Lecture # 5 cost estimation i

Lecture # 5
Cost estimation
Capital and Total Product Cost – part 1
1
Dr. A. Alim

ANALYSIS OF COST ESTIMATION
• Capital and Products costs estimation
• Depreciation / Depletion
• Taxes and EVA
• Disposal of assets/capital gain
2
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
3
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,

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.
4
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.

Breakdown of fixed capital investment items for a chemical process
Table 6-1, page 234, Peters, Timmerhaus, and West
5

6

7

8

9
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.

10
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.
Major
Item

11
McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster
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
12
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.

COST ESTIMATION
CAPACITY FACTOR - Converting the historical capital cost
data to the current equipment using the power law.
n
B
A
B
A
FACTOR
FACTOR
COST
COST







The “factor” is selected to be a feature of the design that
correlates best with the capital cost.
B = known and A = new design
13

COST ESTIMATION
CAPACITY FACTOR
n
B
A
B
A
FACTOR
FACTOR
COST
COST







What is the correct factor for a shell
and tube heat exchanger?
• Heat duty
• area
• number of tubes
• flow rate
n = ??
14

COST ESTIMATION
n
B
A
B
A
FACTOR
FACTOR
COST
COST







What is the correct factor for a
shell and tube heat exchanger?
• Heat duty
• area
• number of tubes
• flow rate
n = ??
Area has the
dominant effect on
manufacturing cost.
Pumps -- m3/s or power
agitators -- power
distillation --
height*diameter
15

Rough guideline, n = 0.6
COST ESTIMATION
CAPACITY FACTOR - The power n < 1.0 (usually) !
n
B
A
B
A
FACTOR
FACTOR
COST
COST







16

COST ESTIMATION
17

COST ESTIMATION
Purchased Equipment Costs
Extensive graphs of various equipment cost/capacity charts
Are found in Peters, Timmerhaus, and West book:
Material handling equipment Chapter 12
Reactor equipment Chapter 13
Heat transfer equipment Chapter 14
Separation equipment Chapter 15
Auxiliary, utility, and instrumentation Appendix B
18
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.

19

20

COST ESTIMATION
INFLATION FACTOR (COST INDEXES) TABLES
21

COST ESTIMATION
Values for Selected Indexes
22

23

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COST ESTIMATION
Types of Cost Estimates
We must balance the needed accuracy with the cost to perform.
Name Accuracy Application Nature
Order of magnitude estimate -40 to +40% Screen investments Predesign
Study estimate -30 to +30% Finalize major choices Predesign
Preliminary -20 to +20% Budget authorization Predesign
Definitive -10 to +10% Project control Design
Detailed -5 to +5% Contracting Design
As the estimate accuracy is increased, so does the cost
of obtaining the estimate
25

COST ESTIMATION
This useful table is available
in Peters,Timmerhaus, and
West and in Perry’s
Handbook.
It gives a summary of the
type of information needed
for each level of estimate.
26Material 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.

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
27

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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33
Short ton = 2000 pounds = 0.9 metric ton

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
34

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
35

Lecture # 5 cost estimation i

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