) are
157 included in the building costs
158
Chilton Method: Important Points…. Chilton Method: Important Points….

 Piping outside the building, including piping supports are BUILDING & SITE DEVELOPMENT COSTS: (Factor of IEC)
termed as outside lines and dealt separately
 Building may be an open structure like refinery and
INSTRUMENTATION COST: (Factor of IEC) petrochemical plant
 Building costs include service facilities such as heating,

 Factors ranging from 0.03 to 0.20 are used based on the extent
plumbing, lighting etc.
of instrumentation
 Factor for building cost ranges from 0.1 to 1.00 depending on
 For extensive instrumentation factor may reach to 0.20 to 0.25
the type of building
 For food, pharmaceuticals, and cosmetics, a building is

essential and the factor may be as high as 1.00
159 160
40

AUXILIARY FACILITIES: (Factor of IEC) NOTE:
 Include steam, electricity, water infrastructures needed  Motors, starters, and wiring for process equipment are
included in the installed equipment costs
 Factor ranges from 0 to 1.00 depending on amount of work
 Electrical services within the building or structure are part of
needed for providing auxiliary facilities
the building costs
OUTSIDE LINES (Factor of IEC)
 Outside feeder lines are part of the outside lines
 All piping outside the building area is classified as “outside”  Substations & transformer costs are under auxiliary facilities.
lines and the costs include the piping supports
 Factor ranges from 0 to 0.25 auxiliary facilities.

161 162
 Total physical plant cost (TPPC) is then calculated as: ENGINEERING & CONSTRUCTION (Factor of TPPC)
TOTAL PHYSICAL PLANT COST = Installed Equipment Cost  Estimated on the basis of a project’s complexity.
+ Cost of (process piping + instrumentation + building & site
 If it is simple, use 20–35% of TPPC
development + auxiliary facilities + outside lines)
 But if the engineering is difficult, first of its kind, or new to the
 The remaining costs are calculated as factors of TPPC company, a percentage selected in the difficult range
163 164
41

CONTINGENCIES (Factor of TPPC) SIZE FACTOR (Factor of TPPC)
 Contingencies are based upon process information available  Small plants have a variety of problems that larger plants don’t.
 If the data are reliable and similar to other known processes,  The “size” factor is included to account for this.
then 10–20% of TPPC is satisfactory
 Depending on the size of the plant a factor of 0 to 35% is used
 If the process is speculative and subject to change, a higher
percentage should be used
165 166
Chilton Method: Important Points…. Summary of Chilton Method

01 Purchase equipment cost + delivery charge Delivered equipment cost
 Finally Total Fixed capital cost is calculated 02 Installed equipment cost (IEC) Factor of 01
03 Process piping
TOTAL FIXED CAPITAL COST 04 Instrumentation
Factor of 02
05 Buildings and site development
Total Fixed Plant Cost = TPPC + Engg. & Construction 06 Auxiliaries
Cost + Contingencies + 07 Outside lines
Size Factor Cost 08 Total physical plant costs Sum of items 2 to 7
09 Engineering and construction
10 Contingencies Factor of 08
 Chilton Method is summarized in the table on the next slides 11 Contingencies
12 Total fixed plant cost Sum of items 8 to 11
167 
168Value ranges of these factors is given in the next table
42
Summary of Chilton Method Summary of Chilton Method
169 170
Summary of Chilton Method Summary of Chilton Method

Learning Exercise
 Like other factor methods, Chilton Method can be
coded easily in MS Excel Spreadsheet or any
suitable computing software or language such as
Matlab
 Make an Excel Spreadsheet of Chilton Method and

solve the next problem
171 172
43
A small fluid processing plant is to be built at an existing plant site.
Estimating Capital Costs… Preliminary Estimates…
The delivered equipment costs are given. The equipment is to be
installed in an outdoor structure. The process is heavily SOLUTION: The total delivered equipment cost is $2,715,000.
instrumented, and auxiliary services and outside lines are
minimal. The process is well defined and is based upon a similar
unit built at another company location. Estimate the battery-limits
fixed capital investment using the Chilton method
173 174
2) Detailed Factorial Estimates Detailed Factorial Estimates…

