Lecture # 5 Cost Estimation I

Lecture # 5
Cost estimation Capital and Total Product Cost part 1
Dr. A. Alim
ANALYSIS OF COST ESTIMATION

Capital and Products costs estimation Depreciation / Depletion Taxes and EVA Disposal of assets/capital gain
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University 2001-2007.

Capital Costs Fixed capital
Manufacturing (direct) Nonmanufacturing (indirect) Working capital
Product Costs Manufacturing costs

Variable costs Fixed costs Overhead costs General expenses Administrative expenses Distribution & Marketing costs R&D

Analysis of Capital costs
Manufacturing fixed capital ( direct): Investment needed for the installed process equipment with all components needed for complete process operation Nonmanufacturing fixed capital (indirect): Investment needed for components not directly related to the process operation.
Working capital: One month raw material and supplies, finished product in stock, cash for payment of startup expenses
Typically, working capital is 10-20 % of total capital.
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University 2001-2007. 4

Breakdown of fixed capital investment items for a chemical process
Table 6-1, page 234, Peters, Timmerhaus, and West
Major Item
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Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster 11 University 2001-2007.
COST ESTIMATION
Cost Components in Capital Investment
It is most common, and most important to develop as accurate as possible an estimate of purchased equipment cost. All other items can usually be estimated as a ratio of purchased equipment Cost. Often, we can use existing or old data for similar equipment, using the following two factors. Two important factors are: 1) Capacity factor (or scaling factor)size effect 2) Inflation factor (or cost indexes)time effect
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University 20012007.
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COST ESTIMATION
CAPACITY FACTOR - Converting the historical capital cost data to the current equipment using the power law.
COS T FACTOR A A COS T B FACTOR B

B = known and A = new design
The factor is selected to be a feature of the design that correlates best with the capital cost.
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COST ESTIMATION
CAPACITY FACTOR
FACTOR A COS T A COS T B FACTOR B

What is the correct factor for a shell and tube heat exchanger? Heat duty area number of tubes flow rate
n = ??
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COST ESTIMATION
FACTOR A COS T A COS T B FACTOR B
n
Pumps -- m3/s or power agitators -- power distillation -height*diameter
Area has the dominant effect on manufacturing cost.

What is the correct factor for a shell and tube heat exchanger? Heat duty area number of tubes flow rate
n = ??
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COST ESTIMATION
CAPACITY FACTOR - The power n < 1.0 (usually) !
COSTA FACTORA COSTB FACTORB
Rough guideline, n = 0.6
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COST ESTIMATION
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COST ESTIMATION
Purchased Equipment Costs
Extensive graphs of various equipment cost/capacity charts Are found in Peters, Timmerhaus, and West book: Material handling equipment Reactor equipment Heat transfer equipment Separation equipment Auxiliary, utility, and instrumentation Chapter 12 Chapter 13 Chapter 14 Chapter 15 Appendix B
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COST ESTIMATION INFLATION FACTOR (COST INDEXES) TABLES
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COST ESTIMATION
Values for Selected Indexes
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COST ESTIMATION
Types of Cost Estimates
We must balance the needed accuracy with the cost to perform.
Name Order of magnitude estimate Study estimate Preliminary Definitive Detailed Accuracy -40 to +40% -30 to +30% -20 to +20% -10 to +10% -5 to +5% Application Screen investments Finalize major choices Budget authorization Project control Contracting Nature Predesign Predesign Predesign Design Design
As the estimate accuracy is increased, so does the cost of obtaining the estimate
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COST ESTIMATION
This useful table is available in Peters,Timmerhaus, and West and in Perrys Handbook. It gives a summary of the type of information needed for each level of estimate.
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COST ESTIMATION
CAPITAL COST ESTIMATION
1) Detailed-Item estimate.
2) Unit cost estimate.
3) Percentage of delivered equipment cost estimate.

4) Lang factor method. 5) Power factor estimate. 6) Turnover ratio estimate
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COST ESTIMATION
1) Detailed-Item estimate: Most detailed. Often prepared by contractors. Accuracy is +/- 5 %.
2) Unit cost estimate: Relies on existing data, and uses index-corrected records and published data. Acc. +/- 10%. 3) Percentage of delivered equipment cost estimate: Once delivered equipment cost is determined, all other costs are determined as percentages of that. Acc. +/- 20%.
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COST ESTIMATION
In the previous table (6-9) costs are expressed as percentage of purchased equipment cost. These costs are average values. If in a given situation costs of certain items are defined differently and/or more explicitly, the defined costs should be used.
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COST ESTIMATION
5) Power factor estimate: If C is the fixed capital, then
C (new) = C (old). f. (capacity new/capacity old)
x
f is the cost index ratio x is typically 0.6-0.7
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Short ton = 2000 pounds = 0.9 metric ton
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COST ESTIMATION
6) Turnover ratio estimate: TR = (gross annual sales)/(fixed capital)
values of 0.2 to 4.0; usually 1.0 to 1.25 in process industries
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COST ESTIMATION
CAPITAL COST ESTIMATION - Summary
1) Detailed-Item estimate.
2) Unit cost estimate.
3) Percentage of delivered equipment cost estimate.

4) Lang factor method. 5) Power factor estimate. 6) Turnover ratio estimate
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Lecture # 5 Cost Estimation I

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Lecture # 5 Cost Estimation I

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Lecture # 5

Cost estimation Capital and Total Product Cost part 1

ANALYSIS OF COST ESTIMATION

ANALYSIS OF COST ESTIMATION

Product Costs Manufacturing costs

ANALYSIS OF COST ESTIMATION

ANALYSIS OF COST ESTIMATION

Table 6-1, page 234, Peters, Timmerhaus, and West

COS T FACTOR A A COS T B FACTOR B

FACTOR A COS T A COS T B FACTOR B

Pumps -- m3/s or power agitators -- power distillation -height*diameter

Area has the dominant effect on manufacturing cost.

COSTA FACTORA COSTB FACTORB

Rough guideline, n = 0.6

COST ESTIMATION INFLATION FACTOR (COST INDEXES) TABLES

3) Percentage of delivered equipment cost estimate.

f is the cost index ratio x is typically 0.6-0.7

Short ton = 2000 pounds = 0.9 metric ton

3) Percentage of delivered equipment cost estimate.

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