1. No category

2015‐03‐20
PLANT DESIGN AND
ECONOMICS
(3)
Zahra Maghsoud
Net profit after taxes, insurance
‫ﺳﻮد ﺧﺎﻟﺺ ﭘﺲ از ﻛﺴﺮ ﻣﺎﻟﻴﺎت و ﺑﻴﻤﻪ‬
Gross profit after depreciation
‫ﺳﻮد ﻧﺎﺧﺎﻟﺺ ﭘﺲ از ﻛﺴﺮ اﺳﺘﻬﻼك‬
Depreciation
‫اﺳﺘﻬﻼك‬
Gross profit
‫ﺳﻮد ﻧﺎﺧﺎﻟﺺ‬
Revenues
‫درآﻣﺪ ﺣﺎﺻﻞ از ﻓﺮوش‬
‫آ‬
Other
investments
‫ﻫﺰﻳﻨﻪ ﻫﺎي دﻳﮕﺮ‬
Bonds and other capital input
‫ﺟﻤﻊ آوري ﺳﺮﻣﺎﻳﻪ از ﻃﺮﻳﻖ ﻋﻘﺪ‬
‫ﭘﻴﺶ ﻓﺮوش ﻣﺤﺼﻮﻻت‬2‫ﻗﺮارداد و‬
Working capital
‫ﺳﺮﻣﺎﻳﻪ در ﮔﺮدش‬
Fixed capital
‫ﺳﺮﻣﺎﻳﻪ ﺛﺎﺑﺖ‬
Capital source
‫ﺻﻨﺪوق ﭘﻮل ﺳﺮﻣﺎﻳﻪ ﮔﺬار‬
Stock
‫ﻓﺮوش ﺳﻬﺎم‬
Total capita
al
‫ﺳﺮﻣﺎﻳﻪ ﻛﻠﻲ‬
‫ﺳ‬
Repayment of
borrowed capital
‫ﺑﺎزﭘﺮداﺧﺖ وام‬
Total product cost
‫ل‬
‫ﻣﺤﺼﻮل‬
‫ﺗﻮﻟﻴﺪ‬
‫ﻫﺰﻳﻨﻪ ﺗ ﻟ‬
‫ﺰ ﻨﻪ‬
Process operation
‫ﺗﻮﻟﻴﺪ ﻣﺤﺼﻮل‬
Net cash flow
‫ﺟﺮﻳﺎن ﭘﻮل ﻧﻘﺪ‬
Cash flow for industrial
operations
‫ﺟﺮﻳﺎن ﭘﻮل در ﺳﺮﻣﺎﻳﻪ‬
‫ﮔﺬاري ﺻﻨﻌﺘﻲ‬
Stockholders'
dividends
‫ﺳﻮد ﺳﻬﺎﻣﺪاران‬
Loans
‫وام‬
1
2015‐03‐20
FACTORS AFFECTING INVESTMENT AND
PRODUCTION COSTS
3
Sources of Equipment

In many cases standard types of tanks reactors or other
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. 
If new equipment must be bought, several independent quotations should be obtained from different manufacturers.

When the specifications are given to the manufacturers, the chances for a low cost estimate are increased if the engineer does not place overly strict limitations on the design.
FACTORS AFFECTING INVESTMENT AND
PRODUCTION COSTS
4
2. Price Fluctuations

In our modern economic society,
society prices may vary widely from one
period to another, and this factor must be considered when the
costs for an industrial process are determined.

It would obviously be ridiculous to assume that plant operators or
supervisors could be hired today at the same wage rate as in 1995.
2
2015‐03‐20
FACTORS AFFECTING INVESTMENT AND
PRODUCTION COSTS
5
3. Company Policies

Policies of individual companies have a direct effect on costs For
Policies of individual companies have a direct effect on costs. For example, some concerns have particularly strict safety regulations and these must be met in every detail.

Accounting procedures and methods for determining depreciation costs vary among different companies. 
The company policies with reference to labor unions should be considered, because these will affect overtime labor charges and the type of work the operators or other employees can do.
FACTORS AFFECTING INVESTMENT AND
PRODUCTION COSTS
6
4. Operating Time and Rate of Production

The fixed costs remain constant and the total product cost increases as the rate of production increases.

The point where the total product cost equals the total income is known as the break‐even point. 3
2015‐03‐20
FACTORS AFFECTING INVESTMENT AND
PRODUCTION COSTS
7

An ideal production rate for this chemical processing plant would be approximately 450,000 kg/month, because this represents the point of maximum net earnings.

