Lecture # 5 cost estimation i

Lecture # 5

Cost estimation

Capital and Total Product Cost – part 1

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Dr. A. Alim

ANALYSIS OF COST ESTIMATION

• Capital and Products costs estimation • Depreciation / Depletion • Taxes and EVA • Disposal of assets/capital gain

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Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th

ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes,

McMaster University © 2001-2007.


Capital Costs

• Fixed capital

•Manufacturing (direct)

•Nonmanufacturing (indirect)

• Working capital

Product Costs

• Manufacturing costs

•Variable costs

• Fixed costs

•Overhead costs

• General expenses

•Administrative expenses

•Distribution & Marketing costs

•R&D

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Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed.

McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes,



Analysis of Capital costs

Manufacturing fixed capital ( direct): Investment needed for the installed process equipment with all components needed for complete process operation Nonmanufacturing fixed capital (indirect): Investment needed for components not directly related to the process operation. Working capital: One month raw material and supplies, finished product in stock, cash for payment of startup expenses Typically, working capital is 10-20 % of total capital.

4

Material used in this lecture is sourced from "Plant Design and Economics for Chem.

Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering

Economics 4N04 class notes, McMaster University © 2001-2007.


Breakdown of fixed capital investment items for a chemical process Table 6-1, page 234, Peters, Timmerhaus, and West

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6 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th



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9

Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers",

5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class

notes, McMaster University © 2001-2007.

10

Material used in this lecture is sourced from "Plant Design and Economics

for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and

also from Engineering Economics 4N04 class notes, McMaster University

© 2001-2007.

Major

Item

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McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster

University © 2001-2007.

COST ESTIMATION

Cost Components in Capital Investment

It is most common, and most important to develop as accurate as possible an estimate of purchased equipment cost. All other items can usually be estimated as a ratio of purchased equipment Cost. Often, we can use existing or old data for similar equipment, using the following two factors. Two important factors are: 1) Capacity factor (or scaling factor)…size effect 2) Inflation factor (or cost indexes)…time effect

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Material used in this lecture is sourced from "Plant Design and Economics for

Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also

from Engineering Economics 4N04 class notes, McMaster University © 2001-

2007.

COST ESTIMATION

CAPACITY FACTOR - Converting the historical capital cost data to the current equipment using the power law.

n

B

A

B

A

FACTOR

FACTOR

COST

COST

The “factor” is selected to be a feature of the design that correlates best with the capital cost.

B = known and A = new design

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COST ESTIMATION

CAPACITY FACTOR

n

B

A

B

A

FACTOR

FACTOR

COST

COST

What is the correct factor for a shell and tube heat exchanger?

• Heat duty

• area

• number of tubes

• flow rate

n = ??

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COST ESTIMATION

n

B

A

B

A

FACTOR

FACTOR

COST

COST

What is the correct factor for a shell and tube heat exchanger?

• Heat duty

• area

• number of tubes

• flow rate

n = ??

Area has the dominant effect on manufacturing cost.

Pumps -- m3/s or power

agitators -- power

distillation -- height*diameter

15 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed.



Rough guideline, n = 0.6

COST ESTIMATION

CAPACITY FACTOR - The power n < 1.0 (usually) !

n

B

A

B

A

FACTOR

FACTOR

COST

COST

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COST ESTIMATION




COST ESTIMATION

Purchased Equipment Costs

Extensive graphs of various equipment cost/capacity charts Are found in Peters, Timmerhaus, and West book: Material handling equipment Chapter 12 Reactor equipment Chapter 13 Heat transfer equipment Chapter 14 Separation equipment Chapter 15 Auxiliary, utility, and instrumentation Appendix B

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Material used in this lecture is sourced from "Plant Design and Economics for

Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from

Engineering Economics 4N04 class notes, McMaster University © 2001-2007.

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COST ESTIMATION

INFLATION FACTOR (COST INDEXES) TABLES

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COST ESTIMATION

Values for Selected Indexes

22 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers",



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COST ESTIMATION

Types of Cost Estimates

We must balance the needed accuracy with the cost to perform.

Name Accuracy Application Nature

Order of magnitude estimate -40 to +40% Screen investments Predesign

Study estimate -30 to +30% Finalize major choices Predesign

Preliminary -20 to +20% Budget authorization Predesign

Definitive -10 to +10% Project control Design

Detailed -5 to +5% Contracting Design

As the estimate accuracy is increased, so does the cost of obtaining the estimate

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COST ESTIMATION

This useful table is available in Peters,Timmerhaus, and West and in Perry’s Handbook.

It gives a summary of the type of information needed for each level of estimate.

26 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and

also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.

COST ESTIMATION

CAPITAL COST ESTIMATION

1) Detailed-Item estimate.

2) Unit cost estimate.

3) Percentage of delivered equipment cost estimate.

4) Lang factor method.

5) Power factor estimate.

6) Turnover ratio estimate

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COST ESTIMATION


1) Detailed-Item estimate: Most detailed. Often prepared by contractors. Accuracy is +/- 5 %.

2) Unit cost estimate: Relies on existing data, and uses index-corrected records and published data. Acc. +/- 10%.

3) Percentage of delivered equipment cost estimate: Once delivered equipment cost is determined, all other costs are determined as percentages of that. Acc. +/- 20%.

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COST ESTIMATION

In the previous table (6-9) costs are expressed as percentage of purchased equipment cost. These costs are average values. If in a given situation costs of certain items are defined differently and/or more explicitly, the defined costs should be used.

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31 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed.



COST ESTIMATION


5) Power factor estimate: If C is the fixed capital, then

C (new) = C (old). f. (capacity new/capacity old) x

f is the cost index ratio

x is typically 0.6-0.7

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Short ton = 2000 pounds = 0.9 metric ton

COST ESTIMATION


6) Turnover ratio estimate: TR = (gross annual sales)/(fixed capital)

values of 0.2 to 4.0; usually 1.0 to 1.25 in process industries

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COST ESTIMATION

CAPITAL COST ESTIMATION - Summary

1) Detailed-Item estimate.

2) Unit cost estimate.

3) Percentage of delivered equipment cost estimate.

4) Lang factor method.

5) Power factor estimate.

6) Turnover ratio estimate

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Lecture # 5 cost estimation i