Cost-benefit analysis (Uge 45) Flashcards
The economic evaluation of a process proceeds in several steps. Which?
- Preparing a process flow diagram
- Calculating mass and energy flows
- Sizing major equipment
- Estimating the capital cost
- Estimating the production cost
- Forecasting the product sales price
- Estimating the return on investment
What is included in capital costs?
- Fixed Capital Investment
- Working Capital
(Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services.)
What is the fixed capital investment made of?
The fixed capital investment is made up of:
- The inside battery limits (ISBL) investment —the cost of the plant itself
- The modifications and improvements that must be made to the site infrastructure, known as offsite or OSBL investment. (Typical OSBL = 40% of ISBL)
- Engineering and construction costs (10 –30% of ISBL)
- Contingency charges (10 –40% of ISBL+OSBL)
(In the base case the fixed capital investment is divided in total direct costs and total indirect costs:
- Total direct cost: Warehouse, site development, additional piping.
- Total indirect costs: Prorateable Expenses, Field expenses, Home Office & Construction Fee, Project Contingency, Other Costs (Start-Up, Permits, etc.) )
What is included in working capital?
Working capital is the additional money needed, above what it cost to build the plant, to start the plant up and keep it running. Working capital typically includes:
- Value of raw material inventory —usually estimated as two weeks’ delivered cost of raw materials
- Value of product and by-product inventory —estimated as two weeks’ cost of production
- Cash on hand —estimated as one week’s cost of production
- Accounts receivable —products shipped but not yet paid for —estimated as one month’s cost of production
- Credit for accounts payable —feedstocks, solvents, catalysts, packaging, etc., received but not yet paid for —estimated as one month’s delivered cost
- Spare parts inventory —estimated as 1% to 2% of ISBL plus OSBL investment cost
For a quick capital cost estimate, shortcut methods have been developed to allow estimates of total plant costs by scaling from a similar plant costs. Which rule has been presented in class?
Six-tenths rule:
C2 = C1*(S2/S1)^n
Where:
C2 = ISBL capital costs of the plant with capacity S2
C1 = ISBL capital costs of the plant with capacity S1
Value for exponent n:
Average for whole chemical industry n is 0,6 hence the name six-tenths rule
Explain the concept “Economy of Scale”.
Larger plants tend to cost less per unit of produced product.
C2/S2 = a*S2^n-1
As n − 1 is less than zero, the cost per unit of production decreases as S2 increases, which allows the owners of large plants to price their products more competitively
Incentive for chemical companies to build plants at larger scale
What is the formula for estimating equipment cost?
Ce = a + b*S^n
Where Ce = purchased equipment cost a, b = costs constants S = size parameter n = exponent for that type of equipment.
What is “Lang Factors”?
Installation factors for equipment.
Lang factors for main plant categories:
F = 3,1 for solids processing plant
F = 4,74 for fluids processing plant
F = 3,63 for mixed fluids-solids processing plant
All cost-estimating methods use historical data, however material & labour costs increase with time due to inflation.
Cost indexes are therefore used to estimate costs for the year in question.
There are 4 main cost indices. Which?
Marshall and Swift Index (MS)
- All industry-equipment index. Arithmetic average of 47 equipment types
- Process-industry equipment index. Weighted average of 8 of these
Engineering News-Record Construction Cost index (ENR)
- Steel, lumber, labor, concrete
- ENR value reported based on 100 in 1913, 1949 or 1967
Nelson-Farrar Refinery Construction Cost index (NF)
- Skilled and common labor, iron and steel, building materials, miscellaneous equipment.
- N-R value of 100 in 1946
Chemical Engineering Plant Cost Index (CEPCI or CE)
- Equipment, machinery 61%, Engineering and supervision 10%, Installation labor 22%, Buildings, material & labor 7%
- PCI value of 100 in 1957-59
What are variable costs of production? and what is included in these costs?
Variable costs of production are costs that are proportional to the plant output or operation rate.
- Raw materials consumed by the process
- Utilities —fuel burned in process heaters, steam, cooling water, electricity, raw water, instrument air, nitrogen, and other services
- Consumables —solvents, acids, bases, inert materials, corrosion inhibitors, additives, catalysts, and adsorbents that require continuous or frequent replacement
- Effluent disposal
- Packaging and shipping —drums, bags, tankers, freight charges, etc.
What are fixed costs of production? and what is included in these costs?
Fixed production costs are costs that are incurred regardless of the plant operation rate or output. Fixed costs include:
- Operating labor
- Supervision —usually taken as 25% of operating labor
- Direct salary overhead —usually 40% to 60% of operating labor plus supervision
- Maintenance, which includes both materials and labor, and is typically estimated as 3% to 5% of ISBL investment
- Property taxes and insurance —typically 1% to 2% of ISBL fixed capital
- Rent of land (and/or buildings) —typically estimated as 1% to 2% of ISBL plus OSBL investment
- General plant overhead —charges to cover corporate overhead functions such as human resources, research and development (R & D), information technology, finance, etc.
- Allocated environmental charges —typically 1% of ISBL plus OSBL cost
- Running license fees and royalty payments.
- Capital charges —these include interest payments on investment loan
Explain “Capital financing”
A capital cost can be taken up as a loan and financed through amortization by determining the annual payment that is needed to repay the initial investment.
Explain the factors included in the formula for capital financing:
A = P*[i(1+i)^n]/[(1+i)^n-1]
A is the annual payment that would have to be paid, to pay off (amortize) the principal amount and interest on a loan of amount P, borrowed at interest rate i, over a term of n years.
Are principal payments part of CAPEX or OPEX?
CAPEX
Are interests part of CAPEX or OPEX?
OPEX
