Wollo University, Kombolcha Institute of Technology

Plant Design and Economics (ChEg5193)

Worksheet on cost analysis

Theoretical part
1. Define the following terms
a) Total capital investment b) Working capital investment
c) Depreciation d) Annuity
e) Perpetuities f) Book value/asset value
f) Hazards n) Interest
g) Safety o) Present worth of annuity
h) Breakeven point p) Capitalized cost
i) Discount cash flow q) Salvage value
j) Inflation r) scrap/junk values
k) Cost-index s) Profitability
l) Turnover ratio t) payback period
m) Revenue u) Return on investment (ROI)
2. Explain the difference between three types of taxes.
3. Explain the types of depreciation and factors for the two types of depreciations.
4. What are the factors affecting the production cost and investment? list and explain their effect.
5. List and explain the methods of estimating capital investment.
6. Explain the different types of profitability evaluation?
Why safety is necessary for plant design? Mention at least five causes of the accident.
Calculation part
1. A chemical manufacturer has created the following cost and revenue functions to track the cost
and revenue from the sales of their brand-new chemical: 𝐂(𝐪) = 18𝑞 + 80 and 𝐑(𝐪)= 30𝑞 Generate
a profit function using these two equations. Would the chemical manufacturer make a gain or a
loss from producing a quantity of?
A) 5 units of chemical B) 12 units of chemicals?
2.Estimate the fixed capital investment by turnover ratio method for plant which producing
formaldehyde with a capacity of 1000 kg per day. The plant may be considered as operating full
time. If the fixed capital investment for a similar plant produced formaldehyde with capacity of
1.25*10^ 8 kg per year is 1$ million. The selling price in dollars per kg of product is 0.035$.
3. The total design and construction cost for a digester to handle a flow rate of 0.5 million gallons per day
(MGD) was $1.7 million in 2000. Estimate the cost today for a flow rate of 2.0 MGD. The exponent from
Table for the MGD range of 0.2 to 40 is 0.14. The cost index in 2000 of 131 has been updated to 225 for
this year.
4. How much money (P) must be set aside at time zero to provide that a pump may be replaced
every 3 years thereafter? The cost of purchasing a new pump and replacing the old pump with the
new one will be $7,000. The money can be invested at 8% interest, which is compounded annually.
5. Calculate the present value (PV) of a $2,000 gift that will be received after 3 years have passed.
Assume money is worth 6% per year.
6. A proposed manufacturing plant requires an initial fixed-capital investment of $900,000 and $100,000
of working capital. It is estimated that the annual income will be $800,000 and the annual expenses
including depreciation will be $520,000 before income taxes. A minimum annual return of 15 percent
before income taxes is required before the investment will be worthwhile. Income taxes amount to 34
percent of all pre-tax profits.
Determine the following:
(a) The annual percent return on the total initial investment before income taxes.
(b) The annual percent return on the total initial investment after income taxes.
(c) The annual percent return on the total initial investment before income taxes based on capital recovery
with minimum profit.
(d) The annual percent return on the average investment before income taxes assuming straight-line
depreciation and zero salvage value.
7. Estimate the FCI in 1980 using power factor applied to capacity ratio method for a similar
process plant with twice plant capacity if the FCI of the solid-fluid processing plant is $436000 in
1975. (0.6 power factor and the Marshall and Swift all-industry indexes in 1975=444 and 1980
=660)
8. The annual direct production costs for a plant operating at 70 percent capacity are $280,000
while the sum of the annual fixed charges, overhead costs, and general expenses is $200,000. What
is the break-even point in units of production per year if total annual sales are $560,000 and the
product sells at $40 per unit?
9. The purchased cost of a shell-and-tube heat exchanger (floating head and carbon-steel tubes)
with 10 ft2 of the heating surface was $4200 in 1990. What will be the purchased cost of a similar
heat exchanger with 20 ft2 of heating surface in 1990 if the purchased-cost-capacity exponent is
0.60 for a surface area ranging from 10 to 40 ft2? If the purchased-cost-capacity exponent for this
type of exchanger is 0.81 for surface areas ranging from 40 to 200 ft2, what will be the purchased
cost of a heat exchanger with 100 ft2 of heating surface in 2000?
10. The purchased cost of equipment for a solid-processing plant is $500,000. The plant is to be
constructed as an addition to an existing plant. Estimate the total capital investment and the fixed-
capital investment for the plant. What percentage and amount of the fixed-capital investment are
cost for land and contractor’s fee?
11.The purchased-equipment cost for a plant that produces pentaerythritol (solid fuel-processing
plant) is $300,000. The plant is to be an addition to an existing formaldehyde plant. The major part
of the building cost will be for indoor construction, and the contractor’s fee will be 7 percent of
the direct plant cost. All other costs are close to the average values found for typical chemical
plants. Based on this information, estimate the following:
(a) The total direct plant cost.
(b) The fixed-capital investment.
(c) The total capital investment.
12. The total capital investment for a chemical plant is $1 million, and the working capital is
$100,000. If the plant can produce an average of 8000 kg of final product per day during a 365-
day year, what selling price in dollars per kilogram of a product would be necessary to give a
turnover ratio of one?
13. The total capital investment for a conventional chemical plant is $1,500,000, and the plant
produces 3 million kg of product annually. The selling price of the product is $0.82/kg. Working
capital amounts to 15 percent of the total capital investment. The investment is from company
funds, and no interest is charged. Raw-materials costs for the product are $0.09/kg, labor $0.08/kg,
utilities $0.05/kg, and packaging $0.008/kg. Distribution costs are 5 percent of the total product
cost. Estimate the following:
(a) Manufacturing cost per kilogram of product.
(b) Total product cost per year.
(c) Profit per kilogram of product before taxes.
(d) Profit per kilogram of product after taxes (use current rate).
14. Applications of different types of interest. It is desired to borrow $1000 to meet a financial
obligation. This money can be borrowed from a loan agency at a monthly interest rate of 2 percent.
Determine the following:
(a) The total amount of principal plus simple interest due after 2 years if no intermediate payments are
made.
(b) The total amount of principal plus compounded interest due after 2 years if no intermediate payments
are made.
(c) The nominal interest rate when the interest is compounded monthly.
(d) The effective interest rate when the interest is compounded monthly.
15. Determination of capitalized cost. A new piece of completely installed equipment costs
$12,000 and will have a scrap value of $2000 at the end of its useful life. If the useful-life period
is 10 years and the interest is compounded at 6 percent per year, what is the capitalized cost of the
equipment?
16. After conceptual design and estimates of chemical plant, the following expenditure and
revenues are estimated after the plant has achieved desired production rate.
Total capital investment: $ 100,000,000, Working capital: $10,000,000, Annual sales: $
80,000,000 and Annual expenditure (total production cost): $20,000,000. Assume straight
line depreciation over 10 years project life and tax rate of 35%, determine
A. The return on investment after taxes
B. The payback periods
17. Suppose that two equally sound investments can be made. One of these requires $100,000 of
capital and will yield a profit of $l0,000/year, and the second requires $1 million of capital and
will yield $25,000/year. Compare the yearly profit and the annual rate of return on both
investments?
18. In the design of a chemical plant, the following expenditures and revenues are estimated after
the plant has achieved its desired production rate:

Total capital investment $10,000,000 Working capital $ 1,000,000

Annual sales $8.000.000/yr. Annual expenditures $2,000,000/yr.

Assuming straight-line depreciation over a 10-year project analysis period, determine

a. The return on the investment after taxes b. The payback periods

19. A company is going to purchase a machine. Two machines A & B are available and their
investment costs are equal birr 500,000. In comparing the profitability of machines, a discount rate
of 10% is to be used.

Year 1 2 3 4 5
Machine A 150,000 200,000 250,000 150,000 100,000
Machine B 50,000 150,000 200,000 300,000 200,000
Indicate which of the machine would be more profitable investment and describe the reason using
payback period, net present value and average rate of return.
20. The total capital investment for a chemical plant is $1 million, and the working capital is
$100,000. If the plant can produce an average of 8000 kg of final product per day during a 365-
day year, what selling price in dollars per unit product would be necessary to give a turnover ratio
of l.0?
21. The total capital investment for a conventional chemical plant is $1,500,000, and the plant
produces 3 million kg of product annually. The selling price of the product is $0.82/kg. Working
capital amounts to 15 percent of the total capital investment. The investment is from company
funds, and no interest is charged. Raw-materials costs for the product are $0.09/kg, labor $0.08/kg,
utilities $0.05/kg, and packaging $0.008/kg. Distribution costs are 5 percent of the total product
cost (TPC). Plant overhead cost is 60% of (operating labor, supervisory and clerical, maintenance
and repairs)
Additional data
Type Cost Type Cost ($/kg)
($/kg)
Direct supervisory and clerical 0.014 Depreciation 0.0425
labor
Maintenance and repairs 0.0255 Local Tax 0.010625

Operating supplies 0.0038 Insurance 0.00298

Laboratory charges 0.012 Administration cost 0.0176

Packaging 0.008 Research and 5% of TPC

development
Assume rent, patents and royalty will be zero and use standard tax 34%
Estimate: -
a) Direct production cost, fixed charges, plant overhead costs and general expense cost
b) Manufacturing cost
c) Annual Total production cost
d) Profit per kilogram of product before tax
e) Profit per kilogram of product after tax f) Annual Net profit and
payback period

