ECONOMIC DESIGN CRITERIA BASIC ECONOMIC TERMS • Total Capital Investment, TCI or I (Total Capital Investment)=(Fixed Capital Investment)+ (Working Capital) TCI = FCI + WC or: I= IF+IW reduced risk → • Total Fixed Capital Investment, FCI or IF FCI = (Direct Costs) + (Indirect Costs) • Working Capital, WC or IW Cash, raw materials, stock, etc. About 10-20% of TCI. BASIC ECONOMIC TERMS • Product Cost, C C=CI+CQ+CO +CG • Fixed Charges, CI Do not depend on production level (insurance, property taxes, depreciation, rent etc.) • Direct Production Cost, CQ Labor, utilities, raw materials, maintenance, supplies, royalties etc. • Plant Overhead, CO Recreation, employee facilities, packaging etc. • General Expenses, CG Administration, marketing, R&D, distribution. BASIC ECONOMIC TERMS • Income from Sales, S in ($/yr) • Gross Earnings, R in ($/yr) R = S - C •Net Earnings, P in ($/yr) P = R - eIF -(R -d IF) t (Net Profit) = (Gross) - (Depreciation) - (Taxes) • Depreciation rate Recovery of Investment, e Taxation purposes, d Straight line depreciation, e=1/n i Depreciation with capital reinvestment e = ()+ n − (sinking fund method) 1 i 1 BASIC ECONOMIC TERMS Salvage Value Net cash obtainable from the sale of used property (above charges for removal and sale) Scrap value: Salvage value after dismantling a unit. Present Value Book Value : (Total Capital Investment) - (All Depreciation) Market Value : Cash obtainable from selling the unit. Replacement Value : Cost of obtaining the same property. BASIC ECONOMIC TERMS Depreciation Reduction in value due to any causes. Example: Pump Cost : CV= $12,000 Scrap value : VS= $2,000 Depreciation : CV -VS = $10,000 For engineers, depreciation is considered as a cost for using the equipment. DEPRECIATION Types Of Depreciation Physical: Wear and Tear, corrosion, accidents, age deterioration. Functional: All other causes. Obsolescence: Due to technological advances. Depletion: Loss due to materials consumed. Applicable to Natural Resources (timber, mineral, oil deposits) IRS: “A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business including a reasonable allowance for obsolescence” BASIC ECONOMIC TERMS Service Life The IRS has determined various values (See P&T for complete list). Group 1: General Business Assets. (Office furniture, Land, Buildings, etc) Group 2: Non-manufacturing activities: (Agriculture, Fishing, Mining, etc.) Group 3: Manufacturing, e.g. Petroleum Refining: 16 years. Chemicals 11 years. Group 4: Transportation, Communication and Public Utilities: (Electrical, Gas, Motor transport, Radio and TV broadcasting, railroad, etc.) BASIC ECONOMIC TERMS S, Income from sales ID Direct C Costs Product Cost II R Indirect Costs (R-d IF) t I F CF Taxes IW Working Capital D=e IF Depreciation Total Capital Investment, I P, Net Earnings BASIC ECONOMIC TERMS Cumulative Cash Position $ 0 n time COST ESTIMATION Fixed Capital Investment : Cost of equipment and facilities FCI = (Direct Costs) + (Indirect Costs) Direct Costs: 1. Purchased equipment: Columns, Heat Exchangers, pumps, tanks, etc. 2. Equipment Installation 3. Piping (includes insulation) 4. Instruments and Control 5. Electrical Equipment. 6. Buildings: Process, Administration, Maintenance shops, etc. 7. Site Preparation 8. Service Facilities: steam, water, air, fuel, etc. Waste treatment, fire control, offices, etc. 9. Land COST ESTIMATION Indirect Costs: 1. Engineering and Supervision: Administrative and Design. Supervision and Inspection. 2. Construction Expenses 3. Contractor's fee 4. Contingency. 5. Start up expenses Table 1, p. 159 in P&T COST ESTIMATION Types Of Cost Estimates 1. Order of Magnitude estimate. Extrapolate similar plant cost Accuracy: over 30% 2. Study Estimate. Knowledge of major pieces of equipment Accuracy: ± 30% 3. Preliminary Estimate. Enough for budget authorization. Accuracy: ± 20% 4. Definitive Estimate. Based on basic Engineering and quotes from suppliers and contractors. Accuracy: ± 10% 5. Detailed Estimate. Based on Detailed Engineering. Accuracy: ± 5% COST ESTIMATION Cost Indexes index value now Present Cost=(original cost at time t)* index value at time t • Marshall and Swift. 1. All industry-equipment index. Arithmetic average of 47 equipment types. 