10/21/99 Engineering Economics 3 1
ENGINEERING ECONOMICS III
ESTIMATING THE PROFITABILITY
OF A CHEMICAL PLANT
t Estimating Investment
t Estimating Cost of Production
t Profitability Evaluation
eReturn on Investment (ROI)
ePayout time (Tpay)
eDCF Rate of Return (DCFROR)
eTransfer Price
10/21/99 Engineering Economics 3 2
INVESTMENT ESTIMATION
t Total Investment =
Fixed Capital + Working Capital + Start-Up
Tinv = Fcap + Wcap + Stup
t Rules of Thumb
Wcap ~ 0.15 Tinv
Stup ~ 0.1 Fcap (Established [nth] Plant)
~ 0.5 Fcap (First-of-a-King [Pioneer] Plant)
So,Tinv = Fcap + 0.1 Fcap + 0.15 Tinv
= 1.3 Fcap (nth Plant)
= 1.8 Fcap (Pioneer Plant)
10/21/99 Engineering Economics 3 3
FIXED CAPITAL ESTIMATION I
t Fixed Capital = Direct Cost + Indirect Cost
t Direct Cost = Onsite + Offsite
e Onsite - Cost of plant facilities shown on flowsheet
aka ISBL (Inside Battery Limits)
e Offsite - Cost of supporting facilities (boiler house,waste
treatment facilities,shop,lab,offices,etc.)
aka OSBL (Outside Battery Limits)
t Rule of Thumb
Offsite ~ 0.45 Onsite (higher for grassroots plant,lower for
established manufacturing complex with excess facilities)
10/21/99 Engineering Economics 3 4
FIXED CAPITAL ESTIMATION II
t Direct Cost = 1.45 Onsite
t Indirect Cost = Owner’s Cost + Contingency
e Owner’s Cost - engineering,supervision,construction expenses
Rule of Thumb,Owner’s Cost = 0.05 (Onsite + Offsite)
eContingency - Allowance for overlooked items and other un-
anticipated expenses
Rule of Thumb,Contingency = 0.20(Onsite + Offsite)
t So,Fcap = (1.45)(1.25) Onsite = 1.8 Onsite
t And,Tinv = (1.3)(1.8) Onsite = 2.36 Onsite
10/21/99 Engineering Economics 3 5
ESTIMATION OF EQUIPMENT COSTS
t Onsite = Cost of Equipment Purchase and Installation
t Types of Estimates
e Definitive,Required for capital commitment (+/- 5%)
X Based on detailed design
XUse vendor quotes,detailed bill of materials,etc.
e Factored,Required for process commitment (+/- 15%)
X Based on detailed equipment design and purchased cost
pricing
X Based on factored installation costs
e Conceptual,Used to guide process development (+/- 30%)
X Based on correlations (Guthrie) for installed cost
10/21/99 Engineering Economics 3 6
INSTALLATION COST FACTORS
t Piping Fabrication and Installation (30 - 40% of Fcap)
t Foundations (for equipment)
t Structural (for equipment support)
t Insulation and Painting
t Electrical (for motors and heaters)
t Instrumentation and control systems
10/21/99 Engineering Economics 3 7
ESTIMATION OF INSTALLED COSTS I
t Method,Cost correlations based on dominant
equipment size parameters
e Heat exchangers - heat transfer area A
e Pressure vessels - diameter D and height H
eCompressors - boiler horsepower (BHP)
t Base Case:
eCarbon steel materials of construction
eLow pressure (< 150 PSI in general)
e Standard design type
X Heat exchangers - floating head
X Pressure vessels - vertical fabrication
10/21/99 Engineering Economics 3 8
ESTIMATION OF INSTALLED COSTS II
t Base Case Adjustment Factors
e Fm - materials of construction
e Fp - pressure
e Fd - design
t Adjustment for Inflation
e Marshall & Swift Construction Cost Index
e M&S = 280 for 1969 (Guthrie’s cost basis)
e M&S = 1100 for 1997 (per Chemical Engineering)
t Ratio of Installed Cost to Purchased Cost
Installed Cost ~ 3.2 x Purchased Cost for base case conditions
t Accuracy,(See accuracy bounds [dashed lines] in Douglas)
10/21/99 Engineering Economics 3 9
EXAMPLE
t Heat Exchanger (A = 2,000 ft2)
e Stainless steel tubes,carbon steel shell (Fm = 2.81)
e Pressure = 250 PSI (Fp = 0.1)
eKettle reboiler design (Fd = 1.35)
Fc = (Fd + Fp)Fm = (1.45)(2.81) = 4.07
t Purchased Cost (1997 $)
Purchased Cost = (M&S/280)101.3 A0.65 Fc
= (1100/280)(101.3)(20000.65)(4.07) = $227,000
t Installed Cost
Installed Cost = (2.29+Fc)/Fc x Purchased Cost
= (2.29 + 4.07)/4.07 x 227,000 = $348,000
10/21/99 Engineering Economics 3 10
TRANSFER PRICE (Tp)
t Definition
Tp = [COP + CCF (Tinv)]/Capacity
Gives a product cost in $/lb
t Useful measure of competitiveness of single-product
processes
eCompare with current and projected future product price
eTransfer price should be less than product price
e Used by SRI for comparing competing technologies
t Example
Plant capacity,200 MM lb/yr COP = $50 MM/yr ($025/lb)
CCF = 0.333 Tinv = $50 MM
Tp = [50 + 16.65]/200 = $0.333 /lb