 If more detailed design information is available, the installation 4. Instruments & automatic process control systems
factor can be estimated more accurately by considering the
cost factors that are compounded into Lang factor individually. 5. Process buildings & structures;
 Direct-cost items incurred in the construction of a plant, in 6. Ancillary buildings, offices, laboratory buildings, workshops
addition to the cost of equipment, are: 7. Storage for raw materials & finished product
1. Equipment erection, including foundations and minor 8. Utilities (Services), provision for steam, water, air,
structural work firefighting services (if not costed separately as offsite)
2. Piping, including insulation and painting 9. Site preparation
3. Electrical power and lighting
175 176
44
 Contribution of items 1-9 to Total Capital Cost is calculated by  The method can be used for approximate estimates of capital
multiplying Purchased Equipment Cost by factors given below cost using equipment cost data
177 178
Material Factors for Correcting Equipment Cost  Material cost factors of some common metals are given in
 The installation factors given in Tables 6.3 and 6.4 are for Table 6.5
plants built from Carbon Steel (CS)
IMPORTANT NOTE
 When more exotic materials are used, then a materials factor
 Material Cost Factors fm is use to correct the equipment cost
fm should also be introduced:
and is different from Materials Factor (Fm) use to correct
 If cost of CS equipment is known, corresponding cost in Factors (see Brown's Method)
another material can be determine by multiplying with Material
Cost Factors fm
179 180
45
 Equation for Detailed Factorial Method can be written in Where,

expanded for each piece of equipment to give:
OR
181 182
Summary of the Factorial Method

1. Prepare material & energy balances, draw preliminary
flowsheets, size major equipment items, and select
materials of construction
2. Estimate the purchased cost of the major equipment
items
3. Calculate the ISBL installed capital cost, using the factors
given in Table 6.4 and correcting for materials of
construction using equation 6.13 or 6.14 with the materials
factors given in Table 6.5.
183 184
46
Estimating Capital Costs… Preliminary Estimates… Estimating Purchased Equipment Costs
Summary of the Factorial Method……  All Factorial Methods are based on equipment costs data
4. Calculate the OSBL, engineering, and contingency costs  Reliable equipment cost are therefore very important
using the factors given in Table 6.4.
 Sources of purchased equipment costs are:
5. The sum of ISBL, OSBL, engineering, and contingency
costs is the fixed capital investment. a) Vendors /suppliers /dealers
6. Estimate the working capital as a percentage of the fixed
b) Manufacturers’ catalog (available online now a days)
capital investment 10 to 20% is typical (or calculate it from
c) Recent data for similar equipment
cost of production if it is estimated)
7. Add the fixed and working capital to get the total d) Data from the open literature
investment required. e) Cost-estimating software (ICARUSTM suite by Aspen)

185 186
Estimating Purchased Equipment Costs Estimating Purchased Equipment Costs

e) Professional cost engineering literature
A Useful Tip:
f) Various internet sources
[e,g. www.aacei.org, www.aacei.org/resources, If the cost of equipment
www.icoste.org] cannot be found, it can
Cost of each
be breakdown into
g) Cost correlations from chemical engineering textbooks component will be find
individual components
and added to give cost
We will discuss it in more in next topic
of whole equipment:
 A reactor can be broken down into components such as vessel, heat

exchange surfaces, spargers, agitators, etc.
187  Distillation column can be broken down into cylindrical shells, trays, etc.
188
47
Estimating capital investment…
 If no reliable cost data or software available, following the

correlation can be used for preliminary estimates:
𝑪𝒆 = 𝒂 + 𝒃𝑺𝒏
 Values of a, b and n are tabulated in chemical engineering
books for a number of commonly used equipment
(A table from Gavin Towler’s book is given in the next slides)
189 190
191 192
48
Chemical Engineering Design, Principles, Practice and Economics of Plant and Process Example 6.2……
Design, By GAVIN TOWLER and RAY SINNOTT
Assuming distillation column to be a vertical pressure vessel plus

internals, the wall thickness t, can be calculated using formula for
Cylinders and Spherical Shells:
Equation 13.41 from
Gavin Towler’s Book,
Section 13.5. (The Design
of Thin-walled Vessels
Under Internal Pressure)
Where Pi is internal pressure, Di is internal diameter, S is max.

