Lecture 6

Capital source

and sink

V, manufacturing fixed capital

investment for project

Ax, non-manufacturing fixed capital


W, working capital investment for

project

Operations for complete project

LoansPreferred stockBonds

Common stock

Other capital input

Stockholders’ dividends

Repayment of borrowed capital

Other investments

Tota

l cap

ital i

nves

tmen

t (w

ithou

t lan

d)

Coj Costs for operations (not including depreciation)

sj Total income from sales $

sj-coj Gross profit (before depreciation

charge)

Total capital Investment (without land), T=W+Ax+V

(sj – coj – dj)(1-φ) Net profit after taxes

dj Depreciation charge (sj – coj – dj)(1-φ) Gross profit

(sj – coj – dj)φ Income taxes(φ is generally 35% of gross profit)

Aj Net cash flow from the project including depreciation charge

Aj = (sj – coj – dj)(1-φ) + dj

=(sj – coj)(1-φ) + djφ

Capital source

and sink






project

Operations for complete projectOperations for

complete project


Common stock

Other capital input



Other investments

Tota

l cap

ital i

nves

tmen

t (w

ithou

t lan

d)


sj Total income from sales $

sj-coj Gross profit (before depreciation

charge)



dj Depreciation charge (sj – coj – dj)(1-φ) Gross profit





Analysis of Cost Estimation

Net profit = Total income – all expensesdirect plant expenses

raw materials, labor, utilitiesindirect expenses

administrative salaries, product sales, distribution costs

Capital source

and sink

Operations for complete project


Common stock

Other capital input



Other investments

Tota

l cap

ital i

nves

tmen

t (w

ithou

t lan

d)

sj Total income from sales $ sj-coj Gross profit (before

depreciation charge)






project




dj Depreciation charge (sj – coj – dj) Gross profit





Cash flow for industrial operations

Raw materials and labor

Estimation of Capital

Investment





W, working capital investment

for projectTotal capital Investment (without land)T = W + Ax + V

Tota

l cap

ital i

nves

tmen

t (w

ithou

t lan

d)Total capital investment (without land)

Fixed capital Investment Ax + V

Some of the capital investment can occur as a lump sum.

The flow of cash for the fixed capital investment is usually spread over the entire construction period.

Because income from sales and cost of operations may occur on an irregular time basis, a reservoir of working capital must be available to meet these requirements.

Cumulative cash position – effects of cash flow over full life cycle of industrial operation (time value of money was neglected)

Here the total capital investment is repaid in 5 years

Factors Affecting Investment and Production Costs The engineer must be aware of actual prices for raw materials and equipment, company policies, government regulations and others

• Sources of Equipment• Price fluctuations• Company policies• Operating time and rate of production• Government policies

Must keep up to date with prices and wage fluctuations: Monthly Labor Review (US Bureaus of Labor Statistics)

Major effect on the profits!

Direct effect!

Occupational Employment and Wage Estimates:http://www.bls.gov/oes/oes_data.htm

e.g., Raleigh Durham area:http://www.bls.gov/oes/current/oes_6640.htm

If equipment stands idle for an extended period, raw materials and labor costs are usually low; HOWEVER, many other costs (fixed costs) like maintenance, protection, depreciation, continue even though the equipment is not active.

Not producing a product – no producing revenue

Downtime should be kept to a necessary minimum (main source of poor profitability in process plants).

Maximum gross earnings

Total product cost

Total In

come (

all pr

oduc

ts)

Fixed Costs

Breakeven point

Gross earnings

Loss

Breakeven chart for chemical processing plant

Rate of Production, Kg/s

Dol

lars

$

0 0.05 0.1 0.15 0.2

0.005

0.010

0.015

0.020

0.025

0

Government Policies

Law and regulations that have a direct effcton industrial costs

• Export tariff regulations

• Depreciation taxes

• Income tax rules

• Environmental and safety regulations

See also http://www.itepnet.org/corp00an.pdf






for projectTotal capital Investment (without land)T = W + Ax + V

Tota

l cap

ital i

nves

tmen

t (w

ithou

t lan

d)Total Capital Investment (without land)


