Costing

Question 1

Define ‘Fixed Capital’

Answer 1

Total cost of the plant ready for start-up.

Question 2

Give 2 examples of fixed capital costs

Answer 2

1) Equipment & installation

2) Design costs

Question 3

Define ‘Working Capital’

Answer 3

Additional investment needed to start the plant & operate until income is earned.

Question 4

Give 2 examples of working capital costs

Answer 4

1) Cost of start-up

2) Catalyst & raw materials

Question 5

How do you calculate the total investment required

Answer 5

Total investment = fixed capital + working capital

Question 6

Give 2 examples of fixed operating costs

Answer 6

1) Labour costs

2) Insurance

Question 7

Give 2 examples of variable operating costs

Answer 7

1) Utilities

2) Feed materials

Question 8

Give an example of direct & indirect overheads

Answer 8

Direct - site facilities

Indirect - research & development

Question 9

What are the 4 methods used to estimate capital costs

Answer 9

1) Find a similar plant & adjust size
2) Time adjustment from the past/for future
3) Estimate cost of individual units & add together
4) Factorial method

Question 10

How do you calculate the cost of a new plant from a similar plant?

Answer 10

Cost plant A = Cost of plant B x [Size A/SizeB]^n

where n = 2/3 (typically)

Question 11

What is the purpose of ‘n’ when calculating plant costs based on similar plants? What is the general range & duplicate value of ‘n’?

Answer 11

Acknowledges scalability that doubling throughput does not double plant costs. When directly duplicated n=1 but generally n ranges between 0.4-0.8.

Question 12

How do you calculate the cost of a plant using time adjustment from the past?

Answer 12

Using the Annual Chemical Engineering Plant Cost Index (Annual CEPCI) for each year then;
Cost (now) = Cost (then) x [CEPCI (now)/CEPCI (then)]

Question 13

How do you calculate the cost of a plant using time adjustment for the future?

Answer 13

Use current inflation rate 1.4% and increase factor (1.014) to the power of the number of years ahead (y);
Cost (future) = Cost (now) x [1.0.14]^y

Question 14

What does the factorial method take into account? Give 2 examples.

Answer 14

It takes account of costs of associated equipment & installations as well as the major process equipment. eg. storage & instruments.

Question 15

How do you calculate the total physical plant cost (PPC) using the factorial method?

Answer 15

PPC = F x PCE

where; F = sum of individual factors & PCE = physical cost (major) equipment.

Question 16

Define ‘Cash Flow’

Answer 16

Movement of money in a set time period.

Question 17

Define what is meant by ‘Project Evaluation’

Answer 17

How long does it take to break even & the total return.

Question 18

How do you evaluate the cost of a ‘small’ & ‘large’ project?

Answer 18

Small - use rate of return (RORI) based on capital & installation.
Large - use all cash flows for discounted cash flow method (DCF).

Question 19

How do you calculate RORI?

Answer 19

RORI = [net cash flow at end of project/(life of project x original investment)] x 100

Question 20

What is the ideal value of RORI & typical payback time?

Answer 20

40% & 18 months

Question 21

What is incremental RORI used for? How is it calulated?

Answer 21

Determines whether extra capital spend is worth the net saving for desired % RORI compared to lowest capital option.
Incremental RORI = (difference net saving)/(difference capital cost)

Question 22

Define ‘Discounted Cash Flow (DCF)’

Answer 22

Time value of money in terms of investment in which a discount rate is applied (i).

Question 23

How do you calculate the net cash flow value in year t using the discount rate i?

Answer 23

F(t) = X (1 + i)^t

where X is the amount invested.

Question 24

What does the ‘Net Present Value (NPV)’ depict? How is it calculated over 7 years?

Answer 24

It says how much the money is worth today.
NPV = Total DCF
NPV = [cash flow/(1 + i)^0] + [cash flow/(1 + i)^1] + … + [cash flow/(1 + i)^7]

Question 25

How do you calculate the discount factor (DF) for year t?

Answer 25

DF = 1/(1+i)^t

Question 26

How do you calculate the discounted cash flow (DCF) in year t?

Answer 26

DCF = DF x cash flow in year t
DCF = cash flow/(1 + i)^t

Question 27

What does the discounted cash flow rate of return (DCFR) depict?

Answer 27

Looks at the worst case scenario, what is the highest discount rate (i*) for the project to break even (NPV=0)?
NPV = total DCF = 0

Question 28

What is depreciation?

Answer 28

Money taken aside from profits each year so when the plant is written off, money can be invested.

Question 29

How do you calculate annual depreciation assuming a linear change?

Answer 29

Annual depreciation = (capital cost - scrap value)/plant life

Question 30

How do you calculate the profits in year n assuming linear change?

Answer 30

Pn = Pn-1 - Ad

where Ad is the annual depreciation

Question 31

How do you calculate annual depreciation assuming a fixed annual percentage (FAP)?

Answer 31

Annual depreciation = FAP x Pn-1

Question 32

How do you calculate the profits in year n assuming fixed annual percentage (FAP) change?

Answer 32

Pn = P0 (1 - FAP)^n

Question 33

Draw the cash flow curve and label;
Working capital 
Maximum investment
Payback time
Break-even point
Net future worth (NFW)
Project Life
Original Investment

Answer 33

See written notes