RP 475 PROCESS ECONOMICS

CHAPTER 2: ESTIMATION OF CAPITAL COST

2.1 ESTIMATION OF CAPITAL COST

• To build and run a chemical/industrial plant it is necessary to have an appropriate

capital.
• This capital can be allocated by the company that decides to build the plant, borrowed
from banks or collected by a trust of investors.

Total Capital Cost or Total Capital Investment (TCI): This is the amount of money
needed for a project to proceed. TCI is the total amount of funds needed to build and start a
chemical plant, including the testing and troubleshooting stages before the actual production.
It does not include operating expenses or maintenance during the production process.

TCI is made up of Fixed Capital Investment (FCI) and Working Capital (WC)

i.e., TCI = FCI + WC

2.2 FIXED CAPITAL INVESTMENT (FCI)

Portion of the total capital that is invested in fixed assets to build the physical process itself,
that stay in the business almost permanently or at the very least, for more than one accounting
period.
• Land
• Buildings
• Machinery
• Vehicles and equipment

FCI can be split into:

• Direct Costs: All costs related to the physical part of the plant.
-Equipment, instrumentation, piping, insulation, foundations, etc.
• Indirect Costs: Not directly attributable to a single function; shared by many
functions because they are necessary to perform the overall objective of the firm.

-Offices, laboratories, locker rooms, canteen, loading and unloading areas, waste storage, etc.

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Examples of Direct and Indirect Costs that Contribute to FCI

2.3 WORKING CAPITAL (WC)

Portion of the total capital is required to start up the plant and meet the initial payroll and
expenses in the first few months of operation before revenues from the process start.
• Amount carried in cash
• Drawn invoices not yet paid; invoices to be issued
• Inventory available to meet initial operating needs (raw materials, solvents,
catalysts, etc).
WC is generally estimated to be 10 to 20% of FCI.

2.4 PURCHASED EQUIPMENT (PE) COST

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PE is the purchased price of equipment from a vendor (someone selling the equipment). It
is one of the major factors in the TCI direct costs. It includes the cost to build the
equipment but does not include the cost associated with transportation of that equipment to
the site, and installation, etc. Many times we may estimate PE costs based on costs of PE
from previous projects. We will usually use factors to adjust the cost for capacity or
changes in prices over time.

2.5 Estimation of Equipment Cost: Adjustment for Capacity

• Power law model

• Recognizes that cost varies as some power of the change in capacity or size.
• Usually, 0 < n ≤ 1 (reflects economies of scale). n values typically vary between 0.40
- 0.80.
• If n < 1, larger capacities will cost less (economies of scale)

Examples of Cost Exponents for Process Equipment

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 • If n is not tabulated or estimable, use n = 0.6. This is called the six-tenth (6/10th) rule.

• Assume all equipment have n = 0.6 in a process unit and scale-up using this method
for whole processes.

Example 1
Use the six-tenths rule to estimate the percentage increase in purchased cost when the
capacity of a piece of equipment is doubled.

Solution

This simple example illustrates a concept referred to as the economy of scale. Even though
the equipment capacity was doubled, the purchased cost of the equipment increased by only
52%. This leads to the following generalization:

The larger the equipment, the lower the cost of equipment per unit of capacity.

Example 2

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A new plant ordered a set of floating head heat exchangers (Area = 100 m 2) at the cost of
$92,000. What would be the cost for a heat exchanger for similar service if area = 50 m2and
n = 0.44?

Solution

NB: The cost of 100m2 exchanger ($92,000) is not twice the cost of 50m2 exchanger

This can be accounted for by economy of scale. As the size of equipment increases, the
purchased equipment cost does not increase linearly.

2.5.1 Cost Index Method

The value of money changes with time due to factors such as inflation. Inflation is measured
by cost indexes. Cost indexes give us an estimate of what a common item costs at different
points in time.

Uses cost index (ratio of cost today to cost in past), therefore, considers impact of inflation.

Commonly used costs indices

• Chemical Engineering Plant Cost Index (CEPCI)

• Nelson-Farrar (Refinery) Index
• Marshall & Swift Equipment Cost Index
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 • Engineering News-Record (ENR) Construction Cost Index

Most are web-based but require a subscription fee to access detailed values.

Variation in Cost Index from 1996 – 2011

Example 3

Cost of vessel in 1993 was $25,000 when CEPCI was 359. What is the estimated cost today
(CEPCI = 582)?

Solution

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Example 4: Accounting for capacity and time

The capital cost of a 30,000-metric ton/year isopropanol plant in 1992 was estimated to be
$23 million. The CEPCI then was 358. Estimate the capital cost of a new plant with a
production rate of 50,000 metric tons/year in 2007 (assume CEPCI = 500).

Solution

Example 5: Accounting for capacity and time

Given below are details of 2 heat exchangers, 1 bought in 1990 and the other in 1995 for the
same service.

