Plant Design and Economics -ChEg5184

Tsegay G.

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 Content Overview
Unit I- Introduction to Design

Unit II- Process Design Development

Unit III- General Design Considerations

Unit IV- Flowsheeting

Unit V- Economic Analysis

Unit VI- Selection and specification of equipment

Unit VII- Waste Minimization

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Unit V- Economic Analysis

❑The design engineer, by analyses of costs and profits, attempts to predict

whether capital should be invested in a particular project.
❑Most chemical engineering design projects are carried out to provide
information from which estimates of capital and operating costs can be made.
❑Chemical plants are built to make a profit, and an estimate of the investment
required and the cost of production is needed before the profitability of a
project can be assessed.
❑Cost estimation is a specialized subject and a profession in its own right, but
the design engineer must be able to make rough cost estimates to decide
between project alternatives and optimize the design.

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Cont…
❑An acceptable plant design must present a process that is capable of
operating under conditions which will yield a profit.
❑Since net profit equals total income minus all expenses, it is essential that
the chemical engineer be aware of the many different types of costs involved
in manufacturing processes.
❑ Capital must be allocated for direct plant expenses, such as those for raw
materials, labor, and equipment.
❑Besides direct expenses, many other indirect expenses are incurred, and
these must be included if a complete analysis of the total cost is to be
obtained.
❑Some examples of these indirect expenses are administrative salaries,
product-distribution costs, and costs for interplant communications.

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Cont…
❑A capital investment is required for any industrial process, and
determination of the necessary investment is an important part of a plant-
design project.
❑The total investment for any process consists of
❑fixed-capital investment for physical equipment and facilities in the plant
plus
❑working capital which must be available to pay salaries, keep raw
materials and products on hand, and handle other special items requiring a
direct cash outlay.
❑Thus, in an analysis of costs in industrial processes, capital-investment
costs, manufacturing costs, and general expenses including income taxes
must be taken into consideration.

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Factors affecting investment and production costs
❑When a chemical engineer determines costs for any type of commercial
process, these costs should be of sufficient accuracy to provide reliable
decisions.
❑the engineer must have a complete understanding of the many factors that
can affect costs. For example, many companies have reciprocal arrangements
with other concerns whereby certain raw materials or types of equipment
may be purchased at prices lower than the prevailing market prices.
❑Thus the engineer must keep up-to-date on price fluctuations, company
policies, governmental regulations, and other factors affecting costs.

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Cont..
❑Sources of Equipment
❖One of the major costs involved in any chemical process is for the
equipment. In many cases, standard types of tanks, reactors, or other
equipment are used, and a substantial reduction in cost can be made by
employing idle equipment or by purchasing second-hand equipment.
❑Price Fluctuations
❖prices may vary widely from one period to another, and this factor
must be considered when the costs for an industrial process are
determined.

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Cont.
❑Operating Time and Rate of Production
❖One of the factors that has an important effect on the costs is the fraction of
the total available time during which the process is in operation.
❖When equipment stands idle for an extended period of time, the labor costs
are usually low; however, other costs, such as those for maintenance,
protection, and depreciation, continue even though the equipment is not in
active use.
❖Operating time, rate of production, and sales demand are closely
interrelated.
❖The ideal plant should operate under a time schedule which gives the
maximum production rate while maintaining economic operating methods.
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Cont…
❑ Governmental Policies
❖The national government has many regulations and restrictions which
have a direct effect on industrial costs.
❖Some examples of these are import and export tariff regulations,
restrictions on permissible depreciation rates, income-tax rules, and
environmental regulations.
❖Governmental policies with reference to capital gains and gross-
earnings taxes should be understood when costs are determined.

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Capital investments

❑Before an industrial plant can be put into operation,

❖A large sum of money must be supplied to purchase and install the
necessary machinery and equipment.
❖Land and service facilities must be obtained, and the plant must be
erected complete with all piping, controls, and services.
❖In addition, it is necessary to have money available for the payment of
expenses involved in the plant operation.
❖Capital investment is the total amount of money needed to supply the
necessary plant and manufacturing facilities plus the amount of money
required as working capital for operation of the facilities.

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Cont…

❑The capital needed to supply the necessary manufacturing and plant

facilities is called the fixed-capital investment,
❑The necessary capital for the operation of the plant is termed the
working capital,
❑The sum of the fixed-capital investment and the working capital is
known as the total capital investment.
❑The fixed-capital portion may be further subdivided into
manufacturing fixed-capital investment and nonmanufacturing fixed-
capital investment.

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 Fixed-Capital Investment

❑The fixed capital investment is the total cost of designing,

constructing, and installing a plant and the associated modifications
needed to prepare the plant site.
❑Manufacturing fixed-capital investment represents the capital
necessary for the installed process equipment with all auxiliaries that
are needed for complete process operation.
❖Expenses for piping, instruments, insulation, foundations, and site
preparation are typical examples of costs included in the manufacturing
fixed-capital investment.