allowable stress and E is the welded-joint efficiency,
Example 6.2 taken from Chemical Engineering Design, Principles, Practice &
Solution: First convert units as required by correlations. For
Economics of Plant and Process Design, By GAVIN TOWLER and RAY
costing of metal equipment, shell mass is needed which can be SINNOTT
calculated
193 using the wall thickness.: 194
Example 6.2…… Example 6.2……
The design pressure of vessels should be ~ 10 % above operating Now the shell mass for the distillation column can be calculated using:
pressure (11 bar or 1.1 x106 N/m2), (section 13.4)
The max. allowable stress for type 304 st. steel @ 500 ˚ F (260 ˚C) is
12.9 ksi (or 89N/mm2) (Table 13.2).
Also assuming weld efficiency to be 1.0. the column wall thickness, tw

will then be:
Using density of 304 stainless steel = 8,000 kg/m3 from Table 7.2, the
shell mass will be:
195 196
49
Example 6.2… Example 6.2…
For horizontal pressure vessel, we first calculate length and diameter

from given volume by assuming L = 2D. 1
Then following similar steps used for distillation column, we calculate

tw = 8mm & Shell Mass = 636 kg.
Using the correlations in Table 6.6, we can obtain the purchase costs:
For the remaining equipment, we obtain the following purchase costs

from the correlations in Table 6.6, in carbon steel construction :
197 198
Example 6.2… Example 6.2……
We now have estimated the purchased cost of the major equipment items.
The ISBL installed capital cost can be calculated using suitable methods Total cost of Dist. Col. + Internals =1,480,000+76,700 =$ 1,560,000.
and correcting for materials of construction using materials factors given
in Table 6.5. The installed cost of the horizontal pressure vessel is:
Hand’s Method: C = 4 x12,000 = $48,000.

The installed cost of the distillation col. is then:
The installed cost for exchangers & storage tank in CS construction is:
The cost of the trays can be converted to type 304 stainless steel by
multiplying with material factor from Table 6.5, giving:
So, the cost in type 304 SS is: 1.3 (176,000) = $ 229,000.
199 200
50
For pumps, we must add the cost of the pump and driver before Factor Method:
determining the installed cost (only pump cost is converted to SS). Using equation 6.13 and the factors given in Table 6.4, the installed cost
For the first type of two pumps: for the exchangers, tank, and pumps will be:
For the second type of three pumps, (only 02 installed), the total
installed cost is:
The installed cost for pressure vessels and pump drivers (no materials
conversion factor needed) is:
The total installed ISBL cost of the plant is then
201 202
The cost of the trays in SS and cost of the spare pump and driver: Note:
 Although the answers obtained by two methods are different

they are well within the range of accuracy of the other
The total installed ISBL cost of the plant is then
 The estimates should be stated as U.S. Gulf Coast basis,
January 2006, as this is the basis for correlations in Table 6.6.
203
51
Estimating capital investment… Estimating capital investment…
Location Factors
 Most plant & equipment cost data are based on U.S. Gulf
Coast (USGC) or Northwest Europe (NWE) basis
 The cost of building a plant in any other location depends on:

 Local fabrication & construction infrastructure
 Local labor availability & cost
 Costs of shipping or transporting equipment to site
 Import duties or other local tariffs
 Currency exchange rates
 These differences are overcome using Location Factor:
where LFA = location factor for location ‘A’ on USGC basis 206
Estimating capital investment…
Location Factors Important Points
LFs for international locations changes with currency exchange

rates
 LFs within a country can be estimated by adding 10% for every

1,000 miles from the nearest major industrial center
 LFs in Table 6.7 are based on 2003 data and can be

updated by dividing with Ratio [U.S. dollar/local currency] in
2003 and multiplying with Ratio [U.S. dollar/local currency] in
the year of interest.
 For future estimates, currency changes need to be forecasted.

207 208
52
EXAMPLE PROBLEMS SCOPE & CONTINGENCY
IMPORTANT PROBLEMS Scope:
 Problems 6.1 to 6.8 Chapter 6,
 A document that defines a project
Gavin Towler’s Book
 Frequently used by cost control & estimating personnel to
 Problems 1 to 4 Chapter 3 Thane
ensure plant constructed as per requirements
Brown’s Book
 A scope should include following info:
 Problems 1 to 10 Chapter 6
Timmerhaus’s Book  What product is being manufactured?
 How much is being produced?
 What is the quality of the product?
209 210
SCOPE & CONTINGENCY… SCOPE & CONTINGENCY…
 A scope should include following info…. Contingency:

 It is a provision for unforeseen elements likely to occur
 Where is the product will be produced?
 There are two types: Process & project contingency.
 What is the quality of the estimate?
Process Contingency:
 What is the basis for the estimate?
 Deal with uncertainties in:
 What are the knowns & unknowns of the project?
1. Technical uncertainties in equipment
2. Integration of new and old process steps
3. Scaling up to large scale plant size
4. Accurate definition of certain process parameters

211 212
53
SCOPE & CONTINGENCY…
Project Contingency What Contingency Values Should Be Used?

