Plan | 6 PM+

• Cost Index
• Equipment cost estimation by scaling
• Problem 1
• Power factor method applied for cost estimation
• Problem 2
RA |
Reading
Assignment :
Reinforce
all this by
self study.
Remember
1:2 rule !

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

COST ESTIMATION

• 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.
• Capital must be allocated for direct plant expenses, such as
those for raw materials, labor, and equipment … .
• Besides direct expenses, many other indirect expenses are
incurred, and these must be included if a complete analysis of
the total cost is to be obtained.
• Some examples of these indirect expenses are administrative
salaries, product-distribution costs, and costs for interplant
communications … .

BITS Pilani, Pilani Campus

COST ESTIMATION

• A capital investment is required for any industrial process,

and determination of the necessary investment is an
important part of a plant-design project.
• The total investment for any process consists of fixed-
capital investment for physical equipment and facilities in the
plant
• plus working capital which must be available to pay salaries,
keep raw materials and products on hand, and handle other
special items requiring a direct cash outlay.
• Thus, in an analysis of costs in industrial processes, capital-
investment costs, manufacturing costs, and general expenses
including income taxes must be taken into consideration.

4 March 2025 3
BITS Pilani, Pilani Campus
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 can be 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.

BITS Pilani, Pilani Campus

 COST INDEXES
• 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:
1. Marshall and Swift all-industry and process-industry equipment
indexes,
2. Engineering News-Record construction index,
3. Nelson-Farrar refinery construction index, and the
4. Chemical Engineering plant cost index.
• Table (next slide) presents a list of values for various types of indexes
over a period of 15 years.

BITS Pilani, Pilani Campus

Cost indexes
as annual averages …

RA |
Reading
Assignment :
Reinforce
all this by
self study.
Remember
1:2 rule !

BITS Pilani, Pilani Campus

 Estimating Equipment Costs
by Scaling
• It is often necessary to estimate the cost of a piece of
equipment when no cost data are available for the
particular size of operational capacity involved.
• Good results can be obtained by using the logarithmic
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 at one
capacity is known, the cost of a similar unit with X times the
capacity of the first is approximately [X] (to the power) 0.6
times the cost of the initial unit.

BITS Pilani, Pilani Campus

 Typical exponents for
equipment cost vs. capacity
However, the
application of the 0.6
rule of thumb for
most purchased
equipment is an
oversimplification of
a valuable cost
concept since the
actual values of the
cost capacity factor
vary from less than
0.2 to greater than
1.0 as shown in Table
…

Because of this, the 0.6 factor should only be

used in the absence of other information.
BITS Pilani, Pilani Campus
Estimating Equipment Costs
by Scaling
• In general, the cost-capacity concept should not be
used beyond a tenfold range of capacity,
• and care must be taken to make certain the two pieces
of equipment are similar with regard to
❖ type of construction,
❖ materials of construction,
❖ temperature and pressure operating range,
❖ and other pertinent variables
❖…
RA | Reading Assignment:
Reinforce all this by
self study.
Remember 1:2 rule !

BITS Pilani, Pilani Campus

Estimating cost of equipment using
scaling factors and cost index

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Solution

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Methods for estimating
Capital Investment

• Various methods can be employed for estimating capital

investment.
• The choice of any one method depends upon the amount of
detailed information available and the accuracy desired.
• Seven methods are outlined (in this chapter), with each method
requiring progressively less detailed information and less
preparation time.
• Consequently, the degree of accuracy decreases with each
succeeding method … !
• A maximum accuracy within approximately [+/-] 5 percent of
the actual capital investment can be obtained with method A.

