Economics and

Management of
Chemical Process
Industries

ChE 4225
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Course Outline
• Engineering economics and chemical process industries.
• Investment cost and interest calculation.
Costs classification; types of interest; cash flow, discounted cash flow, concept of present worth, annuities, concept of
equivalence, determining MARR, PW, FW, AW, IRR, ERR and payback period; Depreciation.
• Comparing alternatives.
Basic concepts for comparing alternatives: the study period, alternatives having equal useful lives, alternatives having
different useful lives, Capitalized worth method; Mutually exclusive combinations of projects; Dealing with uncertainty
nature of risk, uncertainty and sensitivity; Sources of uncertainty; Sensitivity analysis.
• Evaluating projects with B/C ratio method.
Differences between private and public projects; Self-liquidating and multipurpose projects; Difficulties in evaluating public
sector projects; Interest rate for public projects; Evaluating independent projects and mutually exclusive alternatives by B/C
ratios, value chain concept, element of input-output analysis.
• Capital budgeting.
Capital budgeting process; capital rationing and the profitability index.
• Taxes and insurance.
Types of taxes, insurances and insurance requirements for manufacturing concern.
• Functions of management in CPI.
Decision-making: organizing, planning, directing, communicating and controlling. Quantitative techniques in decision-
making; Decision making under risk and uncertainty.

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References
Textbook Journals
• Engineering Economy - Anthony • Engineering
Tarquin, Leland T Blank Economics
• Engineering Economy - C. Patrick • Journal of Business
Koelling, Elin M. Wicks, and William Economics and
G. Sullivan Management
• The Engineering
Economist

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 Science
• Science is a rigorous, systematic endeavor that builds and organizes
knowledge in the form of testable explanations and predictions about the
universe.
Engineering
• The Accreditation Board for Engineering and Technology states that engineering “is the
profession in which a knowledge of the mathematical
Engineering
and natural sciences gained by
study, experience, and practice is applied with judgment to develop ways to utilize,
economically, the materials and forces of nature for the benefit of mankind.”

Science and Engineering

• Engineering is not a science but application of science.
• Role of scientist - Discover the universal laws of nature/behavior.
• Role of engineer – Apply knowledge to a particular situation to produce products and
services.
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 Engineering & Economics
• Engineering activities are means of satisfying human rights and requirements.
• Concerns – material/forces and needs
• Because of resource constraints, engineering is closely associated with economics.
• Its essential that an engineering proposal is evaluated in terms of economics (worth &
cost) before it is undertaken.
• Essential pre-requisite of successful engineering application is economic feasibility.
 Dependence on Engineering
1. Modern civilization depends to a large degree on engineering.
2. Products and services such a communication, machines, roads etc. are result of
engineering.
3. Production is through of engineering.
4. Jobs and skills development.
5. Economic improvement.
6. Business and economic growth.

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 Engineering Economics Defination_01
Engineering economy involves formulating, estimating, and evaluating the expected
economic outcomes of alternatives designed to accomplish a defined purpose.
Mathematical techniques simplify the economic evaluation of alternatives.

Engineering Economics Defination_01

Engineering economy involves the systematic evaluation of the economic merits of proposed
solutions to engineering problems. To be economically acceptable (i.e., affordable), solutions
to engineering problems must demonstrate a positive balance of long-term benefits over
long-term costs, and they must also
• promote the well-being and survival of an organization, well e survive
• embody creative and innovative technology and ideas, tka id
• permit identification and scrutiny of their estimated outcomes, and id security
• translate profitability to the “bottom line” through a valid and acceptable measure of
merit.
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Myriad ( হাজার হাজার ) Applicable Situations
• Choosing the best design for a high-efficiency gas furnace
• Selecting the most suitable robot for a welding operation on an automotive assembly
line
• Making a recommendation about whether jet airplanes for an overnight delivery
service should be purchased or leased
• Determining the optimal staffing plan for a computer help desk

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 The Principles of Engineering Economy
1. Develop the Alternatives
2. Focus on the Differences
3. Use a Consistent Viewpoint
4. Use a Common Unit of Measure
5. Consider All Relevant Criteria
6. Make Risk and Uncertainty Explicit
7. Revisit Your Decisions

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Physical and Economic Efficiency
Output
• Physical efficiency =
Input

Worth
• Economic efficiency =
Cost

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 WHY ENGINEERING ECONOMY IS
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IMPORTANT TO ENGINEERS ?????

• Engineers design and create
• Designing involves economic decisions
• Engineers must be able to incorporate economic analysis into their creative efforts
• Often engineers must select and implement from multiple alternatives.
• Understanding and applying time value of money, economic equivalence, and cost estimation are vital
for engineers.
• A proper economic analysis for selection and execution is a fundamental task of engineering.
 General Steps for Decision Making Processes
problem holo fine object

Understand the
Collect relevant Define the set of Identify the criteria
problem – define
information feasible alternatives for decision making
objectives

Evaluate the
Implement the
alternatives and Select the “best”
alternative and
apply sensitivity alternative
monitor results
analysis

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 Types of Costs
1. Fixed, Variable, and Incremental Costs
2. Direct, Indirect, and Standard Costs
3. Cash Cost versus Book Cost

Cash Cost Book Cost

Requires cash transaction from one owner to Do not involve cash payments but represent
another owner. Results in cash flow. the past expenditures over a fixed period of
time.