Capital: “a stock of accumulated wealth” Capital is savings that may be used. Used for example in investment to promote the production of other goods






for project

Total capital Investment (TCI)(without land)T = W + Ax + V

Tota

l cap

ital i

nves

tmen

t (w

ithou

t lan

d)


Working capital (WC): The capital necessary for the operation of the plant

Fixed-capital Investment (FCI): The capital needed to supply the required manufacturing and plant facilities

Direct cost

Indirect cost(WC/TCI) = varies with different companiesMost chemical plants used 10-20% (it may increase to as much as 50% for companies producing products of seasonal demand)






for project

Tota

l cap

ital i

nves

tmen

t (w

ithou

t lan

d)Fixed Capital Investment (FCI)


Direct Costs: Capital necessary for the installed process equipment with all components that are needed for complete process operation and also: • Site preparation• Piping• Instruments• Insulation • Foundations• Auxiliary facilities

Indirect cost: Construction overhead(field office, supervision expenses, contractor’s fees, etc) and for all plant components that are not directly related to the process operation:• Processing building• Administrative and other offices• Warehouses• Laboratories• Shops






for project

Total capital Investment (without land)T = W + Ax + V

Tota

l cap

ital i

nves

tmen

t (w

ithou

t lan

d)


Total amount of money invested in:

1. Raw materials and supplies carried in stock (*)

2. Finished products in stock3. Semi-finished products being

manufactured4. Accounts receivable5. Cash kept on hand for monthly

payment of operating expenses (salaries, wages and raw materials purchases)

6. Accounts payable 7. Taxes payable

Working Capital (WC)

(*) Usually 1-month supplies valued at delivery prices

Types of Capital Cost Estimates

1. Order-of-magnitude estimate (ratio estimate) based on similar previous cost data (+/- 30%)

2. Study estimate (factored estimate) based on knowledge of major items of equipment (+/- 30%)

3. Preliminary estimate (budget authorization estimate or scope estimate) based on sufficient data to permit the estimate to be budgeted (+/- 20%)

4. Definitive estimate (project control estimate) based on almost complete data but before completion of drawing and specifications (+/- 10%)

5. Detailed estimate (contractor’s estimate) based on complete engineering drawings, specifications and site surveys (+/- 5%)

Cost IndexesAn index value for a given time showing the cost at that time relative to a certain base time.

obtained wascost original time at valueindex time present at valueindex cost originalcost Present ×=

Ok if less than 10 years

We can project costs forward by using extrapolated values of an index or an expected inflation rate.

Most common indexes: • Marshall and Swift all-industry• Process-industry equipment indexes• Engineering News-record construction index• Nelson-Farrar refinery construction index• Chemical Engineering plant cost index

Cost Indices

• Marshall & Swift Equipment Cost Indexes– all-industry equipment index - arithmetic average of indexes for

47 different types of industrial, commercial, and housing equipment

– based on an index value of 100 for the year 1926– account for cost of machinery and major equipment plus costs

for installation, fixtures, tools, office, and minor equipment

• Engineering News-Record Construction Cost Index– indicates variance in labor rates and materials costs for industrial

construction– one of three basis’ used: 100 for 1913, 1949 or 1967

• Nelson-Farrar Refinery Construction Cost Index– petroleum industry construction costs– basis - 100 for 1946

Cost IndicesChem. Engr. Plant Cost Index (CEPCI)

• construction costs for chemical plants• equipment, machinery and supports, 61%;

erection and installation labor, 22%; buildings, materials, and labor, 7%; engineering and supervision, 10%

• major components subdivided as: fabricated equipment, 37%; process machinery, 14%; pipe, valves, and fittings, 20%; process instruments and controls, 7%; pumps and compressors, 7%; electrical equipment and materials, 5%; structural supports, insulation and paint, 10%

• basis - 100 for 1957-1959

Cost IndicesChem. Engr. Plant Cost Index (CEPCI)

CAPCOST®

• CAPCOST® is a Microsoft Excelprogram for estimating bare module, total module, and grass roots costs of complex chemical plants.

CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2006

CHEMICAL ENGINEERING

CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2006

Chemical Engineering Plant Cost Index from 1950 to 2005

y = 2E-07x6 - 0.0028x5 + 13.738x4 - 35882x3 + 5E+07x2 - 4E+10x + 1E+13R2 = 0.9933

0

50

100

150

200

250

300

350

400

450

500

1940 1950 1960 1970 1980 1990 2000 2010

468.22005

444.22004

401.72003

395.62002

394.32001

394.12000

390.61999

389.51998

386.51997

381.71996

381.11995

368.11994

359.21993

358.21992

361.31991

357.61990

355.41989

342.51988

323.81987

318.41986

325.31985

322.71984

316.91983

3141982

2971981

261.21980

CEIYEAR

UpdateAug 2006 Final - CHEMICAL ENGINEERING PLANT COST INDEX

351.9Engineering & Supervision475.2Buildings

312.9Construction Labour

637.7Structural Supports & Misc.414.2Electrical Equipment

788.3Pumps and Compressors437.2Process Instruments

731.7Pipe, valves and fittings556.2Process Machinery

560.9Heat Exchangers and Tanks602.3Equipment

Detailed breakdown for Aug 2006 (final)CEPCI510Aug 2006

Other cost indexes for materials and labors for various types of industries are published monthly by the US Bureau of Labor Statistics in the Monthly Labor Reviewhttp://www.bls.gov/opub/mlr/mlrhome.htm

Current Labor Statistics

"Current Labor Statistics" from the print edition of Monthly Labor Review

Pre-formatted data tables

BLS data for use in databases and spreadsheets

"Current Labor Statistics" from the print edition of Monthly Labor Review

The print edition of Monthly Labor Review regularly features 56 tables of current labor statistics. These tables can be downloaded and printed for reference. (PDF 624K).

--------------------------------------------------------------------------------

Employment and Unemployment Tables

Historical Data for the "A" Tables of the Employment Situation Release (Household/CPS data)

Historical Data for the "B" Tables of the Employment Situation Release (Establishment/CES data)

Tables from Employment and Earnings (Household/CPS data)

Annual average data

Monthly data

Quarterly data

Tables from Employment and Earnings (Establishment/CES data)

Monthly data

Occupational Employment and Wage Data

Employment Projections Tables

http://www.bls.gov/opub/mlr/mlrhome.htm

Occupational

Labor force (demographic)

Education and training

Earnings, occupations

Prices and Living Conditions Tables

Consumer Price Index for All Urban Consumers (CPI-U), All Items, Indexes and Annual Percent Changes from 1913 to the present

International Price Indexes—Historical Tables

Consumer Expenditure Survey data

Standard Bulletin (e.g. Age of reference person, Income before taxes)

Cross-tabulated Bulletin (e.g. Age of reference person by income before taxes)

Metropolitan Statistical Areas (MSAs)

All Consumer Units

Compensation and Working Conditions Tables

Employment Cost Index, Historical Listing (TXT) (PDF 500K)

National Compensation Surveys

Productivity Tables

Industry Labor Productivity Data Tables

Industry Multifactor Productivity Data Tables

Foreign Labor Statistics Tables

International Comparisons of Foreign Labor Statistics

International Price Indexes—Historical Tables

Cost Index and Depreciation Schedules

http://www.dor.state.nc.us/publications/cost_archive/99archive/costindex.html

Cost Components 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.

Example 6-1: Make a study estimate of the fixed-capital investment for a process plant if the purchased-equipment cost is $100,000. Use the ranges of process-plant component cost (Table 6-3) for a process plant handling both solids and fluids with a high degree of automatic controls and essential outdoor operation. Do not include land.

Sizes and specifications determined from equipment parameters fixed or calculated along with the material

and energy balances

Purchased EquipmentThe cost of purchased equipment is the basis of several predesign methods for estimating capital investment.

Equipment:

1. Processing equipment

2. Raw materials handling and storage equipment

3. Finished-products handling and storage equipment.

Most accurate method: obtain firm bids from fabricators and suppliers.

