Capital investments

• Capital needed to supply the necessary

manufacturing and plant facilities is called the
fixed capital investments.
• While that necessary for the operation of the
plant is termed the working capital.
• The sum of fixed capital and working capital is
known as the total capital investment.
• Fixed capital investment may be further
subdivided into manufacturing fixed capital and
non manufacturing fixed capital investments.
• Manufacturing fixed capital investments
represents the capital necessary for the installed
process equipment with all auxiliaries that are
needed for complete process operation.
Expenses for piping , instruments, insulation,
foundation and site preparation etc
• Fixed capital required for construction overhead
and for all plant components that are not directly
related the process operation is designated as
non manufacturing fixed capital investments.
• Land , process building, administrative and
other offices, ware houses, transportation,
laboratories, utilities and waste disposal.
Construction overhead costs consist of field
office and supervision expenses, engineering
expenses, miscellaneous construction costs,
contractors fees and contingencies
 Working capital
• The working capital for an industrial plant consist
of total amount of money invested in
• 1. Raw materials and supplies carried in stock
• 2. Finished products in stock
• 3. Accounts receivables
• 4. Cash kept on hand for monthly payment of
operating expenses such as salaries and raw
material purchases
• 5.Accounts payable
• 6.Taxes payable.
• The ratio of working capital to total capital
investments varies with different companies,
but most chemical plants use an initial
working capital amounting to 10 to 20% of
total capital investment.
 Estimation of Capital investments
• 1. Direct Costs-
• Purchased equipment cost
• Purchased equipment installation
• Instrumentation and control
• Piping
• Electrical equipment and materials
• Buildings (including services)
• Yard improvement
• Service facilities- steam, water, power, refrigeration,
compressed air, fuel, waste disposal. Office furniture,
material handling equipments, distribution and
packaging.
• Land
• 2. Indirect cost-
• Engineering and supervision
• Construction expenses
• Contractors fee
• Taxes ,insurance, interests
• Contingency
 Types of capital cost estimates
• 1. Order of magnitude estimates(Ratio estimate)
– based on similar previous cost data, probable
accuracy of estimate 70%
• 2. Study estimates(Factored estimate) based on
knowledge of major items of equipment.
Probable accuracy of estimate up to70%.
• 3. Preliminary estimates(Budget authorization
estimate, Scope estimate)-based on sufficient
data to permit the estimate to be budgeted.
Probable accuracy is 80%
• 4. Definitive estimate(Project control
estimates)- based on almost complete data
but before completion of drawing and
specification. Probable accuracy of estimate
with in 90%)
• 5. Detailed estimates(contractors estimates)-
based on complete engineering drawings,
specification and site survey. Probable
accuracy of estimate with in 95%
• Order of magnitude estimate study estimate and
preliminary estimates are called pre design cost
estimates. They require much less details than
the other two estimates.
• However these three estimates are very
important for determining if a proposed project
should be given a further consideration or not.
• When more and more details are added to the
pre design estimates it becomes similar to the
definitive and detailed estimates.
 Cost indexes
• cost data which are available for immediate use
in a preliminary or pre design 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.
• Many different types of cost indexes are
published regularly. Some of these can be
used for estimating equipment costs; others
apply specifically to labour, construction,
materials etc.
• The most common of these indexes are the
1.Marshall and Swift all-industry and
process-industry equipment indexes
• 2.The Engineering News-Record construction
index
• 3.The Nelson-Farrar refnery construction
index
• 4.The Chemical Engineering plant cost index.
Cost factors in capital investments
• Capital investment is the total amount of
money needed to supply the necessary plant
and manufacturing facilities plus the amount
of money required for the operation of the
facilities. These are the proportional cost of
each major component of total capital
investments.
• 1. Purchased equipment-20 to 40% of fixed
capital investments.
• 2. Purchased equipment installation-7 to 26% of
fixed capital investments.
• 3. Insulation cost- 8 to 9% of purchased
equipment cost or 2% of total capital
investments.
• 4. Instrumentation and control- 3% of total
capital investments.2.5 to 7 % of fixed capital
investments.
• 5. Piping-20% of fixed capital investments.
• 6. Electrical installation-4 to 11% of fixed
capital investments.