22. A piece of equipment has an initial installed value of $12,000. It is estimated that its useful
life period will be 10 years and its scrap value at the end of the useful life will be $2000. The
depreciation will be charged by making equal charges in each year, the first payment being made
at the end of the first year. The depreciation fund will be accumulated at an annual interest rate of
6 percent. At the end of the life period, enough money must have been accumulated to account for
the decrease in equipment value. Determine the yearly cost (uniform periodic payment of annuity)
due to depreciation for annual interest rate and nominal interest rate use 6%.
23. A company has direct production costs equal to 50 percent of total annual sales and fixed
charges, overhead and general expenses equal to $200,000. If management proposes to increase
present annual sales of $800,000 by 30 percent with a 20 percent increase in fixed charges,
overhead and general expenses,
a) What would be the net profit if the expanded plant were operated at full capacity with
an income tax on gross earnings fixed at 34 percent?
b) What would be the net profit for the enlarged plant if total annual sales remained the
same as at present?
 c) What would be the net profit for the enlarged plant if the total annual sales actually
decreased to $700,000?
24. Two persons A and B, are given Birr 1,000,000 each for investment. Person A invest money
in bank in the form fixed deposit for 5 years at a nominal annual interest rate of 9.5%
(compounded annually). Person B invests money in a business in the same bank in a recurring
deposit (RD) account. Bank pays a nominal annual interest rate of 7% on such accounts. At
the end of years if both A and B are to have same amount of money accumulated in bank, what
should be the net annual profit from business run by person B?
25. For the nominal annual interest rate of 8%, find the value of $10,000 deposit after 6 years
with continuous compounding, daily compounding and quarterly compounding?

26. Comparison of alternative investment using capitalized costs

A reactor handling corrosive liquids is to be designed compare between following options:

➢ MOC: Mild steel, initial installed cost=$50,000

➢ Useful life:3 years
➢ MOC: stainless steel, initial installed cost: $150,000
Assume scrap value to be zero for both reactors and inflation during operation period to be
negligible. For capitalized cost for both reactors to be equal, what should be the useful life period
of stainless-steel reactors? If money is worth 8% compounded annually?

27. After conceptual design and estimates of chemical plant, the following expenditure and
revenues are estimated after the plant has achieved desired production rate. Total capital
investment: $ 100,000,000, Working capital: $ 10,000,000, Annual sales: $ 80,000,000 and
Annual expenditure (total production cost): $ 20,000,000
Assume straight line depreciation over 10 years project life and tax rate of 35%, determine

a) The return on investment after taxes

b) The payback (payout) periods
28. Break even Analysis
A reactor in a chemical plant uses CNG (compressed natural gas) with caloric value of 50 MJ/kg
for heating. The annual energy consumption of reactor is 200 GJ. The company plans to make
energy integration of the plant, as a part of which this reactor will be heat integrated with another
hot stream. This would save net energy consumption of 200 GJ per year. Additional fixed capital
investment required for installation of heat integration system is $ 500,000 and the expected life
time of the system is 5 years. If money is worth an interest rate of 8% compounded annually. Find
the following:
a) Breakeven cost of CNG for the additional investment of company assuming prices of CNG
to remain constant over 5 years operational period.
b) If the prices of CNG are expected to rise 10% annually, determine the breakeven cost of
CNG.
29. A plant produces 15,000 units/month. Find breakeven level if FC = $75,000 /month, revenue
is $8/unit and variable cost is $2.50/unit. Determine expected monthly profit or loss.
30. The first cost of a certain piece of equipment is $50,000. It will have an annual operating cost
of $20,000 and $5,000 salvage value after its 5-year life. At an interest rate of 10% per year,
Calculate the capitalized cost of the equipment
31. Ethio-Agro processors, for its Meat Processing has asked its lead process engineer to evaluate
two different types of conveyors for the beef cutting line. Type A has an initial cost of $70,000
and a life of 3 years. Type B has an initial cost of $95,000 and a life expectancy of 6 years.
The annual operating cost (AOC) for type A is expected to be $9000, while the AOC for type
B is expected to be $7000. If the salvage values are $5000 and $10,000 for type A and type B,
respectively. Which processing line should be chosen? Justify your answers.
32. A product currently sells for $12 per unit. The variable costs are $4 per unit, and 10,000 units
are sold annually and a profit of $30,000 is realized per year. A new design will increase the
variable costs by 20% and Fixed Costs by 10% but sales will increase to 12,000 units per year.
(a) At what selling price do we break even, and (b) If the selling price is to be kept same
($12/unit) what will the annual profit be?
33. A dam will have a first cost of $5,000,000, an annual maintenance cost of $25,000 and minor
reconstruction costs of $100,000 every five years. At an interest rate of 8% per year, what will
be the capitalized cost of the dam?