4. Sunk Cost opportunitiy sunk

5. Opportunity Cost
6. Life-Cycle Cost. Three subgroups:
i.Investment cost
ii.Operation and maintenance cost (O&M)
iii.Disposal cost

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 TIME VALUE OF MONEY (TVM)
The time value of money is the most important concept in engineering economy.

• TVM explains the change in the amount of money over time for
funds owed by or owned by a corporation (or individual).
• Corporate investments are expected to earn a return
• Investment involves money
• Money has a ‘time value’

TVM explains the change in the amount of money over time. A sum of money is worth more now or will be in future.
Example: There are 2 options.
1. Receive $20000 now
2. 2. Receive after 1 year with 3% simple annual interest rate

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 Interest
• It is the manifestation of the time value of money.
• Computationally, interest is the difference between an ending amount of money and the
beginning amount.
• Interest = amount owed now – principle

Interest Rate RATE OF RETURN

• Borrowers perspective • Investors perspective

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 COMMONLY USED SYMBOLS
• t = time, usually in periods such as years or months
• P = value or amount of money at a time t designated as present or time 0
• F = value or amount of money at some future time, such as at t = n periods in the future
• A = series of consecutive, equal, end-of-period amounts of money
• n = number of interest periods; years, months
• i = interest rate or rate of return per time period; percent per year or month

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CASH FLOWS: TERMS

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CASH FLOWS: ESTIMATING
• Point estimate – A single-value estimate of a cash flow element of an alternative
Cash inflow: Income = $150,000 per month
• Range estimate – Minimum and maximum values that estimate the cash flow
Cash outflow: Cost is between $2.5 M and $3.2 M
Point estimates are commonly used; however, range
estimates with probabilities attached provide a better
understanding of variability of economic parameters
used to make decisions

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Chapter 2

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CASH FLOW DIAGRAMS

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 ECONOMIC EQUIVALENCE
• Combination of interest rate (rate of return) and time value of money to determine
different amounts of money at different points in time that are economically equivalent.
• How it works: Use rate i and time t in upcoming relations to move money (values of P, F
and A) between time points t = 0, 1, …, n to make them equivalent (not equal) at the rate i.

TECHNIQUE OF EQUIVALENCE
• Select a common point in time.
• Determine a single equivalent value at that point in time for plan 1.
• Determine a single equivalent value at that point in time for plan 2.
• Judge the relative attractiveness of the two alternatives from the comparable equivalent
values.

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SIMPLE INTEREST

COMPOUND INTEREST

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Factors: How Time and Interest Affect money
Single Payment Factors (F/P and P/F)

Factors are represented in standard factor notation such as (F/P, i, n),

where letter to left of slash is what is sought; letter to right represents what is given
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Asef Shahriar - IEM - KUET
 Example: Finding Future Value
01
A person deposits $5000 into an account which pays interest at a rate of
8% per year. The amount in the account after 10 years is closest to:

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 Example: Finding Present Value
02A small company wants to make a single deposit now so it will have
enough money to purchase a backhoe costing $50,000 five years from
now. If the account will earn interest of 10% per year, the amount that
must be deposited now is nearest to:

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 Example: Finding Present Value
3 Sandy, a manufacturing engineer, just received a year-end bonus of
$10,000 that will be invested immediately. With the expectation of
earning at the rate of 8% per year, Sandy hopes to take the entire
amount out in exactly 20 years to pay for a family vacation when the
oldest daughter is due to graduate from college. Find the amount of
funds that will be available in 20 years by applying the factor formula
and tabulated value separately.

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 Uniform Series Involving P/A and A/P
there is a series of "n" uniform payments
Let "A" be the amount of each uniform payment
Let "F" be a future, single amount equivalent to the series with "F" occurring at the same time as the last "A" payment
Let "P" be a single amount equivalent to the series, with "P" occurring one period before the first "A" payment

The uniform series factors that involve P and A are derived as follows:
• Cash flow occurs in consecutive interest periods.
• Cash flow amount is same in each interest period.
A = Given A=?

0 1 2 3 4 5 0 1 2 3 4 5

P = Given
P=?

Note: P is one period Ahead of first A value

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Asef Shahriar - IEM - KUET
 Example: Uniform Series Involving P/A
04
A chemical engineer believes that by modifying the structure of a certain
water treatment plant, his company would earn an extra $5000 per year. At
an interest rate of 10% per year, how much could the company afford to
spend now to just break even over a 5-year project period?

(A) $11,170 (B) 13,640 (C) $15,300 (D) $18,950

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Uniform Series Involving F/A and A/F

The uniform series factors that involve F and A are derived as follows:
• Cash flow occurs in consecutive interest periods
• Last cash flow occurs in same period as F

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 Uniform series compound amount factor
05 Example: Uniform Series Involving F/A
An industrial engineer made a modification to a chip manufacturing
process that will save her company $10,000 per year. At an interest
rate of 8% per year, how much will the savings amount to in 7 years?