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

METHOD E POWER FACTOR APPLIED
TO PLANT-CAPACITY RATIO.
This method for study or order-of-magnitude estimates relates the fixed-
capital investment of a new process plant to the fixed-capital investment of
similar previously constructed plants by an exponential power ratio.
That is, for certain similar process plant configurations, the fixed-capital
investment of the new facility is equal to the fixed-capital investment of the
constructed facility C multiplied by the ratio R, defined as the capacity of the
new facility divided by the capacity of the old, raised to a power X. This power
has been found to average between 0.6 and 0.7 for many process facilities.

where f is a lumped cost-index factor relative to the original installation cost. D is

the direct cost and I is the total indirect cost for the previously installed facility of
a similar unit on an equivalent site. RA | Reading Assignment:
Reinforce all this by
self study. Remember 1:2 rule !
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Estimating relative costs of construction
labor as a function of geographical area

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Solution

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

 Important Reference

• M.S. Peters & K.D. Timmerhaus, Plant Design and

Economics for Chemical Engineers, McGraw- Hill, 5th
Edition, 2011.
• + 4th Edition, 1991.

4 March 2025 17
Plan

• Break even point

• Problem
❖ break even point and
❖ gross earnings

❖Net profit (to do later!)

BITS Pilani, Pilani Campus

Operating Time and Rate of Production

• One of the factors that has an important effect on the costs is the fraction of
the total available time during which the process is in operation.
• When equipment stands idle for an extended period of time, the labor costs
are usually low; however, other costs, such as those for maintenance,
protection, and depreciation, continue even though the equipment is not in
active use.
• Operating time, rate of production, and sales demand are closely interrelated.
• The ideal plant should operate under a time schedule which gives the
maximum production rate while maintaining economic operating methods.
• In this way, the total cost per unit of production is kept near a minimum
because the fixed costs are utilized to the fullest extent.
• This ideal method of operation is based on the assumption that the sales
demand is sufficient to absorb all the material produced.
• If the production capacity of the process is greater than the sales demand,
the operation can be carried on at reduced capacity or periodically at full
capacity.

4 March 2025 2
BITS Pilani, Pilani Campus
Break-even chart for
chemical processing plant
• Figure gives a graphical analysis of the
effect on costs and profits when the rate of
production varies.
• As indicated in this figure, the fixed costs
remain constant and the total product cost
increases as the rate of production
increases.
• The point where the total product cost
equals the total income is known as the
break-even point.
• Under the conditions shown in Figure, an
ideal production rate for this chemical
processing plant would be approximately
450,000 kg/month, because this represents
the point of maximum net earnings.
• The effects of production rate and
operating time on costs should be
recognized.
• By considering sales demand along with
the capacity and operating characteristics
of the equipment, the engineer can
recommend the production rate and
operating schedules that will give the best
economic results

4 March 2025 3
BITS Pilani, Pilani Campus
 [ Break-even point ], [ gross earnings ], and
(to do later) [ net profit ] for a process plant.
• The break-even point (Figure) occurs when
The annual direct production costs for a
the total annual product cost equals the
plant operating at 70 percent capacity are
total annual sales.
$280,000 while the sum of the annual
fixed charges, overhead costs, and general • The total annual
expenses is $200,000. What is the break- product cost is the
even point in units of production per year sum of the fixed
if total annual sales are $560,000 and the costs (including
product sells at $40 per unit? What were fixed charges,
the annual gross earnings and overhead, and
(to do later) net profit for this plant at 100 general expenses)
percent capacity in 1988 when corporate and the direct
income taxes required a 15 percent tax on production costs
the first $50,000 of annual gross earnings, for n units per year.
25 percent on annual gross earnings of • The total annual
$50,000 to $75,000, 34 percent on annual sales is the product
gross earnings above $75,000, and 5 of the number of
percent on gross earnings from $100,000 units and the
to $335,000? selling price per
unit.
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 Solution

Number of units needed for a break-even point is given by:

5
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 Important Reference

• M.S. Peters & K.D. Timmerhaus,

Plant Design and Economics for
Chemical Engineers, McGraw- Hill,
5th Edition, 2011.

4 March 2025 6
Engineers often encounter annuities in
depreciation calculations, where the
decrease in value of equipment with time
is accounted for by an annuity plan.

