Economic Evaluation

Capital Cost Estimation

The

first task in preparing an economic

evaluation of a project is usually to obtain a
capital cost estimate.
More accurate cost estimates (say 5-10%)
are only required (and possible) after the
detailed design work has been completed,
including the design and sizing of all
equipment, the determination of pipe work
layouts, and specification of the control and
instrumentation schemes.

Cost of Equipment (Major

Items)
Major

items of equipment include reactors,

heat exchangers, columns, pressure vessels,
storage tanks, etc.
Ancillary equipment such as process piping
and insulation can be estimated after the
total cost of the major items is known.

(I) Cost Correlation

Cost

correlations provide a convenient

method for estimating the capital cost of
major items of equipment.
Correlations are usually provided graphically
as plots (log-log coordinates) of capital cost
of a particular item versus capacity (e.g.
volume, surface area, throughput, or power
rating).

(II) Factored Estimate Method

The

complete plant cost can be estimated by

extrapolation from the cost of the major
items of equipment.
An accuracy of 15-25% is possible if
appropriate factors are chosen.

Module Costs
An

estimate of the plant capital cost can also

be obtained by considering the plant as a set
of modules. Each module consists of similar
items of equipment, e.g. heat exchangers,
steam generators, etc.
The standard cost of each process module is
calculated, corrections are applied for the
use of materials other than carbon steel and
for high pressures.
Variations in the process piping cost are
corrected in the contingency allowance.

modified Lang factor is calculated for each

module, including freight costs and sales
taxes.
Site development, construction and
structural work are considered as separate
modules.

Auxiliary Services
It

is necessary to include the full cost of auxiliary

services, e.g. steam, water, electricity supply and
distribution, roads, buildings, communications,
etc., in the capital cost estimate for a new plant.
If a chemical plant is to be constructed on an
existing complex, then a proportion of the cost of
existing services (based upon the estimated
consumption) is usually charged.
A very approximate estimate of the cost of
auxiliary services can be obtained by taking 2025% of the total installed (new) plant cost.
However, in some situations a figure of 40-70%
may be more appropriate.

Operating Costs - fixed

and variable
Fixed

costs such as laboratory costs,

operating labour, capital repayment charges,
insurance, etc. These costs do not depend
upon the production rate, and they must be
paid even if no chemical is produced.

Variable

costs such as raw materials, utilities

(services), shipping, etc. These costs are
dependent upon the amount of chemical
produced.

 General

operating expenses include general

overheads, research and development costs,
sales expenses, etc.
Each company decides how these costs are
apportioned, however as a general indication
they may add 20-30% to the direct production
costs at site.
Operating costs are usually calculated on an
annual basis, and subsequently re-calculated
per tonne of product (for example) when
determining the necessary selling price of the
chemical, and hence the profitability of the
plant.

 The

following items, would normally be

considered as variable costs, although in some
cases there may be both a fixed and variable
component.
(a) Raw materials are determined from the
process flowsheet and from material balances.
(b) Miscellaneous materials include items such
as safety clothing, chart recorder paper, etc.,
that are not included as raw materials or
maintenance materials. These are usually
calculated as 10% of the total maintenance
cost, and sometimes referred to as
"consumables".

(c) Utilities (services) include electricity, water,

steam, compressed air, etc. Quantities are
determined from the flowsheet and from mass
and energy balances; current costs (and
anticipated price rises) should be obtained for
these items.
(d) Shipping and packaging costs depend on
factors specific to the process, including the
location and type of product. In some cases
these costs are negligible, but sometimes they
can be significant.
(e) Maintenance includes materials and labour
costs. This cost is typically between 5-15% of
installed capital costs and should be estimated
by using data obtained from a similar plant.

(f) Labour costs should be estimated from

reasonably detailed supervision estimates. The
operating labour costs may not decrease if
production is reduced, however overtime
payments will be required for significant increases
in production. Operating labour costs do not
normally exceed 15% of the total operating cost
(most plants employ few personnel).
(g) Supervision includes the management team
directly responsible for the overall plant operation
and for directing the work of the plant operators
(item (f) above). The personnel requirements of
the management team should be determined,
although an approximate figure of 20% of item (f)
can be used to provide an initial estimate .

(h) Laboratory costs are incurred for

analyses associated with quality control and
process monitoring. An approximate
estimate can be obtained as 20-30% of the
operating labour cost (item (f) above), or 24% of the total production cost.
(i) Plant overheads include general operating
costs such as security, canteen, medical,
administration, etc. This item is often
estimated as 50-100% of item (f).

 The

following items would normally be

considered as fixed costs which must be paid
even if no chemical is produced or sold.
(a) Capital charges are recovered from the
project to repay the initial capital investment
and the interest accrued on the debt. The
procedure adopted depends upon the
accounting practice of the company. Capital
is often recovered as a depreciation charge
of 10% per annum (for example) based on a
plant operating life of 10 years, although the
plant is not necessarily replaced after that
time.

 Interest

is charged on the capital which is

borrowed to finance the plant, and this must be
repaid (monthly or annually) until the capital debt
is completely repaid. The capital may be obtained
from various sources, e.g. a loan from a finance
company, share issues, internal company
reserves, a fixed-interest government loan, or
some combination of these alternatives.
(b) Rates are payable to the local authority or
shire based upon the assessed rateable value of
the site. A typical figure is 1-2% of the capital
cost.
(c) Insurance for the site, the plant and
employees is usually about 1-2% of the fixed
capital.

(d) Royalties and licence fees are payable to

the company or individual responsible for
developing the process. This payment may
be a lump sum or an annual fee, and is
typically either 1-5% of sales price or 1% of
the fixed capital.

Depreciation
Depreciation

of an asset is determined so
that the company accounts can be prepared
and the shareholders can identify the current
value of the assets of the company.
Depreciation needs to be calculated for
taxation purposes.
Taxes are paid for a particular year based
upon the revenues received, minus the costs
incurred, for that specific 12 months.
Each year the taxation office will allow
depreciation of a capital asset to be claimed
as a deduction from profits before tax is paid.

 Depreciation

allowance is deducted from

gross profits, i.e. money (or tax allowance)
stays within the company and is not taxed.
As the tax to be paid is calculated on the net
profit, so the tax payment is reduced. The
company may decide to use the depreciation
allowance (i.e. tax saved) to fund new
projects which will eventually replace the
existing plant.
If no profit is made in a particular tax year,
then no tax is paid, and hence no
depreciation allowance can be claimed for
that particular year.
Depreciation is is a loss/decline in value of an
asset from its original value.

Profitability Analysis
The Payback Period
The payback period (or payout time) is the
number of years from plant start-up required
to recover all expenses involved in a project.
A payback period of less than five years is
usually required for a project to proceed
(preferably closer to 3 years). However, the
payback period does not consider the timing
of the payments or the profits earned by the
plant after the payback period.

Return on Investment (ROI)

The Return On Investment (ROI) is the
expected profit divided by the total capital
invested, expressed as a percentage return.
It must be clearly stated whether the profit is
based on pre-tax or after-tax earnings.
The after-tax ROI is compared with the
earningsthat could be achieved by an
alternative investment, e.g. capital bonds.
An after-tax ROI of at least 15-20% is usually
expected (or pre-tax ROI of 30-40%).