(A) $45,300 (B) $68,500 (C) $89,228 (D) $151,500

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06 Example: Uniform Series Involving F/A
The president of Ford Motor Company wants to know the equivalent future
worth of a $1 million capital investment each year for 8 years, starting 1
year from now. Ford capital earns at a rate of 14% per year.

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Asef Shahriar - IEM - KUET
 • An arithmetic gradient series is a cash flow
series that either increases or decreases by a
constant amount each period. The
Gradient amount of change is called the gradient.
Series • A geometric gradient series is a cash flow
series that either increases or decreases by a
constant percentage each period. The
uniform change is called the rate of change.

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 Arithmetic Gradients
Suppose that there is a series of "n" payments uniformly spaced but differing from one period to the next by a constant.
The change or "gradient" from one period to the next is denoted "G.“
Let Base Amount be the payment at EOY (end of year) 1.
G= (payment at EOY 2) – Base Amount

• G starts between periods 1 and 2 (not

between 0 and 1).
• This is because cash flow in period 1 is
usually not equal to G and is handled
separately as a base amount.

Note that PG is located Two

𝐶𝐹𝑛 = 𝑏𝑎𝑠𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 + 𝑛 − 1 𝐺 Periods Ahead of the first
change that is equal to G
𝐺 1+𝑖 𝑛 −1 𝑛
𝑃𝐺 = [ − ]
𝑖 𝑖 1+𝑖 𝑛 1+𝑖 𝑛

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Arithmetic Gradients

1 𝑛
𝐴𝐺 = 𝐺 −
𝑖 1+𝑖 𝑛−1

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 Typical Arithmetic Gradient Cash Flow
PT = ?

i = 10%
0 1 2 3 4 5

400
450
Amount in year 1 500
is base amount 550
600

This diagram = this base amount plus this gradient

PA = ? PG = ?
i = 10% i = 10%

+
0 1 2 3 4 5 0 1 2 3 4 5

Amount 400 400 400 400 400

50
in year 1 100
PA = 400(P/A,10%,5) PG = 50(P/G,10%,5) 150
is base 200
amount PT = PA + PG = 400(P/A,10%,5) + 50(P/G,10%,5)
2-38
07
Example: Arithmetic Gradient

A local university has initiated a logo-licensing program with the

clothier Holister, Inc. Estimated fees (revenues) are $80,000 for the first
year with uniform increases to a total of $200,000 by the end of year 9.
Determine the gradient and construct a cash flow diagram that
identifies the base amount and the gradient series.

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08
Example: Arithmetic Gradient

The present worth of $400 in year 1 and amounts increasing by $30 per
year through year 5 at an interest rate of 12% per year is closest to:

(A) $1532 (B) $1,634 (C) $1,744 (D) $1,829

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09
Example: Arithmetic Gradient

Neighboring parishes in Louisiana have agreed to pool road tax

resources already designated for bridge refurbishment. At a recent
meeting, the engineers estimated that a total of $500,000 will be
deposited at the end of next year into an account for the repair of old
and safety-questionable bridges throughout the area. Further, they
estimated that the deposits will increase by $100,000 per year for only 9
years thereafter, then cease. Determine the equivalent (a) present
worth, and (b) annual series amounts, if public funds earn at a rate of
5% per year.

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Geometric Gradients

Pg = ?

1 2 3 4 n 𝑃𝑔 = 𝐴1 (𝑃/𝐴, 𝑔, 𝑖, 𝑛)
0
A1 1+𝑔 𝑛
1−
A 1(1+g)1 1+𝑖
A 1(1+g)2 ;𝑔 ≠ 𝑖
𝑃/𝐴, 𝑔, 𝑖, 𝑛 = 𝑖−𝑔
𝑛
;𝑔 = 𝑖
A 1(1+g)n-1 1+𝑖

Note: g starts between

periods 1 and 2
10 Example: Geometric Gradient

Find the present worth of $1,000 in year 1 and amounts increasing by

7% per year through year 10. Use an interest rate of 12% per year.

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11 Example: Geometric Gradient
A coal-fired power plant has upgraded an emission control valve. The
modification costs only $8000 and is expected to last 6 years with a
$200 salvage value. The maintenance cost is expected to be high at
$1700 the first year, increasing by 11% per year thereafter. Determine
the equivalent present worth of the modification and maintenance
cost by hand and by spreadsheet at 8% per year.

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Summary of Important Points

In P/A and A/P factors, P is one period ahead of first A

In F/A and A/F factors, F is in same period as last A

To find untabulated factor values, best way is to use formula or spreadsheet

For arithmetic gradients, gradient G starts between periods 1 and 2

Arithmetic gradients have two parts, base amount (year 1) and gradient amount

For geometric gradients, gradient g starts been periods 1 and 2

In geometric gradient formula, A1 is amount in period 1
To find unknown i or n, set up equation involving all terms and solve for i or n