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

P1. Application of annuities in determining amount
of depreciation with discrete interest compounding

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 as a cost by making equal
charges 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 due to
depreciation under these conditions.

This method for determining depreciation is based on an ordinary annuity and is

known as the sinking-fund method.

This problem is a typical case of an ordinary annuity. Over a period of 10 years,

equal payments must be made each year at an interest rate of 6 percent. After 10
years, the amount of the annuity must be equal to the total amount of
depreciation.
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
NOMENCLATURE

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Solution

4
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
P2. Application of annuities in determining amount of depreciation
with continuous cash flow and interest compounding.

Repeat P1 with continuous cash flow and nominal annual interest of

6 percent compounded continuously.

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

 Solution
This problem is solved in exactly the same manner as P1,
except the appropriate equation for the continuous-
interest case is used in place of the discrete-interest
equation.

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

 Important Reference

• M.S. Peters & K.D. Timmerhaus,

Plant Design and Economics for
Chemical Engineers, McGraw- Hill,
5th Edition, 2011.

4 March 2025 7
Plan

• Determination of depreciation by straight-

line and declining-balance methods
• Comparison of alternative investments using
capitalized costs

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

P1. Determination of depreciation by straight-
line and declining-balance methods

The original value of a piece of equipment is $22,000, completely installed and

ready for use. Its salvage value is estimated to be $2000 at the end of a service
life estimated to be 10 years. Determine the asset (or book) value of the
equipment at the end of 5 years using:
(a) Straight-line method.
(b) Textbook declining-balance method.
(c) Double declining-balance (200 percent) method (i.e., the declining-balance
method using a fixed-percentage factor giving a depreciation rate equivalent
to twice the minimum rate with the straight-line method).

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Solution

Pls refer text book

giving the details
of Declining-
Balance (or Fixed
Percentage)
Method for more
insight into f…!
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
P2. Comparison of alternative
investments using capitalized costs
A reactor, which will contain corrosive liquids, has been designed. If the reactor is
made of mild steel, the initial installed cost will be $5000, and the useful-life
period will be 3 years. Since stainless steel is highly resistant to the corrosive
action of the liquids, stainless steel, as the material of construction, has been
proposed as an alternative to mild steel. The stainless-steel reactor would have an
initial installed cost of $15,000. The scrap value at the end of the useful life would
be zero for either type of reactor, and both could be replaced at a cost equal to the
original price. On the basis of equal capitalized costs for both types of reactors,
what should be the useful-life period for the stainless-steel reactor if money is
worth 6 percent compounded annually?

The capitalized cost is defined as the original cost of the equipment plus the
present value of the renewable perpetuity. Designating K as the capitalized cost
and Cv, as the original cost of the equipment:

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

 Solution
The capitalized cost for the mild-steel reactor is:

Note: Thus, the useful-life period of

Therefore, the capitalized cost for the stainless-steel reactor should be
the stainless-steel reactor must also be $31,180. 11.3 years for the two types of
reactors to have equal capitalized
For the stainless-steel reactor,
costs. If the stainless-steel reactor
would have a useful life of more than
11.3 years, it would be the
recommended choice, while the
mild-steel reactor would be
recommended if the useful life using
Solving algebraically for n, stainless steel were less than 11.3
years.
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 DCFROR | Discounted Cash
Flow Rate of Return
A company has three alternative investments which are being considered. Because
all three investments are for the same type of unit and yield the same service, only
one of the investments can be accepted. The risk factors are the same for all three
cases. Company policies, based on the current economic situation, dictate that a
minimum annual return on the original investment of 15 percent after taxes must
be predicted for any unnecessary investment | with interest on investment not
included as a cost. (This may be assumed to mean that other equally sound
investments yielding a 15 percent return after taxes are available.) Company
policies also dictate that, where applicable, straight-line depreciation is used and,
for time-value of money interpretations, end-of-year cost and profit analysis is
used. Land value and pre-startup costs can be ignored.