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What is the cost of a 80 m2 heat exchanger today (2010)? (assume current index, I = 582)

Solution (Example 4)

First bring costs to a common time (2010)

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2.6 ESTIMATION OF FIXED CAPITAL COST

• Now we know how to estimate the purchased cost of equipment. Cost of installation
is added to obtain the Fixed Capital Cost (or fixed capital investment).

• Purchased cost: purchased cost of equipment at manufacturer's site (free on board-

f.o.b.)

• Installed cost: Often 3 to 8 times larger than purchased cost. Includes f.o.b. and:

– Shipping
– Materials for installation
– Labor for installation.

Factors associated with installation of equipment

1. Direct Project Expenses

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– Equipment

– Material for installation

– Labour for installation

2. . Indirect Project Expenses

– Freight, insurance, and taxes

– Construction overhead

– Contractor engineering expenses

3. Contingency and Fee

– Contingency (unforeseen circumstances, e.g., loss of time due to storms and strikes,
unpredicted price increases, etc.)

– Contractor fee

4. Auxiliary Facilities
– Site development

– Auxiliary buildings

– Off-sites and utilities

Methods used to estimate the fixed capital cost:

1. Lang Factor Method: The cost determined from the Lang Factor represents the cost
to build a major expansion to an existing chemical plant. The total cost is determined
by multiplying the total purchased cost for all the major items of equipment by a
constant.
2. Bare Module Method: More detailed and most used in the chemical process
industry to estimate the cost of a new chemical plant. This costing technique relates
all costs back to the purchased cost of equipment evaluated for some base conditions

LANG FACTOR METHOD

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Use multiplier (Lang factor) depending on type of plant to escalate purchased equipment
costs to installed costs.

First, estimate the purchased cost of individual pieces of equipment, then estimate the total
installed cost by multiplying by appropriate Lang Factor (LF) to cater for other costs.

Example 6

Determine the capital cost for a major expansion to a fluid processing plant that has a total
purchased equipment cost of $6,800,000 using the Lang Factor Method.

Solution

Capital Costs = ($6,800,000)(4.74) = $32,232,000

The Lang factor method is insensitive to changes in process configuration. It cannot

accurately account for the common problems of special materials of construction and high
operating pressures.

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BARE MODULE FACTOR METHOD

It was introduced by Guthrie in the late 1960s. Most commonly used for capital cost
estimation in the process industry. Direct, indirect, contingency, fees, etc. are expressed as
functions (multipliers) of purchased equipment cost Cp0 at base conditions (1 bar, CS-
material of construction). Each equipment type has different multipliers. The bare module
cost CBM is the sum of the direct and indirect costs associated with equipment purchase and
installation.

B1 and B2 are factors that are dependent on equipment-type

Pressure Factors for Carbon Steel Vessels

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In order to estimate the Bare Module Cost for equipment:

1. Purchased costs for the equipment at base case conditions (ambient pressure using
carbon steel) must be available.

2. Bare module factor and factors to account for different operating pressures and
materials of construction must also be known.

These data are made available for a variety of common gas/liquid processing equipment in
the appendix A of the course textbook (and many other process design textbooks).

BARE MODULE FACTOR METHOD

TOTAL MODULE COST (CTM)

Total module cost refers to the cost of making small to moderate expansions or alterations to
an existing facility. This includes Contingency and Fees at 15% and 3% of CBM.

Total Capital Investment (CTCI) based on individual cost components

Grass-roots Cost (CGR)

A grass-root plant is defined as a complete plant erected on a new site. Grass-roots cost
includes costs for auxiliary facilities.

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 • Base module cost (1 bar and CS) is used in GR cost, since auxiliary facilities should
not depend on pressure or M.O.C.

Example 7

Find the bare module cost of a floating head shell-and-tube heat exchanger with a heat
transfer area of 100 m2 at the end of 2006. The operating pressure of the equipment is 1.0
bar, with both shell-and-tube sides constructed of carbon steel. The cost curve for this type
of heat exchanger is given below.

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Constants for Bare Module Factor (A.4)

From the figure, Cp0 (2001) = ($250)(100) = $25,000

• The bare module cost is given by CBM = Cp0 (B1 + B2FpFM)

• Values of B1 and B2 for floating-head heat exchangers are given (from Table A.4 of
the textbook) as 1.63 and 1.66, respectively.

• For operating pressure of 1.0 bar and carbon steel MOC, Fp = 1 and FM = 1

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ESTIMATION OF OPERATING COST

The next major cost term needed for economic evaluation of a chemical plant is the sum of
the costs related to plant operation, product sales, payback of the invested capital,
administration, management, research and development.

This is referred to as Operating Cost. Other commonly used terms include Manufacturing
Cost or Production Cost. It involves the costs of operating the plant and selling the products.
Operating costs are often expressed in dollars per unit time (usually per year), in contrast to
the capital costs, which are expressed in dollars.

Operating Cost has three parts:

– Direct Operating Costs

– Fixed Operating Costs

– General Expenses

Cost of Manufacture (COM) = Direct Manufacturing Costs (DMC) + Fixed Manufacturing

Costs (FMC) + General Expenses (GE)

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