 Deal with the errors occurring due to  For preliminary estimates:
1. Engineering mistakes & omissions  15–20% project contingency should be use if the process
2. Cost and labor rate changes information is firm
3. Construction of problems  If not, then a process contingency of 15–20% should also

4. Estimating inaccuracies be added.
5. Weather-related problems  For Definitive Estimate : 10–15%
6. Strikes by workers  For Detailed Estimate: 10–15%

7. Miscellaneous “unforeseens”  For small capital project, contingencies are generally higher
213 214
Estimating Capital Costs… Working Capital… Estimating Capital Costs… Working Capital…
WORKING CAPITAL
Total Capital Fixed Capital Working Capital Land
= + +  Funds necessary to conduct a day-to-day business (pay wages
Cost Cost Cost Cost
and salaries, purchase raw materials, supplies, etc.)
 Mostly consist of inventories, accounts receivable, payable
Already  Initial working capital is provided by the company then it is

discussed in regenerated from the sale of products or services
the beginning
lectures  Working capital is generally not available for another purpose,
We have
discussed capital so it is regarded as an investment item
cost estimation in
Lets discuss working  WC is roughly equal to the value of 3 to 6 month of production.
detail
capital now
216
54
How working capital is estimated? a) Percentage of Capital Investment Method:

 Two types of methods available:
 For companies that manufacture and sells product at uniform
 Percentage Methods yearly rate, 15–25% of total capital investment is adequate
amount of working capital
 Inventory Methods
Percentage Methods  For companies in a seasonal business, 20–30% of the total

capital investment is adequate amount of working capital
 Good for OOM, study, and preliminary estimates
 Working capital estimation is based upon either
a) % of annual sales
b) % of capital investment
217 218
EXAMPLE: A company is considering an investment in an Since the working capital is 15% of the total capital investment,
aldehyde facility. The engineering department has estimated that the subtotal above is 85%, providing no other capital items are
the battery-limits fixed capital investment to be $19MM. Land added:
𝟖𝟓
allocated for the project is $500,000 and start-up expenses to be 𝑻𝒐𝒕𝒂𝒍 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 × = 𝟐𝟎, 𝟒𝟎𝟎, 𝟎𝟎𝟎
𝟏𝟎𝟎
capitalized are expected to be $900,000. The company normally
uses 15% of the total capital investment for working capital. Total Capital Investment = 𝟐𝟒, 𝟎𝟎𝟎, 𝟎𝟎𝟎
Determine the estimated amount of working capital for this
project. 𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 = 𝟐𝟒, 𝟎𝟎𝟎, 𝟎𝟎𝟎 − 𝟐𝟎, 𝟒𝟎𝟎, 𝟎𝟎𝟎 = 𝟑, 𝟔𝟎𝟎, 𝟎𝟎𝟎
SOLUTION:
or
TCI= 𝟐𝟎, 𝟒𝟎𝟎, 𝟎𝟎𝟎 + 𝟎. 𝟏𝟓 𝑻𝑪𝑰,
219 220
55
b) Percentage of Sales Method: EXAMPLE: A perfume manufacturer is planning to produce a new

 In some companies, raw materials & finished goods are product. Annual sales are expected to be about $15,000,000.
expansive Estimate the amount of working capital required for this product.
 Thus considerable money tied up in inventory and only a small SOLUTION:

amount in fixed capital
Estimated working capital = $15,000,000 (0.35) = $ 5,250,000
 Thus estimation of working capital is based on % of annual
sales
 Working capital is calculated as 30-35 % of annual sales
 Products that may fall into this category are fragrances,
cosmetics, flavors, perfumes, food additives etc
221 222
Inventory Method EXAMPLE: Plastics, Inc. is considering a project to manufacture