Given the following data, determine which investment, if any, should be made by
alternative-analysis profitability-evaluation methods of Discounted cash flow | DCF.

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Method of Discounted Cash
Flow | Investment 1 This rate of return
represents the after-tax
interest rate at which
the investment is repaid
by proceeds from the
project. It is also the
maximum after-tax
interest rate at which
funds could be
borrowed for the
investment and just
break even at the end of
the service life.

Let us designate
the discounted-
cash-flow rate of
return as i.

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

At the end of five years, the
cash flow to the project,
compounded on the basis of
end-of-year income, will be:

The symbol S represents the future worth of the proceeds to the

project and must just equal the future worth of the initial investment
compounded at an interest rate i corrected for salvage value and
working capital. Thus, Setting Eq. (1) equal to Eq. (2) and
solving by trial and error for i gives i =
0.207, or the discounted-cash-flow
rate of return is 20.7 percent.
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Discounted-Cash-Flow Rate of
Return
Some of the tedious and time-consuming calculations can be
eliminated by applying a discount factor to the annual cash flows
and summing to get a present value equal to the required
investment. The discount factor for end-of-year payments and
annual compounding is:

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

 This discount factor, dn,
is the amount that would
yield one dollar after n’
years if invested at an
interest rate of i. The
discounted-cash-flow
rate of return can be
determined by the trial-
and-error method
illustrated in Table ,
where the annual cash
flows are discounted by
the appropriate discount
factor to a total present
value equal to the
necessary initial
investment.
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Discounted-Cash-Flow Rate of
Return
For investment No. 2, the discounted-cash-flow equation is:

By trial-and-error solution, the discounted-cash-flow rate of return

is 22.9 percent.
Similarly, for investment No. 3,

By trial-and-error solution, the discounted-cash-flow rate of return is

21.5 percent.
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Comparison
In comparing a pair of alternatives, the base time is chosen as the
longer of the two service lines. For the case of the investment with the
shorter life, it is assumed that the accumulated amount at the end of
its life can be invested at the minimum acceptable rate for the
remaining time to equalize the two lives. The rate of return on the
incremental investment can then be determined.
Comparison of investment No. 2 to investment No. 1. At the end of
its 7-year service life, the net value of investment No. 2 is

With investment No. 1, the net value after 7 years is the amount
accumulated in 5 years times the factor to let this accumulated
amount be invested at 15 percent for 2 more years, or

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Comparison

This return is greater than 15

percent; so investment No. 2 is
preferred over investment No. 1.

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

 Comparison
Comparison of investment No. 3 to investment No. 2.
At the end of its 8-year service life, the net value of investment No. 3 is

This return is greater than 15’percent; so

investment No. 3 is preferred over
investment No. 2. Therefore, investment No.
3 should be recommended.
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 Important Reference

• M.S. Peters & K.D. Timmerhaus,

Plant Design and Economics for
Chemical Engineers, McGraw- Hill,
5th Edition, 2011.
• + 4th Edition, 1991.

4 March 2025 11
 ..., 7

BIRLA INSTI TUTE OF TECHNOL-OGY & SCIEN CE, PILANI

Second Seme~t~r (20~4:-~025) -.
Tutoria l Test 1 (Closed Book)
CHE F343 (Process Design Principl e II) • Max Time: 20 mins
Date: 29/0 l /2025 ">Max Marks: 18
.......................
.........................................................................-............. ..... .............Sec
Name: fD No: No:
. ........... ., ...........
.. .
........... ........... ........... ........... ........... ........... ........... ........... ...........
- .

salvage
Ql The initial cost of a complet ely installed reactor in a plant is Rs. 60,000 and the
s for
value at the end of useful life is estimated to.be Rs. I 0,000.-The totat annual expense
the plant are Rs. 40,000. • •
the
A) How many years of useful life should be estimated for the i:eact__ot if ~5% of
total annual expense s/or the plant are due to the cost for reactor deprecia tion for
year 2. • ••
are
B) Determ ine the useful life in case the salvage value is Rs. 0 (other conditions
same). . ' .
Assume sum of the years digits method for d~termin jng yearly de.precia tion· in all cases.
 ~tr~~. ../
_.:2..\...-...~ ( (: ,o _, oo ~. = ".l...o.:,ooa
~~"""~
--> ~ *-~ : : .
't -
~ ~ Y '- .

