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Introduction

Economics is ever present in our lives because we earn money from our jobs and

we spend money allocated by our personal budgets for housing, clothing,

transportation, entertainment, etc. We spend money for these items based upon

the perceived economic utility. Further, economics is the engine that drivesindustry.

Chemical engineering students in their formal education devote most of

their efforts to the study of science and technology, including courses in

chemistry, physics, mathematics, thermodynamics, kinetics, transport theory,

unit operations, and design. The student learns how to utilize various physical

phenomena in the design and operation of chemical plants. To function in

industry today, the chemical engineer must understand and be able to apply more

than just science and technology. Unlike many of the subjects studied in the

chemical engineering curriculum, economics is not a science. In fact, it is more

art than science but there are certain definitions, techniques, and principles that

must be understood to use economics in a correct manner. The engineer must

apply this entire body of knowledge to accomplish something of benefit to

society.

Chemical engineering students in accredited programs take courses such as

those shown in Figure 1.1, beginning in the lower right-hand corner of the

triangular diagram with the technical/scientific courses [1]. As the student

progresses in the program, basic chemical engineering courses cited in the

previous paragraph are studied, culminating in the capstone process design

course. Engineering students take at least one engineering economics course

besides the classical economics course in business schools. Students may wish to

TM Copyright 2003 by Marcel Dekker, Inc. All Rights Reserved.

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take other business courses such as accounting and finance to increase their

knowledge of business. Of particular importance today are the humanities

courses with special emphasis on the sociopolitical issues that form a basis for

understanding political, environmental, health, and safety issues. These courses

are important and give insights to chemical engineering students, helping them to

appreciate the economic constraints affecting the application of technology that

management encounters in making decisions about future projects.

Chemical engineers in the performance of their jobs will employ

economics in the preparation of capital cost estimates, operating expense

estimates, profitability analyses including the time value of money, feasibility

studies, and to perform sensitivity and uncertainty analyses considering many

alternatives. To move up the management ladder, they must have a working

knowledge of balance sheets, income statements, and financial analyses of a

corporate venture. This fundamental information in annual reports is covered in

this text.

In the development of an industrial project, economics plays a significant

role at various stages as the project progresses. Initially, an idea or need for the

manufacture of a product may originate from customers, marketing, or research

personnel. The development of the project is a team effort involving research anddevelopment, marketing, manufacturing, engineering, and management.

Research and development and engineering personnel will evaluate the idea

with thermodynamic and kinetic appraisals of the proposed process to determine

if the product can be made in reasonable quantities and rates. Small amounts of

the product may be made for customers to evaluate the product. If the product

FIGURE 1.1 Decisive factors and university courses.


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seems promising, crude estimates of the capital required and the operating

expenses may be made. If on the other hand, this process is not feasible at this

stage, it may be abandoned or alternate processes may be considered. As the

number of technical alternatives are developed, economic issues become

dominant. Some of these may be the availability and prices of equipment, sources

of raw materials, plant size, etc. to determine which alternative is most efficient inthe utilization of resources. Lets assume that the original idea seemed to be

promising. A preliminary economic study of capital costs, operating expenses,

and profitability will be prepared. Simultaneously, marketing personnel will

conduct a domestic and global market survey to determine potential sales

volume. The results are reported to management and if they are promising, large-

scale laboratory or pilot plant studies are performed to obtain the required process

engineering data for the proposed plant. Marketing needs to be involved at every

stage in the development of the project, so further marketing information

including potential price structure, competition, and share of the market is

gathered. Again, if the results are not favorable, the project may be abandoned or

recycled back to a previous step for further study. If the project appears to be

feasible, then more detailed process engineering data, capital costs, operating

expenses and market data are obtained to prepare a request for an appropriation to

do definitive or detailed engineering. Once the appropriation meeting the criteria

for a capital expenditure has been approved, the detailed engineering begins.

Again there is the possibility that the economics may not be attractive and the

project may be curtailed or recycled back to a previous step. It is apparent from

the above project description that the overall procedure is an iterative one.

In todays economy many companies outsource the detailed engineering to

consulting-design-engineering firms who have the dedicated staffs to perform

these tasks, as many chemical companies do not have large numbers of personnel

required due to downsizing. It should be pointed out that engineers continually

monitor costs and economics at every stage of a project, including detailed

design, construction, and startup of the facility. Once the unit comes on stream

and the plant has been turned over to operating personnel for routine operation,

economics are very important since the company is now committed to the

process. The final step may be to fine-tune the process by making necessary

process and plant improvements as more is learned during initial production.

At the initial stages of a project, there is a tendency to be optimistic about

markets, product prices, capital costs, operating expenses, cash flow, and

profitability. As the project proceeds through the various stages of development,the costs tend to escalate and the returns diminish. Of approximately, 100 project

ideas, perhaps 2 of them may become operating plants.

Figure 1.2 depicts a typical career path irrespective of whether it is with one

or several companies. A chemical engineer in the early years of a career is

primarily concerned with the technical aspects of an assignment, but economics


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quickly enters the picture. As a person enters the first level of management, 0 10

years, he or she is confronted with unfamiliar terminology used by corporate

executives. A companys set of jargon is often foreign to a new employee. These

new terms are confusing to a person whose experience has been in the

engineering or scientific realm. As the young engineer advances up the corporate

ladder, in perhaps 510 years, economics and financial matters play a significant

role in his or her career. Further, the young engineer soon realizes the importance

of marketing information and how that information may alter an investment

decision. The chemical engineer in performance of the job will employ

economics in the preparation of capital cost and operating expense estimates,

profitability analyses including the time value of money, feasibility studies, and

perhaps simple optimization studies. Further, there will be a need to understand

balance sheets and income statements. The engineer, after 1020 years, may

move up to an upper-level managerial position in which the main requirements

will necessitate the handling of personnel, economic, and sociopolitical issues.

To learn the economics and financial terminology is not difficult, but the effective

application of the information contained in this text takes time and experience.

Economics underlies decisions in all these areas.

The chemical professional needs to master certain skills for a sucessfulmanagement career. This person should be able to read, analyze, perform, and

comprehend financial reports to understand how management views a rational

basis for decisions [2]. In addition to the classical approach to profitability, the

new economy approach and terminology, e.g., value added (VA), economic value

added (EVA), and market value added (MVA), are presented.

FIGURE 1.2 A typical career path.


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The fundamentals of process engineering economics are the focus of the

material in this text. The book was written with the senior-level undergraduate

student in mind and the contents are based upon pragmatic application of

economics. The text also may be useful to the experienced engineer who needs a

review or as a continuing education course text.

REFERENCES

1. JR Couper, OT Beasley, WR Penney. The Chemical Process Industries

Infrastructure: Function and Economics. New York: Marcel Dekker, 2001.

2. JR Couper, WH Rader. Applied Finance and Economic Analysis for Scientists and

Engineers, New York: Van Nostrand Reinhold, 1986.

TM Copyright 2003 by Marcel Dekker Inc All Rights Reserved

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