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LECTURE 5
1
PROCESS ECONOMICS
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Economics is ever present inour lives because we earnmoney from our job and wespend money allocated byour personal budget e.g
entertainment, food, houseetc.
In engineering we learn manysubjects of science so as toutilize the phenomena in our
design and operation of
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Economics
Processdesigncourse
Technicalscientific
Physical
chemistry
Environment
al impactcourse
Social
sciencecourse
Sociopolitical
BasicEconomic
course
Business
courseBasicchemicalEnggcourse
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FINANCING THEVENTURE
Most important responsibilitiesof Management
Capital budgeting Planning
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Business Plan
Strategic planning: setting of goals,objectives and broad business plansfor next 5-10 years
Tactical planning: detailing ofstrategic plan for next 2 years
Capital budgeting: request, analysis
and approval of expenditure for thecomin ear
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Business plans
Perceived goals and objective ofcompany
Market data
Capital requirement
Operating expenses
Profitability Projected risk
Project life
Projected share ofmarket
Market priceMarket growthMarkets the companyservesCompetitionProject/product life
Fixed capital
investmentWorking capitalManufacture expenses
Sales expensesGeneral overhead
expenses
Profit after taxesCash flowPayout periodRate of returnReturn on equity/assets
Effect of change inrevenueEffect of change indirect/indirect taxesEffect of cost of capitalEffect of potential
changes in market
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Sources of FUND
Internal Sources:
Retained
earnings Reserves
External Sources:
Debt
Stockholders
equity
Current debtIntermediatedebtLong term
debtPreferred stockCommon stock
Commercial loanCommercial paperBankersacceptanceDeferred paymentcontractRevolving creditTerm loansMortgageDebentureIncomeConvertible bonds
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Engineering EconomicsAnalysis of Chemical
Process
Estimation of capital cost
Estimation of Manufacturingcosts
Engineering Economicanalysis
Profitability analysis
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Process Economics
Role of process economics:
Evaluation of design options
Process optimization
Overall project profitability
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A plant-design project moves to completionthrough a series of stages such as isshown in the following:
1. Inception
2. Preliminary evaluation of economics andmarket
3. Development of data necessary for finaldesign
4. Final economic evaluation
5. Detailed engineering design
6. Procurement
7. Erection
8. Startup and trial runs
9. Production
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Capital cost for new design
Total investment cost can be divided infollowing parts
Battery limit investment
Utility investment
Offsite investment
Engineering fees Working capital
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Estimating purchasedEquipment cost
Effect of capacity on purchased equipment cost
Ca/C
b= (A
a/A
b)n
OR Ca= K (A
a)n
The value of n is mostly around 0.6 and thus the relationship referred to as six-tenths ruleEquipment
TypeRange ofcapacitycorrelation
Units ofcapacity
CostExponent
Compressor 220-3000 kW 0.70
Shell and tubeheat exchanger
5-50 m2 0.44
Vertical tank CS 1-40 m3 0.52
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Graphical Presentation. Equipment cost data arepresented in the literature by Guthrie , Hall et al.,Hall et al., Peters and Timmerhaus, Garrett, and
Page as logarithmic plots of cost as a function ofequipment capacity.
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Problem Statement: Recently a cast iron leafpressure filter with 100 ft2 was purchased forclarifying an inorganic liquid stream for $15,000.
In a similar application, the company will need a450 ft2 cast iron leaf pressure filter. The sizeexponent for this type filter is 0.6. Estimate thepurchased price of the 450 ft2 unit.
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Cost Indexes
Cost data are presented as of a specific date. They are adjusted through theuse of cost indexes that are based upon constant dollars in a base year andactual dollars in a specified year.
The base year selected for each index was a period in which inflationwas flat and the economy stable.
Many cost indexes are published on a regular basis. Some indexes can be usedfor estimating equipment costs while other indexes apply only to labor andmaterials in specialized fields.
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Effect of time purchased capacity
C2= C
1(I
2/I
1)
I = cost index Marshall and Swift Equipment Cost Index
The Chemical Engineering Plant Cost Index
NelsonFarrar Index
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M and S index
Based on two major components, namely, aprocess-industry equipment average and allindustry equipment average. The process-industry equipment average is based upon
selected process industries. The percentages used for this average are
cement, 2; chemicals, 48; clay products, 2;glass, 3; paint, 5; paper, 10; petroleumproducts, 22; and rubber, 8.
Related industries such as electric power, miningand milling, refrigeration, and steam power arealso included.
The M&S Index tracks equipment costs andinstallation labor, thereby reflecting changes in
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The basis for CEPCI
This index is intended for use in escalating processplant construction costs and is designed to reflecttrends in chemical process equipment costs.
Four major components of this index are
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The dominant components, equipment,machinery, and supports consist of the followingsubcomponents:
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NelsonFarrar Indexes
The original indexes were established in 1946with a value of 100 and are heavily weightedtowards the petroleum and petrochemicalindustries. The NF Indexes are based upon the
following components:
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Problem Statement: A stainless steelcentrifuge cost $85,000 in 1990. What is
the cost of that same centrifuge in 2001?Use the CE Index.
Solution:
CE Index in 1990 = 357.6
CE Index in 2001 = 396.8