a specialty product for the polymer industry. The expected sales
are 10,000,000 lb/yr at 65 cents/lb. In the manufacture of this
product, all raw materials are delivered by pipeline from other
operating departments except one, so the only on-site storage is
an inorganic compound. It costs 18 cents/lb and is consumed at
a rate of 500,000 lb/month. The total manufacturing expense is
estimated to be 30 cents/lb of product. Goods-in-process amount
to about $300,000 because of hold tanks in the process. The
fixed capital investment for this process is $8,000,000 and the
maintenance is 6% per year of the fixed capital investment.
Estimate the amount of working capital required by the inventory
method.
223 224
56
225 226
START-UP EXPENSES Start-up Expenses…
 One-time expenses needed to brought the plant to operation How Much Start-Up Expanses Should be used
 Period between end of construction and production of product  Start-up expenses vary between 5 to 20% of FCI
in required quality and quantity is termed as Start-Up
 For plants with FCI ≥ $100MM, 6% is a reasonable
 In this period several expenses are incurred such as
 For plants with FCI $10MM to $100MM, 8% is satisfactory
 Operator and maintenance employee training
 Temporary construction  For plants of < $10MM, start-up expenses may be as high as
10% of FCI
 Auxiliary services
 Testing & adjustment of equipment, piping & instruments etc
227 228
57
PRODUCTION COSTS Production Costs…
 All expenses required to make a product ready for shipment Classification of Production Costs
 Include cost of:
 Can be classify in two broad groups
 Manufacturing a product
1. Fixed Costs: Do not change with production volume
 Packaging and shipping
 Selling and distribution 2. Variable Costs vary with production volume
 General overhead expenses.

 Production costs usually range from 60% to 80% variable, with
 Unit cost: Cost of product based upon either mass or volume 70% being a good average to use if no other data is available
unit (dollars per lbs, dollars per gal, dollars per barrel, etc.)
 Some costs have both fixed and variable character, such as
 RM, by-products & utility costs are quoted on these bases. maintenance, laboratory etc.
229 230
Production Costs… Production Costs…
Another way of classifying production cost Another way of classifying production cost…
1) Direct Expenses: Costs that are directly associated Indirect Expenses: Costs that are nearly constant with
with product manufacture (e.g., utilities, supplies, and labor) respect to production rate (e,g. depreciation, security, fire
protection, roads, yards, gardening, docks)
 Direct costs are nearly directly proportional to production rate.
 On a unit-cost basis, the indirect expenses tend to decrease
 On per unit-cost basis, they remain constant irrespective of
with increasing production, since their cost is constant or
the amount of material produced.
varies slightly with the production rate
 Raw materials and byproducts are often mentioned separate
items from direct and indirect expenses, although they tend to
vary directly with the production rate!
231 232
58
TYPE Estimation Method
PRODUCTION COST Production Costs…
Fixed Variable Direct Estimate Factor
1) Raw materials    We will now discuss the production costs which are directly
2) Packaging materials   estimated :
3) Manufacturing
1. Raw materials Numbers are based on
a) Operating labor    PRODUCTION COST List in
b) Utilities    2. Packaging materials the previous slide
c) Employee benefits   
3b) Utilities
d) Supervision   
e) Laboratory    3a) Operating labor,
f) Maintenance    4) Product Delivery
g) Insurance & taxes  
h) Operating supplies  
i) Plant overhead  
j) Depreciation  
4) Product delivery  
233 234

1, 2, 3b) Raw Material, Packaging Materials & Utility Costs 1, 2, 3b) Raw/Packaging Materials & Utility Costs…
 Can be calculated from:  For RM prices, other data sources are company price data,
supplier quotations, or published data
 Material and energy balances
 Company data  Two good public sources are Chemical Market Reporter for
chemicals and The Wall Street Journal for commodities
 Public data for the same process
 For packaging material costs, use current company price data
 When using material balance data, add 2 to 3 % to ideal
or supplier quotations
raw/packaging material usage to cover losses & over packing
 For utilities, use company price data or quotes from utility
 For thermal utilities, add 5 to 10% for heat & material losses
companies for electric, fuel, gas, waste treatment and landfill.
 Electrical losses are negligible; ignore them
235 236
59
 For items such as cooling water, refrigeration, and steam, SOLUTION
company cost data is probably the most accurate.
EXAMPLE: Calculate the utility costs in $/lb of product for a

process having the following energy balance. Use the 1997 costs
from Table
Ulrich Table
Production Costs…
3a) Operating Labor:
 To determine labor costs, we need to estimate the number of

operators (crew size) and the wage rate.
 Two methods are used: Wessell Ratio & Ulrich Method
Ulrich Method:
 If we know what equipment is in the process, Ulrich Table can
be used to estimate the crew size
60
Ulrich Table
Production Costs…
EXAMPLE: Find the crew size for a process that has the following
equipment:
241 242

