Ministry of Higher Education and Scientific Research

Al-Mustaqbal University College

Chemical Engineering and Petroleum Industries Department

Chemical Engineering Economics

Fourth Stage
Lecture No.4

Ass. Lec. Zahraa Abdulelah Hadi

 2. Study Estimates

The information needed to prepare a study estimate includes a project scope,

preliminary material and energy balances, preliminary flowsheets, rough sizes of
equipment, rough quantities of utilities, rough sizes of building and structures.
 Lang Factor Method ( Factorial Method)
Lang, developed a method for obtaining quick estimates of the capital investment
based upon information gathered on 14 processing plants of varioussizes and types. He
recommended that the delivered equipment cost be multiplied by a factor based upon
the type of processing plant to obtain the fixed capital investment. These factors include
process equipment, instrumentation and automatic control equipment, piping,
insulation, electrical, engineering costs, etc., but do not include a contingency
(emergency) factor. The Lang factor method has a tendency to produce high results.
The factors are found in Table 1. If C= Fixed cost , LF = Lang factor, and ∑ 𝐶𝑒𝑞 is
the sum of all delivered costs of all major items in the flow sheet, C eq = Cost of
equipment then;

C= 𝐿𝐹 ∗ ∑ 𝐶𝑒𝑞

Table 1: Lang factors

 Example 1

ESTIMATION OF PURCHASED EQUIPMENT COSTS for Common

Chemical Processes Equipment
The cost of purchased equipment is the basis of several predesign methods for
estimating capital investment. Sources of equipment prices, methods of adjusting
equipment prices for capacity, and methods of estimating auxiliary process
equipment are therefore essential to the estimator in making reliable cost estimates.
The various types of equipment can often be divided conveniently into
1. processing equipment,
2. raw-materials handling and storage equipment
3. finished-products handling and storage equipment.
Equipment Cost Data
Equipment cost data are stated as purchased, delivered, or installed costs. Purchased
cost is the price of the equipment FOB (free on board) at the manufacturer’s plant.
Delivered cost is the price of the equipment plus delivery charges to the purchaser’s
plant FOB. installed cost. This means the equipment item, for instance, a centrifugal
pump has been purchased, delivered, uncrated, and placed on a foundation in an
operating department but does not include piping, electrical, insulation costs. Perhaps
a more accurate term would be set- in-place cost. Equipment cost data are correlated
as a function of equipment parameters. This correlation technique is used whether the
costs are purchased, delivered, or installed equipment costs. Typical capacity
parameters are presented in Table 2. Estimating Equipment Costs by Scaling is
often necessary to estimate the cost of a piece of equipment when cost data are not
available for the particular size or capacity involved. Predictions can be made by
using the power relationship known as the six-tenths factor rule, if the new piece of
equipment is similar to one of another capacity for which cost data are available.
According to this rule, if the cost of a given unit b at one capacity is known, the cost of
a similar unit a with X times the capacity of the first is X 0 6 times the cost of the initial
unit. The equation above is known as the six-tenths or 0.6 rule. The preceding
equation indicates that a log-log plot of capacity versus cost for a given type of
equipment should be a straight line with a slope equal to 0.6. Figure 1 presents a plot
of this sort for shell-and-tube heat exchangers. The application of the 0.6 rule of
thumb for most purchased equipment is, however, an oversimplification, since the
actual values of the cost capacity exponent vary from less than 0.3 to greater than 1.0,
as shown in Table3. Because of this, the 0.6 power should be used only in the
absence of information.
Figure 1: Application of "six-tenth factor" rule to costs for U-tube heat exchangers

Table 2: Cost-capacity parameters

Example:
Recently a cast iron leaf pressure filter with 100 ft2 was purchased for clarifying an
inorganic liquid stream for $15,000. In a similar application, the company will need a
450 ft2 cast iron leaf pressure filter. The size exponent for this type filter is 0.6.
Estimate the purchased price of the 450 ft2 unit.