Second best: cost values from the file of past purchase orders (must be corrected with the appropriate cost index ratio)

Estimating Equipment Cost by Scaling

Predictions can be made using the six-tenths factor rule

b equipment ofCapacity a equipment ofCapacity

b equipment of Costa equipment of Cost

=

×=

X

X .60

Use only in the absence of other information. Do not use beyond 10-fold range of

capacity

Purchased-equipment prices are usually quoted as f.o.b. (free on board, meaning that the purchaser pays the freight).

Pre-design estimates od delivery allowance: 10% of the purchased-equipment cost is recommended

f.o.b. prices!

Check Example

The six-tenths factor rule

Typical exponents in the six-tenths factor rule

Purchased-Equipment Installation (25-55%!!!)Involves costs for labor, foundations, supports, platforms, construction expenses, etc.

There is wide variations of installation labor cost depending on equipment size.

Instrumentation and Controls8-50 % of the total delivered cost (taking 26%, this is about 5% of the total capital investment).

PipingIncludes labor, valves, fitting, pipe, support, etc.Can run as high as 80% of the total delivered cost (about 20 % of the total fixed capital investment).

Electrical Systems15-30% of the delivered purchased equipment cost (4-8 % of fixed capital investment)Buildings

BuildingsIncluding services, consist of labor, materials and supplies. Plumbing, heating, ventilation are included.

Yard ImprovementsFencing, grading, roads, sidewalks, railroad sidings, landscaping: 10-20% of the delivered purchased equipment cost (2-5 % of fixed capital investment)

Service FacilitiesUtilities for supplying steam, water, power, compressed air and fuel. Also includes shop, first aid, cafeteria...30-80% of the delivered purchased equipment cost (55% on average for plant handling solid/liquids). This is equivalent to 8-20 % - 14% avg - of fixed capital investment)

Health, Safety, and environmental FunctionsSee previous table. This is an increasingly important issue. Pollution mitigation is sometimes the driving force for new process development

LandCost factor per acre as high as 30-50% between a rural district and highly industrialized area. Average land cost for industrial plants amount to 4-8% of the delivered purchased equipment cost (1-2 % of fixed capital investment)By law, land cost cannot be depreciated – not included in the fixed-capital investment.

Engineering and SupervisionConsidered as an indirect capital; cost investment – approx. 30% of the delivered purchased equipment cost (8 % of fixed capital investment)

Legal Expenses1-3 % of fixed capital investment

Construction expensesIndirect cost associated to temporary construction, and operation, construction tools and rentals, home office personnel, construction payroll, travel and living, taxes and insurance, and other construction overhead. 8-10 % of fixed capital investment.

Contractor’s Fee2-8% of direct plant cost or 1.5-6% of fixed capital investment

ContingenciesUnexpected events and changes (storms, floods, strikes, etc.)5-15 % of fixed capital investment (8 % average)

Methods for Estimating Capital Investment

A: Detailed-Item Estimate

B: Unit Cost Estimate

C: Percentage of Delivered-Equipment Cost

D: Lang Factors for Approximation of Capital Investment

E: Power factor Applied to Plant/Capacity ratio

F: Investment cost per unit capacity

G: Turnover ratio

Less detailed information required!Less preparation time!Degree of accuracy decreases!


A: Detailed-Item Estimate

Accuracy of +/- 5%


B: Unit Cost EstimateFor preparing definitive and preliminary estimates, requires detailed

estimates of purchased price (quotation or index-corrected costs and

published data)

10-20% accuracy

( ) FfnddfeHefLMyfxMxfLEEnC

∑ ∑ ∑ ∑++

+++= '

newcapital

investment

delivered purchased-equipment

costdelivered-equipment labor cost

specific material unit cost

specific materialquantity

specific materiallabor unit cost per

employee-hours

laboremployee-hour for the specific material

unit cost for engineering

Engineering employee-hour

unit cost for drawings or

specifications

number of drawings or specifications

Construction / field expense factor (>1)


C: Percentage of Delivered-Equipment CostRequires determination of delivered equipment cost

20-30% accuracy

see next table and textbook spreadsheet

∑ ∑

+++++=

+++++=

nnffffEEfEfEfEfEnC ......