2. Process-industry equipment index. Weighted average of 8 of these: cement 2% paint 5% chemicals 48% paper 10% clay products 2% petroleum 22% glass 3% rubber 8% M&S was 100 in 1926. Published in “Chemical Engineering”. COST INDEXES • Engineering News-Record Construction Cost index. Steel, lumber, labor, concrete. Published in “Engineering News-record”. ENR value reported based on 100 in 1913, 1949 or 1967. • Nelson-Farrar Refinery Construction Cost index. Skilled and common labor, iron and steel, building materials, miscellaneous equipment. Published in “Oil and Gas Journal”. N-R value of 100 in 1946. • Chemical Engineering Plant Cost Index. Chemical Plants. Equipment, machinery, Engineering and supports 61% supervision 10% Installation labor 22% Buildings, material, labor 7% Published in “Chemical Engineering”. PCI value of 100 in 1957-59. Methods For Estimating Capital Investment 1. Detailed-Item Estimate. All items in the direct and indirect cost are evaluated with as much detail as possible. All specs are known. (± 5% accuracy, contractor’s estimate) 2. Unit-Cost Estimate. Prices from quotations or index-corrected records. =[ ()+ + ()+ + + ] C ∑∑E EL fxMx fyML ∑∑feHe fddn fF See p. 181 in P&T. (10-20% accuracy, definitive or preliminary estimate) Methods For Estimating Capital Investment 3. Percentage of Delivered-Equipment Cost. All items in the direct and indirect cost are evaluated as a percentage of the delivered-equipment cost. (definitive estimate in certain cases, ± 10% ) =[ + ()+ + +l] C ∑∑E f1E f2E f3E fI See Table 17, p. 183 in P&T. 4. Estimation based on “Lang” factors . Named after Lang (1947). The Fixed Capital Investment is found by multiplying equipment cost by a factor (see Table 18, p. 184 in P&T) (± 30% accuracy, order of magnitude estimate) Methods For Estimating Capital Investment 4. Estimation based on “Lang” factors . =[ ( + + + )+ + ] C E1 fF fp fm Ei A fI fF: cost factor for field labor fp: cost factor for piping materials fm: cost factor for miscellaneous (insulation, foundations etc.) fI: indirect cost factor Ei: cost of already installed equipment A: incremental cost for corrosion resistant materials Methods For Estimating Capital Investment 5. Power factor applied to plant-capacity . Order of magnitude estimates based on the fixed capital investment for a similar plant. = ()x C Cold R x: between 0.6 and 0.7 R: Capacity ratio, (new facility)/(old facility) If the direct, D, and indirect, I, costs are known, then: C=[D()R x +I] f Methods For Estimating Capital Investment 5. Power factor applied to plant-capacity . The factor f is a composite of the geographical labor cost index, the area productivity index and a material and equipment index. Example: Plant in Dallas: $100,000 cost What is the cost for a similar plant in Los Angeles? SW labor rate=0.88 PC labor rate=1.22 SW productivity=1.04 PC productivity=0.89 (Tab. 20) Relative Labor=(PC/SW)=1.22/0.88/=1.3864 Relative Productivity=(PC/SW)=0.89/1.04=0.8558 PC SW = =1.62*100000=162,000 f SWCost SWCost SWlabor PCproduc Methods For Estimating Capital Investment 6. Turnover ratios. Very rapid and very crude estimation. Can be off by 100% or more. Turnover Ratio=(gross annual sales)/FCI It can be anywhere between 0.2 and 5. Assumption for CPI (Chemical Process Industry): TR=1 Fixed Capital Investment Cost Table 4 Table 17 Table 26 Fluid Direct Costs Processing Onsite Plant Purchased Equipment E E Installation 6-14% IF 47 % E 22-55 % E Instrumentation 2-8% IF 18 % E 6-30 % E Piping 3-20% IF 66 % E 10-80 % E Electrical 2-10% IF 11 % E 10-40 % E Offsite Buildings 3-18% IF 18 % E 10-70 % E Yard Improvement 2-5% IF 10 % E Included in Service Facilities Service Facilities 8-20% IF 70 % E 40-100 % E Land 1-2% IF 6 % E 1-2 % IF (or 4-8 %E) Fixed Capital Investment Cost Table 4 Table 17 Table 26 Fluid Indirect Costs Processing Plant Engineering 4-21% IF 33 % E 5-30% D Construction 4-16 % IF 41% E Included in Contractor’s fee Contractor’s Fee 2-6 % IF 5 % 6-30 % D (direct+eng +const) Contingency 5-15% IF 10 % 5-15% IF (direct+eng +const) Working Capital 10-20% IF 15 % TCI 10-20% TCI BASIC ECONOMIC TERMS Must Be Done Projects: A MUST BE DONE Project is a project that has no specific revenue or savings identified. Examples •Replacement of obsolete equipment •Waste treatment/ Pollution Prevention units mandated by law. •Safety improvement. How do we calculate a Total Annualized Cost for these type of Projects? Easy!! TAC= AFC + OC TAC : Total Annualized Cost AFC :Annualized Fixed Cost OC : Operating Costs BASIC ECONOMIC TERMS Must Be Done Projects: CONCEPT: You borrow the Fixed Capital Investment. The annual payments need to recover the FCI. • Straight line depreciation: AFC=FCI/n where n is the number of service years expected. • Sinking fund method: Need to recover S=FCI*(1+i)n AFC is similar to an annuity payment i (1+ i)n i AFC = S = FCI (1+ i)n −1 (1+ i)n −1 BASIC ECONOMIC TERMS Must Be Done Projects • Sinking fund method: (1+ i)n i Thus TAC = FCI + OC (1+ i)n −1 YOU WILL NEED THIS FOR DESIGN LAB. BASIC ECONOMIC TERMS • Interest - Return on Investment, ROI • Simple Interest: I=P * i * n I : Total interest paid P : Principal or Capital Borrowed i : Interest rate for one period of time n : Number of periods. Repayment is S = P + I = P * (1 + i * n) Usually : 1 period = 1 year . For less than 1 year we have: Ordinary Simple Interest = P* i * d/360 Exact Simple Interest = P* i * d/365 BASIC ECONOMIC TERMS - ROI • Compound Interest: At the end of each interest period the interest is added to the principal.