By considering sales demand along with the capacity and operating characteristics of the equipment, the engineer can recommend the production rate and operating schedules that will give the best economic results.
FACTORS AFFECTING INVESTMENT AND
PRODUCTION COSTS
8
5. Governmental Policies

the chemical engineer should understand the effects of the
chemical engineer should understand the effects of
governmental regulations on costs. 
Each company has its own methods for meeting these regulations, but changes in the laws and alterations in the national and company economic situation require constant surveillance if p
optimum cost conditions are to be maintained.
4
2015‐03‐20
Total capital investment (TCI)
Fixed capital(FCI)
Di t costs
Direct
t
onsite(ISBL)
Working capital (WC)
I di t costs
Indirect
t
offsite(OSBL)
•Raw materials
•Finished products
•Salaries& wages
•Raw-material purchases
•Taxes payable
•land
•Buildings
•Yard improvement and
service facilities
•Purchased equipment
•Purchased equipment installation
•Instrumentation & control
•Piping
•Electrical equipment & material
•Engineering& supervision
•Construction expenses and
contractor’s fee
•Legal expenses
9
Project cost & influence of design decisions 10

As a project proceeds from initial concept through detailed design to start up:

costs begin to be accumulated, particularly once procurement and construction get underway

the ability of the design engineer to influence project cost decreases 5
2015‐03‐20
Accuracy of cost estimation
11

The accuracy of an estimate depends on:



The amount of design detail available.
g
The accuracy of the cost data available.
The time spent on preparing the estimate.

In the early stages of a project, only an approximate estimate will be required, and justified, by the amount of information available.

The Association for the Advancement of Cost Estimating International (AACE International) is the professional association representing the cost engineering profession in the United States. Accuracy of cost estimation
12

AACE International classifies capital cost estimates into five types according to their accuracy and purpose:
according to their accuracy and purpose:
1.
Order of magnitude
2.
Preliminary
3.
Definitive
4.
Detailed
5.
Check estimates
±30‐50 %
±30 %
±10‐15 %
±5 10 %
±5‐10 %
±5‐10 %
6
2015‐03‐20
Accuracy of cost estimation
13

1.Order of magnitude estimates (‘‘ballpark estimate,’’ ‘‘guesstimate,’’ ‘‘Class 5 estimate’’), accuracy typically ± 30–50%, usually based on the costs of similar processes and requiring essentially no design information. These are used in initial feasibility studies and for screening purposes.

2.Preliminary (‘‘approximate,’’ ‘‘study,’’ ‘‘feasibility,’’ ‘‘Class 4’’) estimates, accuracy typically ± 30%, which are used to make coarse choices between design alternatives. They are based on limited cost data and design detail.
Accuracy of cost estimation
14

3.Definitive (‘‘authorization,’’ ‘‘budgeting,’’ ‘‘control,’’ ‘‘Class 3’’) estimates, accuracy typically ± 10–15%. These are used for the authorization of funds to proceed with the design to the point where an accurate and more detailed estimate can be made. 
In a contracting organization this type of estimate could be used with a large contingency factor to obtain a price for tendering especially with experience, and where a company has cost data available from similar
experience, and where a company has cost data available from similar projects. Normally, however, an accuracy of about ± 5% would be needed and a more detailed estimate would be made, if time permitted. 7
2015‐03‐20
Accuracy of cost estimation
15



4.Detailed estimates (‘‘quotation,’’ ‘‘tender,’’ ‘‘firm estimate,’’ ‘‘contractor’s estimate,’’ ‘‘Class 2 estimate’’), accuracy ± 5–10%, which are used for project cost control and estimates for fixed price contracts. These are based on the completed (or near complete) process design, firm quotes for equipment, and a detailed breakdown and estimation of the construction cost. By this stage the contractor can usually present a list of all the items that must be purchased and can make a firm commitment to the client.
5.Check estimates (‘‘tender,’’ ‘‘as‐bid,’’ ‘‘Class 1 estimate’’), accuracy ± 5–10%. This is based on a completed design and concluded negotiations on procurement of specialized items and long lead‐time items.
ESTIMATING INFORMATION GUIDE
16
Plant Design and Economics for
Chemical Engineers, M. S. Peters and
K. D. Timmerhaus, Ch 6, page 161
8
2015‐03‐20
The cost of making a cost estimate 17
Improving a cost estimate is itself a cost!
Cost Index
18

The prices of the materials of construction and the costs of labor j
are subject to inflation. 
Cost indices relate present costs to past costs, and are based on data for labor, material, and energy costs. 
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
showing the cost at that time relative to a certain base time.
9
2015‐03‐20
Cost Index
19

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.
Cost Index
20

To get the best estimate, each job should be broken down into its p
p
indices should be used for labor and components, and separate
materials. 
It is often more convenient to use the composite indices published for various industries in the trade journals These are weighted
for various industries in the trade journals. These are weighted average indices combining the various components of costs.
10
2015‐03‐20
Different types of cost indices
21