• 7. Building and services- 3 to 18% of FCI
• 8 . Yard improvement- 2 to 3% of fixed capital
investments.
• 9. Service facilities- 6 to 25 % of fixed capital
investments with 13% considered as an
average value.
• Land- 1 to 2% of Total capital investments.
• Engineering and supervision- 35% of purchased
equipment cost or 10% of the total direct cost of the
process plant.
• Construction expense- 10% of the total direct cost of
the process plant.
• Contractors fee- 2 to 7% of the total direct cost of the
process plant or 1.5 to 6% of the fixed capital
investments.
• Contingencies-8 to 20 % of direct and indirect plant
costs.
• Start up expense- 12% of fixed capital investments
• Prepare a study estimate of the FCI for a
process plant, if the purchased equipment
cost is Rs 100,000 .
Purchased equip 100000 % 0f FCI
Purch.Equipment 36000
installation
Instrumentation 28000
piping 32000
Electrical 20000
Building 20000
Yard improvement 8000
Service facilities 60000
Land 4000
Enggg.Supervision 40000
Construction Exp 48000
Contractors fee 8000
Contingency 32000
• Prepare a study estimate of the FCI for the
process plant, if the delivered equipment cost
is Rs 100,000
Delivered Equipment cost (E) 100000
Purchased Equipment installation 39% of E
Instrumentation 28% of E
Piping 31% 0f E
Electrical 10% of E
Building 22% of E
Yard imp 10% of E
Service facilities 55% of E
Land 6% of E
Engg. And supervision 32%E
Construction expense 34%E
Contractors fee 5% of (D+I)
Contingency 10% of (D+I)
• The purchased cost of equipment for a solid
processing plant is Rs 500000. The plant is to
be constructed as an addition to an existing
plant. Estimate the total capital investment
and the fixed capital investment. Working
capital investment is 20% of the FCI.
Purchased Equipment cost (E) 500000
Purchased Equipment installation 45% E
Instrumentation 9% E
Piping 16% E
Electrical 10% E
Building 25% E
Yard imp 13% E
Service facilities 40% E
Land 6% E
Engg. And supervision 33% E
Construction expense 39% E
Contractors fee 5% of (D+I)
Contingency 10% of (D+I)
Working capital 20 % of FCI
 Estimating Equipment Cost by Scaling
• When no cost data is available for a particular
piece of equipment, the cost of the
equipment needs to be estimated.
• If the new equipment is similar to one of
another capacity for which cost data are
available, the six-tenth factor rule can be
used, which gives a fairly good estimate.
• According to this rule, if the cost of a given
unit at one capacity is known, the cost of a
similar unit with X times the capacity of the
first is approximately (X^ 0.6 ) times the cost
of the initial unit.
• This cost capacity concept should not be used
beyond a ten fold range of capacity.
 Problems
• The purchased cost of 200 lit of glass lined
jacketed reactor was Rs 300000 in 2000.
Estimate the purchased cost of similar
equipment of 1000 litre capacity in 2006. Cost
index for such type of equipment in 2000 was
511 and in 2006, 651.
• The purchased cost of a Shell an tube heat
exchanger with 100 ft^2 of heating surface was
Rs 140000 in 1970. what will be the purchased
cost of a similar equipment with 200 ft^2 of
heating surface in 1970, if the purchased cost
capacity exponent of this type of HE is 0.6 for
surface area ranging from 100 to 400 ft^2. if the
purchased cost capacity exponent for this type of
HE is 0.81 for surface area ranging from 400 to
2000 ft^2, what will be the purchased cost of a
HE with 1000 ft^2 of heating surface in 1970.
• The 1990 cost for an Aluminium tank
weighing 100,000 kg was Rs 188000. for a size
range from 200000 to 1000000Kg, the cost
weight exponent for Al tanks is 0.93. If an Al
tank weighing 700000 kg is required, what is
the capital investment needed in 1995 ?. Cost
index in 1990 is 620 and in 1995 is 740. The
cost of installation in 1995 may be taken as
40% of the purchased equipment cost.
 Methods for estimating capital
investment
• METHOD A- DETAILED-ITEM ESTIMATE
• Requires careful determination of each
individual item.
• Equipment and material needs are
determined from completed drawing and
specifications.