SOLUTION: 4) Product Delivery
 Difficult to estimate b/c it’s hard to define shipping destinations
and to estimate per mile shipping rates
 Few simplifying assumptions are use such as:
 Identify 10 to 15 main customers & assume all product shipped to them
 Split the country into 5 to 10 regions, and roughly estimate amount of

product that will be shipped to each region. Finally. approximate the
center of customer mass for each region and estimate mileage
 It is best to get a rough estimate from the experts
 Next best is to ask for quotes from trucking companies and railroads
243 244
61
Subcategories (3c to 3j) of Production Cost Subcategories of Production Cost Estimated by Factor Method:
Estimated by Factor Method:  Insurance and Taxes: use 3 to 5% of the capital investment
 Employee benefits: 22 to 45% of Operating Labor Cost (For  Operating Supplies: use 0.5 to 3% of the capital investment
study estimates, use your company’s percentage)
 Plant Overhead: 1 to 5% of the capital investment.
 Supervision: 10 to 30% of Operating Labor Cost
 Depreciation: calculated using Straight-Line method
 Laboratory: 10 to 20% of Operating Labor Cost
The annual straight depreciation cost (write off) is given by:
 Maintenance: For new plants use 2 to 10% of Total Plant Cost
(the average is 6%)
For older plants, use 5 to 31% of the depreciated cost of plant,
(the average being 12%) Numbers are based on PRODUCTION
245 COST List 246
Assignment Concept of Time Value of Money

Solve all 04 problems of Chapter 03 from Engineering
Economics & Economic Design For Process Engineers By
Thane Brown
You will be needing Appendix IV Equipment Pricing Data
Lecture slides here onwards, are from Chapter 3 of “Optimization of

Chemical Processes” By T. F. Edgar, D. M. Himmelblau & L. S. Lasdon
247 248
62
249 250
251 252
63
253 254
255 256
64
257 258
259 260
65
261 262
263 264
66
265 266
267 268
67
269 270
271 272
68
273 274
275 276
69
277 278
279 280
70
281 282
Discounted Cash Flow Rate of Return (DCFROR) or

Internal Rate of Return (IRR)
Interest rate (discount rate) for which the present value of the future
cash flows would equal to the initial cost (capital investment
OR,
Interest rate for which the NPV of all the cash flows is zero
Present Value = Cost or NPV = 0
We know that NPV is given by:
The value of i for which NPV = 0 is IRR

Therefore to have a positive NPV the i < IRR
283 284
71
Discounted Cash Flow Rate of Return (DCFROR) or IRR…important Points Discounted Cash Flow Rate of Return (DCFROR) or IRR…important Points
IMPORTANT NOTES…
IMPORTANT NOTES:
 IRR is a more useful method than NPV for comparing projects of
 IRR also called Interest Rate of Return and Discounted Cash Flow
very different size because:
Rate of Return (DCFROR)
1) NPV of large projects is usually higher than NPV of small projects, but then the
 It is a measure of the maximum interest rate that the project could investment amount is also much greater
pay and still break even by the end of the project life 2) IRR is independent of project size, and the project with the highest IRR always
 IRR is a useful way of comparing different projects, independent of provides the best returns!
the amount of capital used, the life of the plant, or the actual interest  When IRR is used as an investment criterion, good projects are
rates prevailing at any time. those which have IRR > the cost of capital (interest rate).
285 286
Internal Rate of Return (IRR)… Important Formulas for the Problems
The management’s goal is:
287 288
72
289 290
291 292
73
293 294
295 296
74
297 298
299 300
75
301 302
303 304
76
305 306
307 308
77
309 310
311 312
78
313 314
315 316
79
317 318
319 320
80
321 322
323 324
81
325 326
327 328
82
Do this problem only with Net Present Value
329 330
331 332
83
Do this problem only with Net Present Value
333 334
335 336
84
337 338
339 340
85
341 342
343 344
86
EXAMPLE: A plant is producing 10,000 metric tons per year There are two ways of evaluate the modification:
(10kMTA) of a product. The overall yield is 70%, on a mass basis 1) If all the increased production can be sold, (sufficient demand exist), the
(kg of product per kg raw material). The raw material costs proposal will increase earnings (increased sales)
$500/metric ton, and the product sells for $900/metric ton. A
2) Even if no demand exist for additional production, the modification will still
process modification has been devised that will increase the reduce raw materials requirement for the current production level (reduce
yield to 75%. The additional investment required is $1,250,000, RM cost)
and the additional operating costs are negligible. Is the
The second way is the safest basis for making the evaluation
modification worth making?
SOLUTION: At 10kMTA production,
345 346
Raw Material Saving = 14286 -13333 = 953 MT/y EXAMPLE: A carbon steel heat exchanger that costs $140,000
is expected to have a service life of 5 years before it requires
Amount saved = 953 x 500 = $ 476500 /y
replacement. If type 304 stainless steel is used, then the service
Therefore , life will be increased to 10 years. Which exchanger is the most
economical if the cost of capital is 12%?
SOLUTION:
and Pay Back Period (inverse of ROI) ,
From Table 6.5, we can estimate the cost of the type 304
stainless steel exchanger to be $140,000 X 1.3 = $182,000
DO YOURSELF
As both ROI and payback period are very attractive, the
proposed investment worth implementation depending on other
constraints and company policy.
87
PERPETUITIES & CAPITALIZED COSTS PERPETUITIES & CAPITALIZED COSTS
Perpetuity: Capitalized Cost…
 Perpetuity is an annuity (periodic payments) that continue In these cases, a fund P is maintained which will earn enough
indefinitely interest to pay for periodic equipment replacement
If annual interest rate is 6 % the fund needed in this case can be
 It is use to determine the total investment required for a piece of
calculated as:
equipment or asset under conditions which allow it to be
replaced perpetually without considering inflation or deflation. 𝑃+10000 𝑃+10000
𝑃= = , therefore P = 12650 $
1+𝑖 𝑛 1+0.6 𝑛
Capitalized Cost:
The fund of 12650 would becomes ($12650)(1+0.06)10= $22650
Let original cost of an equipment is $12,000, useful-life is 10 yrs
after 10 years.
and the scrap value is $2000
Thus, after 10 yrs, the equipment can be replaced for $10,000
To use the equipment for long time, it will be necessary to spend and $12,650 will remain in the fund.
$10,000 every 10 yrs to replace it.
This cycle could now be repeated indefinitely.
PERPETUITIES AND CAPITALIZED COSTS…. PERPETUITIES AND CAPITALIZED COSTS….