Journal of Chemical Engineering 

“The
The Chemical Engineering Plant Cost Index (CEPCI)
Chemical Engineering Plant Cost Index (CEPCI)” or or “CE”
CE “Marshall and Swift index” or “(M&S equipment cost index)”

Oil and Gas Journal
 “Nelson‐Farrer Refinery Construction Index” or “NF index”

Journal of Engineering News Record
 Construction cost index

Journal of Process Engineering
Journal
of Process Engineering
 Monthly cost indices
The Chemical Engineering Plant Cost Index (CEPCI or CE)
22



The four major components of this index are weighted by percentage in the following manner:  equipment, machinery, and supports: 61
equipment machinery and supports: 61
 erection and installation labor: 22
 buildings, materials, and labor: 7  engineering and supervision: 10 The major component, equipment:  fabricated equipment: 37  process machinery: 14
 pipe, valves, and fittings; 20  process instrument and controls; 7  Pumps and compressors: 7  electrical equipment an materials: 5  Structural supports, insulation, and paint: 10
All are based on 100=1959‐1957
11
2015‐03‐20
The Chemical Engineering Plant Cost Index (CEPCI)
23
http://www.che.com
24

Example 1: A centrifuge cost $95,000 in 1998. What is the cost of the same centrifuge in third quarter of 2004? Use the CE index.
g
q
12
2015‐03‐20
Marshall and Swift cost index
25

The Marshall and Swift (formerly known as Marshall and Stevens) q p
is found in each issue of the magazine Chemical g
equipment index
Engineering and is normally divided into two categories:



The all‐industry equipment index
The process‐industry equipment index
The Marshall and Swift indexes are based on an index value of 100 for the year 1926. These indexes take into consideration the cost of machinery and major equipment plus costs for installation, fixtures, tools, office furniture, and other minor equipment.
Nelson‐Farrer Refinery Construction Index
26

For oil refinery and petrochemicals projects, the Oil and Gas Journal publishes the Nelson‐Farrer
R fi
Refinery Construction Index (NF index). C t ti I d (NF i d )
http://www.ogj.com

The Nelson‐Farrer index is on a U.S. Gulf Coast basis rather than U.S. average and is more reliable than the CE index for the types of equipment used in hydrocarbon processing.

base year 1946 =100
U.S. Gulf Coast
The discovery of oil and gas deposits along
the coast and offshore, combined with easy
access to shipping, have made the Gulf
Coast the heart of the U.S. petrochemical
industry. The coast contains nearly 4,000 oil
platforms.
13
2015‐03‐20
Construction cost index
27

The journal of Engineering News Record publishes a monthly construction cost index. 
This is based on civil engineering projects. This index has been published since 1904 and is the oldest of all the indices.

For international projects, the journal of Process Engineering publishes monthly cost indices for several countries, including the United States, United Kingdom Japan Australia and many of the EU countries
United Kingdom, Japan, Australia, and many of the EU countries.
Use of cost indices
28

The Chemical Engineering Plant Cost Index is based on four major p
g
components, which are weighted as follows:





equipment, machinery, and supports: 61
erection and installation labor: 22
buildings, materials, and labor: 7 engineering and supervision: 10 Anyone who feels this index does not best represent his situation can make up his own index by weighing the components and/or subcomponents differently.
14
2015‐03‐20
Use of cost indices
29
Example 2
 In June, 1969, the indexes for the major components in the Chemical In June, 1969, the indexes for the major components in the Chemical
Engineering Plant Design Index were:





equipment, machinery, and supports: 115.9
erection and installation labor: 127.0
buildings, materials, and labor: 121.5 engineering and supervision: 109.8
Suppose the proposed plant costs consisted mainly of warehouses and construction labor. Assume the ratios are as follows




equipment, machinery, and supports: 35
erection and installation labor: 35
buildings, materials, and labor: 20 engineering and supervision: 10
C.I.=120.3
CE cost index (C.I.)
equipment, machinery, and supports: 61
 erection and installation labor: 22
 buildings, materials, and labor: 7  engineering and supervision: 10 C.I.=118.2
Use of cost indices
30

All cost indices should be used with caution and judgment. The g
p
longer the period over which the correlation is made, the more unreliable the estimate. 
Between 1970 and 1990, prices rose dramatically. Prices then grew at a more or less steady 2 to 3% per year until 2003, when high demand for fuels projects and high energy prices caused another period of steeper price inflation. 15
2015‐03‐20
Use of cost indices
31

The same are data plotted relative to the 1990 value of each index.

The NF index starts to accelerate ahead of the M&S and CE indices as fuels sector activity led price inflation from 2000 onward.

For use with chemical‐plant investment estimates, the Marshall and Swift equipment cost indexes and the Chemical Engineering plant cost indexes are recommended. 
The Nelson‐Farrar refinery construction index has shown a very large increase with time and should be used with caution and only for refinery construction.
16