Table 3 Typical exponents for equipment cost as a function of capacity

Chemical Engineering Economics 4th Stage

Cost indexes
Most cost data which are available for immediate use in a preliminary or predesign
estimate are based on conditions at some time in the past. Because prices may change
considerably with time due to changes in economic conditions, some method must be
used for updating cost data applicable at a past date to costs that are representative of
conditions at a later time.? This canbe done by the use of cost indexes.
A cost index is merely an index value for a given point in time showing the cost at
that time relative to a certain base time. If the cost at some time in the past is known,
the equivalent cost at the present time can be determined by multiplying the original
cost by the ratio of the present index value to the index value applicable when the
original cost was obtained.

Cost indexes can be used to give a general estimate, but no index can take into
account all factors, such as special technological advancements or local conditions.
The common indexes permit fairly accurate estimates if the time period involved is
less than 10 years.
Many different types of cost indexes are published regularly. Some of these can be
used for estimating equipment costs; others apply specifically to labor,
construction, materials, or other specialized fields. The most common of these
indexes are the Marshall and Swift all-industry and process-
industryequipment indexes, the Engineering News-Record construction index,
the Nelson-Farrar refinery construction index, and the Chemical Engineering
plant cost index. Table 1 presents a list of values for various types of indexes.
Marshall and Swift Cost Index (M&S): Originally known as the Marshall and
Stevens Index, was established in the base year, 1926, with a value of 100. The index is
reported as a composite of two major components, namely, a process-industry
equipment average and all industry 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; petroleum products, 22; and rubber, 8. Related industries such as electric
power, mining and milling, refrigeration, and steam power are also included. The

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Chemical Engineering Economics 4th Stage

M&S Index tracks equipment costs and installation labor, thereby reflecting changes
in installed equipment costs. The all-industry average is a simple arithmetic average
of individual indexes for 47 different types of industrial, commercial, and housing
equipment. Included in the Marshall and Swift Index is a correction for changes in
labor productivity. This index is found in each issue of Chemical Engineering, on the
pages entitled Economic Indicators [20].
Chemical Engineering Index (CE): It was established in the early 1960 s using a
base period of 1957–1959 as 100. The index consists of four major components:

The dominant components, equipment, machinery, and supports consist of the

following subcomponents:

The CE Index is updated monthly and reflects short-term changes in chemical

industry plant costs. In 1982, a correction was introduced to reflect changes in labor
productivity; in January 2002, it was revised by updating the components making up
the index and in revising the productivity factor.
Nelson–Farrar Indexes (NF): The Nelson–Farrar Indexes were originally known as
the Nelson Refinery Construction Indexes. These indexes are calculated and

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Chemical Engineering Economics 4th Stage

published in the first issue each month of the Oil and Gas Journal. The original
indexes were established in 1946 with a value of 100 and are heavily weighted
towards the petroleum and petrochemical industries. The NF Indexes are based upon
the following components: Pumps, compressors, etc. Heat exchangers Electrical
Machinery, Miscellaneous equipment, Internal combustion engines, Materials,
Instruments, Labor. A more detailed breakdown of each of the above components
may be found in annual index summaries and how the index was determined may be
found in the November 29, 1978 issue of the Oil and Gas Journal. This index does
account for changesin labor productivity.
Engineering News Record Index (ENR). The Engineering News Record Index is
the oldest cost index. It was established in 1913 with an arbitrarily set value of 100
and has been adjusted twice as a result of inflation in 1926 and in 1949. The 1913
index today (late 2001) is 6391. The ENR Index is more suitable for the general
construction business than for the CPI. It is based upon labor craft rates, the cost of
lumber, steel and other construction materials basedupon a 46-city average. This index
does not account for adjustment in labor productivity, and, therefore has a tendency
to increase more rapidly than other indexes. The ENR Index may be found weekly in
Engineering News Record.