Capitalized Cost… Calculating the Capitalized Costs:
 Therefore for perpetuation, theoretical amount of capital Let P be the present value of the amount which can accumulate
necessary at the start would be: to an amount of S during n interest periods at periodic interest
$12,000 (for equipment) + $12,650 (for replacement fund)

rate i. 𝑺
𝑷= 𝒏
(1)
(𝟏 + 𝒊)
 The total capital cost determined in this manner is called the
For perpetuation, the amount S accumulated after n periods
Capitalized Cost.
minus the cost for the replacement (CR) must equal to present
 Engineers often use capitalized costs principally for comparing worth P:
alternative choices. 𝑷 = 𝑺 − 𝑪𝑹 (2)
The amount required for the replacement must be

earned as interest over a given length of time. Combining 1 and 2 gives,
88
The Capitalized Cost is defined as the original cost of the
equipment plus the present value of the renewable perpetuity.
If K represents the capitalized cost and CV is the original cost of

equipment
Thus, the useful-life of stainless-steel reactor should be 11.3 yrs

for the two types of reactors to have equal capitalized costs.
If the stainless-steel reactor would have a useful life of more than
11.3 years, it would be the recommended choice,
While the mild-steel reactor would be recommended if the useful
life using stainless steel were less than 11.3 years.
89
Practice Problems
A plant is proposing to install a combined heat and power system (CHP)
to supply electrical power and process steam. Power is currently taken
from a utility company, and steam is generated using onsite boilers.
The capital cost of the CHP plant is estimated to be $23 million.
Combined heat and power are expected to give net savings of $10
million per year. The plant is expected to operate for 10 years after the
completion of construction. Calculate the cumulative net present value
of the project, at a discount rate of 12%. Also, calculate the discounted
cash flow rate of return. Construction will take 2 years, and the capital
will be paid in two equal increments, at the end of the first and second
years. The savings (income) can be taken as paid at the end of each
year. Production will start on the completion of construction.
END OF LECTURE SLIDES

Wishing you all best of luck with your exams,
Dr. SYED IMRAN ALI
Associate Professor
Department of Applied Chemistry & Chemical Technology
90
Recommended Books HEAT EXCHANGERS BASICS
1) PLANT DESIGN AND ECONOMICS FOR CHEMICAL ENGINEERS Log Mean Temperature Difference (LMTD):
BY Max S. Peters & Klaus D. Timmerhaus (Chapter 6) The temperature difference between hot & cold fluids varies
along the heat exchanger. LMTD is used to calculate average
2) CHEMICAL ENGINEERING DESIGN, Principles, Practice and temperature difference:
Economics of Plant and Process Design,
BY Gavin Towler & Ray Sinnott (Chapter 6)
3) The topics Time Value of Money and Measure of Profitability are from
OPTIMIZATION OF CHEMICAL PROCESSES, Here Δ𝑇2 & Δ𝑇1 are the temperature difference between the two
By T. F. Edgar, D. M. Himmelblau & L. S. Lasdon fluids at the two ends (inlet & outlet) of the heat exchanger.
(Chapter 3) NOTE: It makes no difference which end of heat exchanger is
taken as inlet or outlet as shown in figure:
362
HEAT EXCHANGERS BASICS….