• They are priced either from current cost data
or preferably from firm delivered quotations.
• Estimates of installation cost are determined from accurate
labour rates and employee hour calculations.
• Accurate estimates of engineering, drafting, field
supervision, field expenses etc are also detailed.
• Site survey and soil data must be available to minimize
errors in site development and construction cost estimates.
• Large amount of engineering time is required to prepare
such detailed item estimate.
• This type of estimate is prepared by contractors bidding on
lumpsom work from finished drawing and specification.
• Accuracy is 95%.
• METHOD B- UNIT-COST ESTIMATE.
• gives good estimating accuracies for FCI,
provided accurate records of previous cost
experience are available.
• This method is used for preparing definitive and
preliminary estimates.
• This estimate requires detailed estimates of
purchased price obtained either from quotations
or from index corrected cost records.
• Equipment installation labour is evaluated as a
fraction of the delivered equipment cost.
• Costs for concrete, steel, pipes, electrical,
instrumentation, insulation etc are obtained by
applying unit costs to the material and labour.
• Unit cost is also applied to engineering hours.
• A factor for construction expenses, contractors
fee and contingency is assumed based on
previous experience.
• Less accurate than Method A.
• METHOD C- PERCENTAGE OF DELIVERED-
EQUIPMENT COST- This method for estimating
the fixed or total-capital investment requires
determination of the delivered-equipment cost.
The other items included in the total direct plant
cost are then estimated as percentages of the
delivered-equipment cost
• This method is commonly used for preliminary
and study estimates.
• Less accurate than method B.
• The additional components of the capital
investment are based on average percentages
of the total direct plant cost, total direct and
indirect plant costs, or total capital
investments.
• Method D- Lang Multiplication factor for FCI and
Total capital investment
• Factor x delivered-equipment cost = fixed-capital
investment or total capital investment.
• Cost of a process plant may be obtained by
multiplying the basic equipment cost by some
factor to approximate the capital investment.
• Separate factors may be used for errection of
equipment, foundation, utilities, piping etc.
• Accuracy generally less than Method A, B& C.
Type of plant FCI TCI
Solid processing plant 3.9 4.6
Solid fluid processing plant 4.1 4.9
Fluid processing plant 4.8 5.7
• METHOD E- POWER FACTOR APPLIED TO PLANT-
CAPACITY RATIO- This method for study or order-
of-magnitude estimates relates the fixed-capital
investment of a new process plant to the fixed-
capital investment of similar previously
constructed plants by an exponential power ratio.
• Six- tenth rule – if the cost of a given unit at one
capacity is known, the cost of a similar unit with X
times capacity of the first is approximately XO.6
Times the cost of the initial unit.
• This power ratio varies from 0.2 to 1.0
• METHOD F- INVESTMENT COST PER UNIT OF
CAPACITY- it is possible to determine the unit
investment costs which apply for average
conditions. An order-of-magnitude estimate.
of the fixed-capital investment for a given
process can then be obtained by multiplying
the appropriate investment cost per unit of
capacity by the annual production capacity of
the proposed plant.
• It is a rapid evaluation method.
• Suitable for order of magnitude estimate.
• Problem.
• 1.Estimate by turn over ratio method, the FCI
of a sulphuric acid plant of capacity 140000
MT of 100% acid per year. The selling price of
Sulphuric acid is Rs 9000/MT. Assume a turn
over ratio of 2.
• 2. The TCI for a chemical plant is Rs 100
crores. If the plant can produce an average of
80 MT/ day of final product, during a 365 day
per year, what selling price in Rs of product
would be necessary to give a turn over ratio of
2.
 Total product cost
• It is divided into two categories
• 1. manufacturing cost
• 2. General expenses
• Manufacturing cost is known as the operating
cost or the production cost.
• Total product cost are commonly calculated in
one of the three ways.
• 1. daily basis
• 2. unit of product basis
• 3. annual basis
 Manufacturing cost
• Direct production cost- raw material, labour,
Maintenance, power, utilities.
• Fixed charges- depreciation, insurance, taxes,
rent
• Plant overhead cost-medical, safety, pension,
life insurance, ware house, storage, recreation
 General expenses
• Administrative expenses
• Marketing
• R&D
• Financing expense
• Gross earning expense