3213211

E is the delivered purchased-equipment cost

fi are multiplying factors for piping, electrical, indirect costs, etc. (average % values presented in next table)

Percentage of Delivered-Equipment Cost (cont’d)

Check Example

Percentage of Delivered-Equipment Cost (cont’d)

9. A second evaluation sheet, 'Year-0 $', also is included. It is the same as sheet 'Evaluation', except that all the inflated $ values are converted to constant, year-0 dollars (as discussed in the text). This method is considered to reflect more realistically the effect of inflation on the profitability measures. The user may change the default inflation rates in order to study their impacts on profitability.

8. The sheet 'Evaluation' uses values from other sheets to calculate the common profitability measures. The user may change defaults, or enter desired values into the sheet. In particular, the user may change the default inflation rates in order to study their effects on profitability. All calculations in 'Evaluation' are made in current (i.e. inflated) dollars. Inflation adjustments are made from the time of the estimates. To make evaluations for periods of less than 10 years, leave unneeded columns blank. For periods greater than 10 years, insert columns as needed and copy from an existing year column into the new columns. Check equations for correct cell references.

7. On the 'Annual TPC' sheet, all values are calculated from information available on other sheets. The user may change defaults or enter preferred values. The calculated annual TPC is transferred to 'Evaluation'.

6. The 'Depreciation' sheet is used only if the user wishes to change the default (5-year MACRS) depreciation method. To make a change, copy the appropriate MACRS row to the 'Annual depreciation" row of sheets 'Evaluation' and 'Year-0 $', or, enter constant annual (straight line) value into depreciation row of those sheets.

5. On the sheet 'Utilities' the quantity of each utility needed annually must be entered in appropriate units. The total annual utilities cost is transferred to sheet 'Annual TPC'.

4. On the sheet 'Materials & Labor' enter the product prices and flowrates, the raw materials prices and flow rates, and the labor requirements and current ENR labor index.

3. On the sheet 'Capital Inv.' enter the estimated current total purchased cost of the process equipment. For the proposed plant type, copy the corresponding "Fraction of calculates and transfers results to appropriate subsequent sheets.

2. Purchased Equipment Costs may be obtained from the file "Equipment Costs,“ the graphs in the text, or otherwise, and entered manually into cell H12 on the Capital Inv.' spreadsheet.

1. The sheets are intended for use in the sequence presented. However, any sheet may be by-passed so long as the information skipped is input manually where needed in subsequent sheets. Default values may be replaced by the user.

The basis for all costs is Jan. 2002.

Cost & Evaluation Workbook accompanying Plant Design and Economics for Chemical Engineers, 5th edition


D: Lang Factors for Approximation of Capital InvestmentTo obtain order-of-magnitude estimates.

Obtained by multiplying the equipment cost by some factor to approximate the fixed or total capital investment.

D: Lang Factors for Approximation of Capital Investment (cont’d)

Greater accuracy if a number of factors are used:

++

+++= AEmfpffEfnC iFI 1'

( )

+

−−= ''' ...log..log

Ef

EeEf v

F 50609920001015406350

( )

+

−−−= ''' ...log..log

Ep

EeEf p 55601560001001402660

The three installation costs defined as follows:

( )

++= '' ..log..log

EtEfm 1941001003303440

E’ is the purchased equipment on an f.o.b basis, fI is the indirect cost factor (1.4), fF is the cost factor for field labor, fp the cost factor for piping materials, fm the cost factor for misellaneous items, Ei the cost of equipment already installed, A the incremental cost of corrosion-resistant alloy materials, e the total heat exchanger cost, fv the total cost of field-fabricatd vessels, p the total pump plus driver cost and t the total cost of tower shells.

Methods for Estimating Capital InvestmentE: Power factor Applied to Plant/Capacity ratio

To obtain order-of-magnitude estimates.

