cost

• Chemical & Biological Engineering


  Course title
• Costing and Economic Evaluation


  Course topic
• Economic evaluation


  • Key skill for chemical engineer
  • Concepts are equally relevant to new process design or replacing a control valve
• Purpose of economic evaluation


  Give information required to enable senior management to make a decision about whether to go ahead with the project
• Information provided in economic evaluation


  • Capital costing - what is required for start up
  • Project evaluation - how long to break even and total return
• Learning objectives


  • Estimation of project profitability
  • Costing of plant in 2nd year design week/Assignment 2b
  • Costing of plant in 3rd year design project
• Resources


  • Sinnott & Towler, 2009, Chemical Engineering Design, Butterworth Heiniemann
  • Smith, 2016, Chemical Process Design and Integration, 2nd Edition, Wiley
  • Aries, Chemical Engineering Cost Estimation
  • Gerrard, Guide to Capital Cost Estimating
  • Chemical Engineering - Journal

  
• Outline


  • Definition of fixed and working capital
  • Estimation of capital costs: plant indices (exponential method)
  • Estimation of capital costs: based on costs from the past
  • Estimation of capital costs: factorial method
  • Project cash flow diagram
  • Project evaluation: rate of return on investment (RORI)
  • Project evaluation: discounted cash flow (DCF) (NFW, NPV)
  • Project evaluation: discounted cash flow rate of return (DCFR)
  • Project evaluation: depreciation

  
• Sales price


  Determined by market/regulation
• Production costs


  • Capital costs
  • Operating costs
• Trade-off in design


  • Pipe size - smaller diameter pipe is cheaper but pumping cost higher
  • Heat exchanger - pressure drop vs size (cost) - high internal velocities and transfer rates gives small exchanger with high pressure drop, low velocities gives large exchanger and lower pressure drop
• Capital cost includes


  • Design
  • Project management
  • Planning permission
  • Equipment
  • Installation and commissioning
  • Process licence
• Operating costs


  • Fixed costs independent of throughput: Labour costs, Local taxes, Insurance, Overheads (direct: site facilities, indirect: corporate headquarters, R&D), Process royalty
  • Variable costs depend on production rate: Feed materials, Utilities, Packaging, Waste disposal, By products
• Fixed capital


  Total cost of the plant ready for start up - cost paid to the contractors
• Working capital


  Additional investment needed to start the plant and operate until income is earned
• Most of working capital is recovered at the end of the project
• Total investment required is sum of fixed and working capital
• Working capital can vary from as low as 5% of the fixed capital for a simple process to as high as 30% for a more complex process
• Methods to estimate capital costs

  • Find a plant elsewhere of the same process (exponential method for total plant cost)
  • Time adjustment from past (e.g. similar plant built 10 years ago)
  • Estimate cost of units and add them up (exponential method for individual equipment items)
  • Factorial method (inclusion of various cost contributions)

  
• Exponential method


  n = typically about 2/3, can vary from 0.4 to 0.8. Acknowledgement that scalability means that doubling throughput will not lead to a doubling in plant costs. n = 1 when items are just duplicated.
• Adjusting for date - from the past


  Use Chemical Engineering Plant Cost Index

  
• Adjusting for date - for the future


  Use current inflation rate

  
• Costing individual items


  Exponential method can be applied to individual process items, then summed. The value of n may vary for different items. The CEPCI is specified for different items.

  
• Factorial method


  Cost of process plant is not just the cost of the individual items. When installed, it will have cost us something for the associated equipment and installation. Factors include: civil engineering, structural steel, installation, insulation, painting, pressure gauges, temperature instruments, control valves, wiring to control system.

  
• Typical factors for estimation of project fixed capital cost
• Project cash flow diagram


  Movement of money in a set time period. Cash in: sales revenue. Cash out: design, construction, operating charges, staff costs, tax, royalties.
• All projects have risks: technical, marketing, global and national financial (includes political stability)
• Project life


  The full duration of a project
• Positive cash flow


  Cash inflows to the project
• Negative cash flow


  Cash outflows from the project
• Cumulative cash flow


  The total net cash flow over the project life
• Pay-back time


  The time taken for the cumulative cash flow to become positive
• Maximum investment


  The largest negative value of the cumulative cash flow
• Working capital


  The capital required to fund the project before it becomes self-financing
• Break-even point


  The point where cumulative cash flow becomes positive
• Net future worth (NFW)


  The final positive value of the cumulative cash flow
• Doing nothing is the greatest risk!
• If risk is high, financial return sought will be high
• Small projects


  Use rate of return methods based on capital and installation costs and operating costs
• Large projects


  Determine all cash flows and use discounted cash flow methods