Estimation Of Capital Investment

2017-CH-716
 CAPITAL INVESTMENT

Fixed capital investment Working capital

Manufacturing or direct Non-Manufacturing or

fixed capital investment indirect fixed capital
investment
 Fixed capital investment

The capital needed to supply the necessary manufacturing and plant

facilities is called the fixed-capital investment.
The fixed-capital portion may be further subdivided into;

1) Manufacturing fixed-capital investment

2) Non-manufacturing fixed-capita investment
 Manufacturing fixed capital investment

Manufacturing fixed-capital investment represents the capital

necessary for the installed process equipment with all auxiliaries that
are needed for complete process operation.
Expenses for piping, instruments, insulation, foundations, and site
preparation are typical examples of costs included in the
manufacturing fixed-capital investment.
Non-Manufacturing fixed capital investment

Fixed capital required for construction overhead and for all plant
components that are not directly related to the process operation is
designated as the nonmanufacturing fixed-capital investment.
These plant components include the land, processing buildings,
administrative, and other offices, warehouses, laboratories,
transportation, shipping, and receiving facilities, utility and waste-
disposal facilities, shops, and other permanent parts of the plant.
 working capital

The working capital for an industrial plant consists of the total amount of
money invested in;
1. Raw materials and supplies carried in stock
2. Finished products in stock and semi-finished products in the process of
being manufactured
3. Accounts receivable
4. Cash kept on hand for monthly payment of operating expenses such
as salaries, wages, and raw-material purchases,
5. Accounts payable
6. Taxes payable
 ESTIMATION OF CAPITAL INVESTMENT
 Of the many factors which contribute to poor estimates of capital
investments, the most significant one is usually traceable to;
1. Sizable omissions of equipment
2. Services
3. Auxiliary facilities
4. Gross errors in costing
 Types of Capital Cost Estimates

1. Order-of-magnitude estimate (ratio estimate) based on similar previous cost data;

probable accuracy of estimate over + 30 percent.
2. Study estimate (factored estimate) based on knowledge of major items of
equipment; probable accuracy of estimate up to 30 percent.
3. Preliminary estimate (budget authorization estimate; scope estimate) based on
sufficient data to permit the estimate to be budgeted; probable accuracy of estimate
within +20 percent.
4. Definitive estimate (project control estimate) based on almost complete data but
before completion of drawings and specifications; probable accuracy of estimate
within 10 percent.
5. Detailed estimate (contractor’s estimate) based on complete engineering
drawings, specifications, and site surveys; probable accuracy of estimate within +5
percent.
 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.
 Types Of Cost Indexes
The commonly used index are following;
1. Marshall and swift all-industry and process-industry equipment indexes
2. The engineering news-record construction index
3. The nelson-farrar refinery construction index
4. The chemical engineering plant cost index
 Marshall and Swift Equipment Cost Indexes
The Marshall and Swift (formerly known as Marshall and Stevens)
equipment indexes are normally divided into two categories.
 The all-industry equipment index is simply the arithmetic average of
individual indexes for 47 different types of industrial, commercial, and
housing equipment.
The process-industry equipment index is a weighted average of eight
of these, with the weighting based on the total product value of the
various process industries.
The Marshall and Swift indexes are based on an index value of 100
for the year 1926.
 Percentages

The percentages used for the weighting in a typical year are as follows:
1. Cement 2%
2. Chemicals 48%
3. Clay Products 2%
4. Glass 3%
5. Paint 5%
6. Paper 10%
7. Petroleum 22%
8. Rubber 8%
 Engineering News-Record Construction Cost Index

Relative construction costs at various dates can be estimated by the

use of the Engineering News-Record construction index.
This index shows the variation in labor rates and materials costs for
industrial construction.
It employs a composite cost for;
1. 2500 lb of structural steel
2. 1088 fbm of lumber
3. 2256 lb of concrete
4. 200 h of common labor
The index is usually reported on one of three bases;