Hot Fluid
ΔT2 = T1-t1 ΔT2 = T2 - t2
Cold Fluid
Heat transfer with parallel flow
Hot Fluid
ΔT2 = T1 - t2
ΔT2 = T2 – t1
Cold Fluid
Heat transfer with counterflow.
363 364
91
HEAT EXCHANGERS BASICS….
Calculating Heat Transfer in a Heat Exchanger
If Q is the overall heat transfer rate across a heat exchanger

U is the overall heat transfer coefficient, A is the heat transfer area
between hot and cold sides, LMTD is the logarithmic mean
temperature difference, then:
Q = U × A × LMTD
365
92

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WHAT IS ECONOMICS?

Course No. 508

What is economics... WHAT IS INDUSTRIAL ECONOMICS?

 Profitability & financial analysis (quantitative

WHAT YOU NEED? BOOKS COST ESTIMATION

2) CHEMICAL ENGINEERING DESIGN, PRINCIPLES, PRACTICE AND

Uses of Capital Cost Estimates CAPITAL COST

 To appropriate funds for construction

Components of Capital Cost Components of Capital Cost…. FCC

a) ISBL Plant Costs

ISBL… ISBL… Indirect field costs…

Components of Capital Cost…. FCC Components of Capital Cost…. FCC

b) OSBL Plant Costs (Offsite Costs) OSBL….

1. Electricity infrastructure, standby generators 8. Loading facilities, conveyors, warehouses, railroads

 Also referred to as contractor charges

 Include the costs of design and other engineering services

Note:  30% of (ISBL + OSBL) for small projects

 40% can used as initial estimate if no site details available

Components of Capital Cost…. FCC Components of Capital Cost….

d) Contingency Charges 2) WORKING CAPITAL

3) LAND COST TOTAL CAPITAL COST

 Small part of Total Capital Investment Fixed Capital Working Land

Costs of Production Costs of Production…

Variable Costs of Production d. Effluent disposal

c. Consumables (solvents, acids, bases, inert materials,  Fixed costs include:

Fixed Costs of Production…. Fixed Costs of Production…

 Typically 65% of (labor + supervision + direct overhead

Revenues, Margins, and Profits…

 Net Profit is the amount left after taxes:

Net profit = Gross Profit - Taxes

Estimating Capital Costs… Estimating Capital Costs…

Estimation is a scientific way of finding the approximate Why Estimation??

 Its more an art than a science!  It can help determining whether to

4. Estimating capital cost  Accuracy depends on amount of design detail available,

Estimating Capital Costs… Estimating Capital Costs…

Lets have a brief look at them!

2. Study Estimate 3. Preliminary Estimate

 Used for authorization of funds to proceed to a point

Estimating Capital Costs… Estimating Capital Costs…

4. Definitive estimate 5. Detailed Estimate

 Probable accuracy: ± 10 %  Final PFD and P&ID

Accuracy range of different types of estimates Significance of Various Levels of Estimates

 In early stages, an OoM estimate may suffice for screening

 Study Estimates are used for preparing preliminary economics

 Predesign (OoM, study & preliminary) estimates require less

Estimating Capital Costs… Estimating Capital Costs…

Significance of Various Levels of Estimates… Equipment Cost Data

 Various types of equipment: Equipment Cost Data: WHY IT IS SO IMPORTANT?

 There are many sources of data listed in the literature

 Potential errors  Prefer recent data since it reflect latest technology

 Cost data from vendors is most up-to-date but proprietary

DELIVERED COST: Price of equipment + delivery charges to

Some Common Cost Indexes

 Marshall & Swift Installed Equipment Index

 Nelson Refinery Construction Index

 Chemical Engineering Index

 Wholesale Price Index (US Department of Commerce)

Estimating Capital Costs… Equipment Cost Data…

Which Index is Better for Me?

 For general construction, ENR Index is best

 For petroleum/petrochemical NF Index is suitable

 For chemical process industries, CE or M&S are good

 Companies also have their preferences

Cost Indexes… Cost Indexes…