Chemical Engineering Economics 4th Stage

Ministry of Higher Education and Scientific Research

Al-Mustaqbal University College
Chemical Engineering and Petroleum Industries Department

Chemical Engineering Economics

Fourth Stage
Lecture No.3

Ass. Lec. Zahraa Abdulelah Hadi

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Chemical Engineering Economics 4th Stage

Estimation of Capital Costs

An acceptable plant design must present a process that is capable of
operating under conditions which will yield a profit. Since net profit equals
total income minus all expenses, it is essential that the chemical engineer be
aware of the many different types of costs involved in manufacturing
processes.
Before an industrial plant can be put into operation, a large sum of money
must be supplied to purchase and install the necessary machinery and
equipment. Land and service facilities must be obtained, and the plant must
be erected complete with all piping, controls, and services. In addition, it is
necessary to have money available for the payment of expenses involved in
the plant operation.
The capital needed to supply the necessary manufacturing and plant facilities
is called the fixed-capital investment, while that necessary for the operation
of the plant is termed the working capital. The sum of the fixed-capital
investment and the working capital is known as the total capital
investment. The fixed-capital portion may be further subdivided into
manufacturing fixed-capital investment and nonmanufacturing fixed-capital
investment.

Capital Investments
1. Fixed-capital investment
 Manufacturing Fixed-capital investment
 Nonmanufacturing Fixed capital investment
2. Working capital
 Raw materials and supplies carried in stock

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 Accounts payable, taxes payable. accounts receivable

 Cash kept on hand for monthly payment of operating expenses, such
as salaries, wages, and raw-material purchases,
 Finished products in stock and semi-finished products.

Fixed-Capital Investment
Manufacturing fixed-capital investment represents the capital necessary
for the installed process equipment with all auxiliaries that are needed for
complete process operation. Expenses for piping, instruments, insulation,
foundations, and site preparation are typical examples of costs included in
the manufacturing fixed-capital investment.
Fixed capital required for construction overhead (general) and for all plant
components that are not directly related to the process operation is
designated as the nonmanufacturing fixed-capital investment. These plant
components include the land, processing buildings, administrative, and other
offices, warehouses, laboratories, transportation, shipping, and receiving
facilities, utility and waste-disposal facilities, shops, and other permanent
parts of the plant. The construction overhead cost consists of field-office and
supervision expenses, home-office expenses, engineering expenses,
miscellaneous construction costs, contractor’s fees, and contingencies. In
some cases, construction overhead is proportioned between manufacturing
and nonmanufacturing fixed-capital investment.

Working Capital
The working capital for an industrial plant consists of the total amount of
money invested in:

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 raw materials and supplies carried in stock;

 finished products in stock and semi-finished products in the process of
being manufactured;
 accounts receivable;
 cash kept on hand for monthly payment of operating expenses, such as
salaries, wages, and raw material purchases;
 accounts payable; and
 taxes payable.

The raw material inventory included in working capital usually amounts to a

1-month supply of the raw materials valued at delivered prices. Finished
products in stock and semi-finished products have a value approximately
equal to the total manufacturing cost for 1 month's production. Because
credit terms extended to customers are usually based on an allowable 30-day
payment period, the working capital required because of accounts receivable
ordinarily amounts to the production cost for 1 month of operation.
The ratio of working capital to total capital investment varies with different
companies, but most chemical plants use an initial working capital
amounting to 10 to 20 percent of the total capital investment. This
percentage may increase to as much as 50 percent or more for companies
producing products of seasonal demand, because of the large inventories
which must be maintained for appreciable periods.

Types of Capital Cost Estimates

An estimate of the capital investment for a process may vary from a
predesign estimate based on little information except the size of the
proposed project to a detailed estimate prepared from complete drawings

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and specifications. Between these two extremes of capital-investment

estimates, there can be numerous other estimates which vary in accuracy
depending upon the stage of development of the project. These estimates are
called by a variety of names, but the following five categories represent the
accuracy range and designation normally used for design purposes:
1. Order-of-magnitude estimate (ratio estimate) based on similar previous
cost data; probable accuracy of estimate over ± 30 percent.
2. Study estimate (factored estimate) based on knowledge of major items of
equipment; probable accuracy of estimate up to ± 30 percent.
3. Preliminary estimate (budget authorization estimate; scope estimate)
based on sufficient data to permit the estimate to be budgeted; probable
accuracy of estimate within ± 20 percent.
4. Definitive estimate (project control estimate) based on almost complete
data but before completion of drawings and specifications; probable
accuracy of estimate within ± 10 percent.
5. Detailed estimate (contractor’s estimate) based on complete engineering
drawings, specifications, and site surveys; probable accuracy of estimate
within +5 percent.

Cost of Preparing a Capital Cost Estimate

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Predesign cost estimates (defined here as order-of-magnitude, study, and

preliminary estimates) require much less detail than firm estimates such as
the definitive or detailed estimate. However, the predesign estimates are
extremely important for determining if a proposed project should be given
further consideration and to compare alternative designs.

In this study, we will use the tree category method.

1. Order-of-Magnitude {OOM}
This estimate is generally used by management for feasibility studies, for
evaluating the best process, the establishment of plant size, and the
economic feasibility of the project.

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Turnover Ratio
This is a rapid, simple method for estimating the fixed capital investment but
is one of the most inaccurate. The turnover ratio is defined as

The annual gross sales figure is the product of the annual production rate and
the selling price per unit of production. A basic assumption is that all
product made is sold. For a large number of chemical processes operating
near ambient conditions, the turnover ratio is near 1.0. These ratios may vary
from 0.2 to 5.0. Values less than 1.0 are for large volume, capital-intensive
industries and those greater than 1.0 are for processes with a small number
of equipment items. A list of turnover ratios is found in Table 1.

Example 1

Solution:
The TOR for ammonia plant is 0.65

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Table:1 Turnover Ratio

Seven-Tenths Rule
The cost of the plant can be determined by the ratio method by adjusting the
capacity by using the 7th rule. It has been found that cost-capacity data for
process plants may be correlated using a logarithmic plot similar to the 0.6

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rule. Remer and Chai have compiled exponents for a variety of processes
and most are between 0.6 and 0.8. The use of an average value 0.7 is the
name of this method. In order to use this method, the estimator must have
the fixed capital investment for another plant using the same process but at a
different capacity. Cost indexes may be used to correct costs for time
changes.
Table 1 contains appropriate data. The equation is

Table 2: Seven-Tenths Rule

Example 2 :
A company is considering the manufacture of ethylene oxide as an
intermediate for its polymer division. The process to be used is the direct
oxidation of ethylene. The company built a similar unit in 1997 that had a
rated capacity of 100,000 tons annually for $60,000,000. The projected
production of the new facility is to be 150,000 tons annually. Estimate the
fixed capital investment in late 2001 dollars to produce the required ethylene
oxide.
Solution:

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CE Index for 1997 = 386:5

CE Index for late 2001 =396:8
The equation can be modified to include the cost indexes. So,

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