Obtained by relating the fixed-capital investment of a new process plant (Cn) to the fixed-capital investment of similar previously constructed plants (C) by an exponential power ratio (x):

xen R fCC ××=

fe is the cost index at the time of cost Cn to that at the time of C.

( ) IDRfC xn +=

Closer approximation:

f is a lumped cost index factor relative to the original facility cost,

D is the direct cost for previously installed facility

I is the indirect cost for previously installed facility

f is the product of a geographic labor cost index, area labor productivity index, and a material and equipment cost index:

Check Example (2)

Methods for Estimating Capital InvestmentF: Investment cost per unit capacity

Methods for Estimating Capital InvestmentG: Turnover ratio

Turnover ratios range from 0.2 to 4 (rule of thumb for chemical industry: turnover ratio =1)

The reciprocal of this ratio is the so-called capital ratio or the investment ratio.

investment capital-fixedsales annual GrossratioTurnover =

Instructions for file “EQUIPMENT COSTS” accompanying Plant Design and Economics for Chemical Engineers, 5th edition, Peters, Timmerhaus, and West 1. The opening sheet of the file EQUIPMENT COSTS is called CALCULATION PAGE. The column at the left lists equipment types alphabetically. The names used are the same as those on the cost figures in the text. CLICK a name to SELECT an EQUIPMENT TYPE. This brings up a panel in the upper right of the screen.2. The upper right panel shows the text Figure # and title for the source of the cost data plus additional equipment specifications as needed. CLICK to SELECT the APPROPRIATE LINE. This brings up a panel on the lower right.3. In the lower right panel input REQUIRED DESIGN PARAMETERS, as requested. An equipment number is requested, and must be supplied by the user in order for results to be transferred to the EQUIPMENT LIST. CLICK appropriate RADIO BUTTONS, if shown, to select discreet parameters, such as operating pressure and material of construction. When entries are complete, CLICK on CALCULATE. All calculated values are purchased costs unless otherwise noted.4. The lower right panel shows the calculated cost of the item in $. "Add value" TRANSFERS the equipment information to the EQUIPMENT LIST. "Display Results" shows the EQUIPMENT LIST, and "Clear Results" deletes all EQUIPMENT LIST entries. The use of the button "Display CSV" is described below.5. Upon clicking "Display Results," the user will be asked for a date, and then for the value of the Chemical Engineering (CE) Plant Cost Index. The default values are Jan. 2002 and CE index = 390.4 (the basis for the calculated costs). Any appropriate date may be entered; the CE index entered should correspond to that date; the index must be extrapolated for dates beyond the most recently available value. Costs shown on the EQUIPMENT LIST are updated with the index provided. Only one date and CE index may be used per session (the latest entered is applied to all costs).6. At the top of the EQUIPMENT LIST, the user may enter project identification information. In the last column on the right of the EQUIPMENT LIST, the user may insert additional information about the equipment, such as a dimension or design pressure.7. Return to the CALCULATION PAGE and continue, by repeating the foregoing steps, adding equipment until project costing is complete.8. The EQUIPMENT LIST can be PRINTed. WARNING: EQUIPMENT LIST is not saved when the EQUIPMENT COST file is closed.9. The EQUIPMENT LIST can be transferred to a spreadsheet as follows:a. Open a notepad.b. Click "Display CSV." Copy the resulting page and paste it in the notepad.c. Save the notepad file with a '.csv' extension (without quotes) to a convenient location.d. Open a spreadsheet application. The following instructions are for Excel.e. Click 'Data' -> 'Get External Data -> 'Import Text File.'f. Find and select the .csv file saved in step c. Make sure that you see all file types if it doesn't show up.g. Follow the instructions of the wizard. In step 2, check 'Other' and insert '#' (without quotes) into the box next to Other.10. To continue with an economic analysis, the total Purchased Equipment Cost may be manually entered into cell H12 on the "Capital Inv." spreadsheet, or copied from the spreadsheet made in step 9.

Lecture 6

Documents

estimating

previously

projecttotal

sj coj dj

working capital

total capital

employment

fixed capital