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Cont…
❑Fixed capital required for construction overhead and for all plant
components that are not directly related to the process operation is
designated as the nonmanufacturing fixed-capital investment.
❖These plant components include the land, processing buildings,
administrative, and other offices, warehouses, laboratories, transportation,
shipping, and receiving facilities, utility and waste-disposal facilities, shops,
and other permanent parts of the plant.
❑The construction overhead cost consists of field-office and supervision
expenses, home-office expenses, engineering expenses, miscellaneous
construction costs, contractor’s fees.
Read page 159 and 160 on PLANT DESIGN AND ECONOMICS FOR CHEMICAL ENGINEERS -- TIMMERHAUS
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Cont…

❑The fixed capital investment is made up of

1. The inside battery limits (ISBL) investment—the cost of the plant
itself;
2. The modifications and improvements that must be made to the site
infrastructure, known as offsite or OSBL investment;
3. Engineering and construction costs;
4. Contingency charges.

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Cont…

❑The ISBL plant cost includes the cost of procuring and installing all the
process equipment that makes up the new plant.
❑Offsite cost or OSBL investment includes the costs of the additions that
must be made to the site infrastructure to accommodate adding a new
plant or increasing the capacity of an existing plant.
❑The engineering costs, sometimes referred to as home office costs or
contractor charges, include the costs of detailed design and other
engineering services required to carry out the project.
❑Contingency charges are extra costs added in to the project budget to
allow for variation from the cost estimate.

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Working Capital

❑Working capital is the additional money needed, above what it cost to

build the plant, to start the plant up and run it until it starts earning
income.
❑The working capital for an industrial plant consists of the total amount
of money invested in (1) raw materials and supplies carried in stock, (2)
finished products in stock and semi finished products in the process of
being manufactured, (3) accounts receivable, (4) cash kept on hand for
monthly payment of operating expenses, such as salaries, wages, and
raw-material purchases, (5) accounts payable, and (6) taxes payable.

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❑Working capital is better estimated from the cost of production rather than
capital investment. It is recovered at the end of the plant life.
❑Variable Costs of Production
❖are costs that are proportional to the plant output or operation rate. These include the
costs of
❖1. Raw materials consumed by the process;
❖2. Utilities—fuel burned in process heaters, steam, cooling water, electricity, raw water,
instrument air, nitrogen, and other services brought in from elsewhere on the site;
❖3. Consumables—solvents, acids, bases, inert materials, corrosion inhibitors, additives,
catalysts, and adsorbents that require continuous or frequent replacement;
❖4. Effluent disposal;
❖5. Packaging and shipping—drums, bags, tankers, freight charges, etc. Variable costs can
usually be reduced by more efficient design or operation of the plant.

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Cont..
❑Fixed Costs of Production
❖are incurred regardless of the plant operation rate or output. If the plant
cuts back its production, these costs are not reduced. Fixed costs include
1. Operating labor
2. Supervision—usually taken as 25% of operating labor.
3. Direct salary overhead—usually 40 to 60% of operating labor plus
supervision.
4. Maintenance,
5. Property taxes and insurance

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Cost indexes
❑Most cost data which are available for immediate use in a preliminary
or predesign estimate are based on conditions at some time in the past.
❑Because prices may change considerably with time due to changes in
economic conditions, some method must be used for updating cost
data applicable at a past date to costs that are representative of
conditions at a later time. This can be done by the use of cost indexes.
➢A cost index is merely an index value for a given point in time showing
the cost at that time relative to a certain base time.
➢If the cost at some time in the past is known, the equivalent cost at
the present time can be determined by multiplying the original cost by
the ratio of the present index value to the index value applicable when
the original cost was obtained.

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❑ Cost indexes can be used to give a general estimate, but no index can take
into account all factors, such as special technological advancements or local
conditions. The common indexes permit fairly accurate estimates if the time
period involved is less than 10 years.

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Cost Factors In Capital Investment

Capital investment is the total amount of money needed to supply the necessary plant and manufacturing
facilities plus the amount of money required as working capital for operation of the facilities.

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Purchased Equipment
The cost of purchased equipment is the basis of several predesign methods
for estimating capital investment.
The various types of equipment can often be divided conveniently into (1)
processing equipment, (2) raw-materials handling and storage equipment,
and (3) finished-products handling and storage equipment. The cost of
auxiliary equipment and materials, such as insulation and ducts, should also
be included

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Purchased-Equipment Installation
The installation of equipment involves costs for labor, foundations, supports,
platforms, construction expenses, and other factors directly related to he
erection of purchased equipment.

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Instrumentation and Controls
Instrument costs, installation-labor costs, and expenses for auxiliary equipment and materials
constitute the major portion of the capital investment required for instrumentation.
Piping
The cost for piping covers labor, valves, fittings, pipe, supports, and other items involved in the
complete erection of all piping used directly in the process. This includes raw-material,
intermediate-product, finished-product, steam, water, air, sewer, and other process piping.