~ " " -- ~ " '- -~ ~ "

" '- ~ ~ :t ~ D
4- ?: ): :-- ~~~~~ 0
-; ;: :5 ? ~ -= -~ ~ ~
~~~-~~~~ -

~
::= ;., ~= ~~~ %• s ~A)
. . .· 9 ~:'--== ;i__
~ - 7 7 ~ ~• s
1
-" ~-:::•:.• -..)..~n~. \_&~...__
v,

• I

.I.

/' . .

•i

I • •
 & SCIENCE, PILANI
BIRLA INSTITUTE OF TECHNOLOGY
Second Semester (2024-2025)
Tutorial Test 2 (Closed Book) Max Time: 20 mins
CHE F343 (Process Design Principle II) Max Marks: 18
Date: 5/2/2025
....................................................................
.......................................................ID No: Sec No:
Name: .......................................
.....................................................................................
life of the tow er is
tow er is Rs. 36,0 00 and the usef ul
QI The original cost for a distillation is used and
met hod for dete rmin ing dep reci atio n
estimated to be 6 years. The sink ing- fund scra p valu e of
depr ecia tion funJ is 5 per~ e'(,J .(t~ e
the effective annual interest rate for the end of 4 year s
rmin e the amo unt acc um ul~ ~~
the distillation tow er is Rs. 400 0, dete
ion)
of useful life (show all steps in calculat

Solution:
 lllRLA INST ITUT E OF TEC IINO LOG Y & SCIF
:NCE , P ILAN I
Secon d Seme s ter (2024 -2025 )
Tutor ial Test 3 (C losed Book )
CIIE FJ43 (rroccss Desig n Princ iple II) Max Time: 20 mins
Date: 12/2/2025 Max Marks: 18

••••••••••• • •••• • • • ••••

••• •• ••• ••• •••••••••••
•• • • t •••••• •• •••••• • • •
•••• • •••• • ••••• • •• • • • ••
• • • • • • • • • • • • • • • • • • •• • • • • ••
• • •• • • • •

QI It is known that capita lized cost for a proce ss equip

ment= [original cost of equipment 1
present value of the renew able perpetuity]. By usi ng this conce
pt, for continuous interest
comp oundi ng. derive an expression for Capitalized cost
in terms of original cost.
replacement cost, r (rate or interest) and n (time duration in ye.irs/
scrvice Iilc):-
Plcas c sho·w all steps for your rcsult /culcu lations .

Solut ion: ~\ ""-\-'4}- ~. .,

~~ ~= S- c .i :~ ~
~ f = \' .Q.,~- c:...__ \..::. ~ <J:,a.~
.

"=> ctt.= -<'~~~~

p,,-, ~ ~~ ~ \ -

~~~ ~ ¥-:::: c" T f

<::.." -\- ~
\="~-~
 BIRLA INSTITUTE ()F TECHNOLOGY & SCIENCE, PILANI
Second Semester (2024-2025)
Tutorial Test 4 (Closed Book)
CHE F343 (Process Design Principle 11) Max Time: 20 mins
Date: 19/2/2025 Max Ma:rks: I 8
...........................................................................................................................
Name: ID No: Sec No:
............................................................................................................................
Ql The annual constant cash flow to a project after taxes is Rs. 80.000. the salvage value is
Rs. 5000 at the end of service life of 5 years and total initial fixed capital investment -= Rs.
90,000. Apply sum of year digits method for depreciation calculations. Determine payout
period (years) with no interest charges. [all calculation steps should be documentedJ

Solution:

- j
-