1. An index value of 100 in 1913

2. An index value of 100 in 1949

3. An index value of 100 in 1967

 Nelson-Farrar Refinery Construction Cost Index

 Construction costs in the petroleum industry are the basis of the

Nelson-Farrar construction index.
 An index value of 100 is used for the base year of 1946.
 The total index percentages are weighted as follows:
1. Skilled labor 30%
2. Common labor 30 %
3. Iron and steel 20 %
4. Building materials 8%
5. Miscellaneous equipment 12 %
 Chemical Engineering Plant Cost Index
 Construction costs for chemical plants form the basis of the
Chemical Engineering plant cost index.
 The four major components of this index are weighted by percentage
in the following manner;
1. Equipment, machinery, and supports 61 %
2. Erection and installation labor 22 %
3. Buildings, materials, and labor 7%
4. Engineering and supervision 10%
 The major component, equipment, is further subdivided and weighted
as follows;
1. Fabricated equipment 37%
2. Process machinery 14%
3. Pipe, valves, and fittings 20%
4. Process instruments and controls 7%
5. Pumps and compressors 7%
6. Electrical equipment and materials 5%
7. Structural supports, insulation, and paint 10%

 All index components are based on 1957-1959 = 100.

 Purchased Equipment
The cost of purchased equipment is the basis of several predesign
methods for estimating capital investment.
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
 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)0.6 times the cost of the initial unit.
 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.
 Methods For Estimating Capital Investment
The choice of any one method depends upon the amount of detailed
information available and the accuracy desired.
1. Detailed-item estimate
2. Unit-cost estimate
3. Percentage of delivered-equipment cost
4. “Lang” factors for approximation of capital investment
5. Power factor applied to plant-capacity ratio
6. Investment cost per unit of capacity
7. Turnover ratios
 Detailed-item Estimate
A detailed-item estimate requires careful determination of each
individual item.
Equipment and material needs are determined from completed
drawings and specifications and are priced either from current cost
data or preferably from firm delivered quotations.
Estimates of installation costs are determined from accurate labor
rates, efficiencies, and employee-hour calculations.
Complete site surveys and soil data must be available to minimize
errors in site development and construction cost estimates.
The extensive data necessary and the large engineering time
required to prepare such estimate, this type of estimate is almost
prepared by contractors bidding on lump-sum work from finished
drawings and specifications.
 Unit-cost Estimate.
The unit-cost method results in good estimating accuracies for fixed-
capital investment provided accurate records have been kept of
previous cost experience.
Equipment installation labor is evaluated as a fraction of the
delivered-equipment cost.
Costs for concrete, steel, pipe, electrical, instrumentation, insulation,
etc. are obtained by take-offs from the drawings and applying unit
costs to the material and labor needs.
A unit cost is also applied to engineering employee-hours, number of
drawings, and specifications.
A cost equation summarizing this method can be given as;
 Percentage Of Delivered-equipment Cost
This method for estimating the fixed or total-capital investment
requires determination of the delivered-equipment cost.
The other items included in the total direct plant cost are then
estimated as percentages of the delivered-equipment cost.
Estimating by percentage of delivered-equipment cost is commonly
used for preliminary and study estimates.
• For comparable plants of different capacity, this method has
sometimes been reported to yield definitive estimate accuracies.
This is summarized in the following cost equation:
The percentages used in making an estimation of this type should be
determined on the basis of;
1. The type of process involved
2. Design complexity
3. Required materials of construction
4. Location of the plant
5. Past experience
 “LANG” FACTORS FOR APPROXIMATION OF
CAPITAL INVFSTMENT
This technique, proposed originally by Lang and used quite frequently
to obtain order-of-magnitude cost estimates, recognizes that the cost of
a process plant may be obtained by multiplying the basic equipment
cost by some factor to approximate the capital investment.
These factors vary depending upon the type of process plant being
considered.
where the three installation-cost factors are, in turn, defined by the
following three equations:
 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.
Cn = C(R)x
 A closer approximation for this relationship which involves the
direct and indirect plant costs has been proposed as

where f is a lumped cost-index factor relative to the original

installation cost
 INVESTMENT COST PER UNIT OF CAPACITY

An order-of-magnitude estimate Of the fixed-capital investment for a

given process can then be obtained by multiplying the appropriate
investment cost per unit of capacity by the annual production capacity
of the proposed plant.
 The necessary correction for change of costs with time can be made
with the use of cost indexes.
 Turnover Ratios
A rapid evaluation method suitable for order-of-magnitude estimates
is known as the “turnover ratio” method.
 Turnover ratio is defined as the ratio of gross annual sales to the
fixed-capital investment,

where the product of the annual production rate and the average
selling price of the commodities is the gross annual sales figures.
The reciprocal of the turnover ratio is sometimes defined as the capital
ratio or the investment ratio.
Turnover ratios of up to 5 are common for some business
establishments and some are as low as 0.2.
For the chemical industry, as a very rough rule of thumb, the ratio can
be approximated as 1.