Plant Design and Economics

Instructor : Ysacor M/Surafel .

Year : 2013 E.C

Target group : 5th year chemical Engineering students

Lecture -4
 Course outline
UNIT: INTRODUCTION TO PLANT DESIGN UNIT 4: COST BENEFIT ANALYSIS (CBA)
1.1 The need for professionalism and ethics 4.1 Cash-Flow
1.2 General Design Considerations 4.2 Measures of profitability (PBP, IRR, NPV, PI)
1.3 Nature and function of design 4.3 Interests, Taxes and insurance, Depreciation
1.4 Sources of design information and data
UNIT 2: PROCESS DESIGN DEVELOPMENT UNIT 5: SELECTION AND SPECIFICATION OF EQUIPMENT
2.1 Project conception 5.1 Auxiliaries and utilities
2.2 Preparing flow-sheets, Block diagram, process flow 5.2 Material handling equipment
diagrams and standard symbols 5.3 Mass transfer and reactors equipment
2.3 Piping & Instrumentation Diagrams 5.4 Mechanical unit operation equipment
2.4 Material and Energy Balances 5.5 Materials selection

UNIT 3: FINANCIAL & ECONOMIC ANALYSIS OF A PLANT UNIT 6: SITE SELECTION& PLANT LAYOUT
3.1 Types of Capital Investments
3.2 Cost Estimation and Its Techniques UNIT 7: SAFETY IN PROCESS PLANT DESIGN
3.3 Types of Capital Cost Estimates 7.1 Safety and loss prevention
3.4 Factors Affecting Investment and Production Cost 7.2 Environmental and safety considerations
3.5 Cost indexes 7.3 Waste Minimization

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 CAPITAL INVESTMENTS

 Before an industrial plant can be put into operation, a large sum of money must
be supplied to purchase and install the necessary machinery and equipment.

 Land and service facilities must be obtained, and the plant must be erected
complete with all piping, controls, and services. In addition, it is necessary to
have money available for the payment of expenses involved in the plant
operation.

 The capital needed to supply the necessary manufacturing and plant facilities
is called the fixed-capital investment, while that necessary for the operation
of the plant is termed the working capital. The sum of the fixed-capital
investment and the working capital is known as the total capital investment.
The fixed-capital portion may be further subdivided into manufacturing capital
investment and nonmanufacturing capital investment

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 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.

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 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.
 The construction overhead cost consists of field-office and supervision
expenses, home-office expenses, engineering expenses, miscellaneous
construction costs, contractor’s fees, and contingencies. In some cases,
construction overhead is proportioned between manufacturing and
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.
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 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, and raw-material purchases,
(5) accounts payable, and
(6) taxes payable

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 Cost Estimation

 Of the many factors which contribute to poor estimates of capital

investments, the most significant one is usually traceable to sizable
omissions of equipment, services, or auxiliary facilities rather than to
gross errors in costing. A check list of items covering a new facility is an
invaluable aid in making a complete estimation of the fixed-capital
investment. Table 1 gives a typical list of these items.

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 Table 1 - Break down of fixed capital invest in chemical process

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 Types of Capital Cost Estimates

 An estimate of the capital investment for a process may vary from

a predesign estimate based on little information except the size of
the proposed project to a detailed estimate prepared from complete
drawings and specifications.

 Between these two extremes of capital-investment estimates, there

can be numerous other estimates which vary in accuracy
depending upon the stage of development of the project.

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  These estimates are called by a variety of names, but the following five categories represent
the accuracy range and designation normally used for design purposes:

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.

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 FACTORS AFFECTING INVESTMENT AND PRODUCTION COSTS

 When a chemical engineer determines costs for any type of commercial process,
these costs should be of sufficient accuracy to provide reliable decisions. To
accomplish this, the engineer must have a complete understanding of the many
factors that can affect costs.

 if the chemical engineer bases the cost of the raw materials for the process on
regular market prices, the result may be that the process is uneconomical. If
the engineer had based the estimate on the actual prices the company would
have to pay for the raw materials, the economic picture might have been altered
completely. Thus the engineer must keep up-to-date on price fluctuations,
company policies, governmental regulations, and other factors affecting costs.

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 a) Sources of Equipment

 One of the major costs involved in any chemical process is for the
equipment. In many cases, standard types of tanks, reactors, or other
equipment are used, and a substantial reduction in cost can be made
by employing idle equipment or by purchasing second-hand
equipment.
 If new equipment must be bought, several independent quotations
should be obtained from different manufacturers. When the
specifications are given to the manufacturers, the chances for a low
cost estimate are increased if the engineer does not place overly strict
limitations on the design

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 b) Price Fluctuations

 In our modern economic society, prices may vary widely from one
period to another, and this factor must be considered when the costs
for an industrial process are determined. It would obviously be
ridiculous to assume that plant operators or supervisors could be
hired today at the same wage rate as in 1975.

 The same statement applies to comparing prices of equipment

purchased at different times. The chemical engineer, therefore, must
keep up-to-date on price and wage fluctuations

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 c) Company Policies

Policies of individual companies have a direct effect on costs.

 For example, some concerns have particularly strict safety regulations
and these must be met in every detail.
 Accounting procedures and methods for determining depreciation costs
vary among different companies.
 The company policies with reference to labor unions should be
considered, because these will affect overtime labor charges and the
type of work the operators or other employees can do.

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 d) 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

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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

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 e) Governmental Policies

 The national government has many regulations and restrictions

which have a direct effect on industrial costs. Some examples of
these are import and export tariff regulations, restrictions on
permissible depreciation rates, income-tax rules, and environmental
regulations

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 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

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  Present cost = original cost (index value at present time /index value at time 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.

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 Marshall & Swift Equipment Cost Indexes
– all-industry equipment index - arithmetic average of indexes for 47
different types of industrial, commercial, and housing equipment
– based on an index value of 100 for the year 1926
– account for cost of machinery and major equipment plus costs for
installation, fixtures, tools, office, and minor equipment
• Engineering News-Record Construction Cost Index
– indicates variance in labor rates and materials costs for industrial
construction
– one of three basis’ used: 100 for 1913, 1949 or 1967
• Nelson-Farrar Refinery Construction Cost Index
– petroleum industry construction costs
– basis - 100 for 1946

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 Chem. Engr. Plant Cost Index (CEPCI)
• construction costs for chemical plants
• equipment, machinery and supports, 61%; erection and
installation labor, 22%; buildings, materials, and labor, 7%;
engineering and supervision, 10%
• major components subdivided as: fabricated equipment, 37%;
process machinery, 14%; pipe, valves, and fittings, 20%;
process instruments and controls, 7%; pumps and
compressors, 7%; electrical equipment and materials, 5%;
structural supports, insulation and paint, 10%
• basis - 100 for 1957-1959

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