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 Electrical Installations
The cost for electrical installations consists primarily of installation labor and
materials for power and lighting, with building-service lighting usually included
under the heading of building-and-services costs.
In ordinary chemical plants, electrical-installations cost amounts to 10 to 15
percent of the value of all purchased equipment. However, this may range to as
high as 40 percent of purchased-equipment cost for a specific process plant.
The electrical installation consists of four major components, namely,
power wiring, lighting, transformation and service, and instrument and control
wiring. Table 9 shows these component costs as ratios of the total electrical cost.

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Buildings Including Services
The cost for buildings including services consists of expenses for labor, materials,
and supplies involved in the erection of all buildings connected with the plant.
Service Facilities
Utilities for supplying steam, water, power, compressed air, and fuel are part of
the service facilities of an industrial plant. Waste disposal, fire protection, and
miscellaneous service items, such as shop, first aid, and cafeteria equipment and
facilities, require capital investments which are included under the general
heading of service-facilities cost.

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Land
The cost for land and the accompanying surveys and fees depends on the location of
the property and may vary by a cost factor per acre as high as thirty to fifty between a
rural district and a highly industrialized area. As a rough average, land costs for
industrial plants amount to 4 to 8 percent of the purchased-equipment cost or 1 to 2
percent of the total capital investment.
Engineering and Supervision
The costs for construction design and engineering, drafting, purchasing, accounting,
construction and cost engineering, travel etc.
Construction Expense
Another expense which is included under indirect plant cost is the item of construction
or field expense and includes temporary construction and operation, construction tools
and rentals, home office personnel located at the construction site, construction
payroll, travel and living, taxes and insurance, and other construction overhead.
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Contingencies
A contingency factor is usually included in an estimate of capital investment to
compensate for unpredictable events, such as storms, floods, strikes, price

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Methods for estimating capital investment

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Cont…
❑ Revenues, Margins, and Profits
❑Estimating capital costs
❑Profitability analysis

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Revenues, Margins, and Profits
❑Revenues
❖The revenues for a project are the incomes earned from sales of main
products and byproducts.
❑Margins
❖The sum of product and byproduct revenues minus raw material costs
is known as the gross margin (or sometimes product margin or just
margin).
Gross margin = Revenues --- Raw materials costs

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Cont..
❑Profits
❖The cash cost of production (CCOP) is the sum of the fixed and variable
production costs:
CCOP = VCOP + FCOP
Where:
VCOP = sum of all the variable costs of production minus byproduct revenues;
FCOP = sum of all the fixed costs of production.
The cash cost of production is the cost of making products, not including any
return on the equity capital invested.

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Cont…
❑The gross profit is
Gross profit = Main product revenues - CCOP
❑Gross profit should not be confused with gross margin, as gross profit
includes all the other variable costs in addition to raw materials, and
also includes fixed costs and byproduct revenues.
❑The profit made by the plant is usually subject to taxation. Different tax
codes apply in different countries and locations, and the taxable income
may not be the full gross profit.
Net profit = gross profit - taxes

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Cont…
❑ to calculate a total cost of production (TCOP), assuming that a plant
generates a specified return on investment.
❑In this case an annual capital charge (ACC) is added to the cash cost of
production:
TCOP = CCOP + ACC

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 Discounted Cash flow Method (DCF-Method)
• Time Value of Money (the time preference for money)
Money earned today is more worth than money earned tomorrow
• Compounding
S = P (1 + r/100 ) n where,

S = the sum owing at time t

P = principal (sum invested at time 0)
N = number of time periods, usually years
R = the percentage interest rate per time period
• Discounting
P= S
(1 + r) n
100

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 e.g. A company receives USD 136 in 3 yrs. attaching a 13% per annum time value of
money. What amount would the company receive today?
Present Value (PV) = discounted value = 136___
(1 + 13)3
100
= 136 x 0.693
= USD 94.25
Discounting rate, cut-off rate, minimum rate of return, hurdle rate, cost of capital, opportunity
cost of capital

1 = discount factor
(1 + r) n

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Net Present Value
NPV = NCF0 + (NCF1 x DF1) + NCF2 x DF2) + …. + (NCFn x an)
Where, NCFn = annual net cash flow
n = number of years
an = discount factor
The NPV is calculated using the formula.
NPV = CF0+ CF1 + CF2 + CF3 + ....... + CFn
(1+r)1 (1+r)2 ( 1+r)3 (1+r)n

CFx =cash flow in period x,

n=the number of periods (normally the expected lifetime of the project).
r=the discount rate.
CF0 =investment cost, which will be negative as it is money paid out.

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Simple Methods for Economic Analysis
Payback Time
The payback period disregards the time value of money. It is determined by counting the number of years
it takes to recover the funds invested. For example, if it takes five years to recover the cost of
an investment, the payback period is five years.
A simple method for estimating the payback time is to divide the total initial capital (fixed capital
plus working capital) by the average annual cash flow:
simple pay-back time = total investment / average annual cash flow
Return on Investment

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According to the international chemical plant design literature

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