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Plant Design and Economics

This document discusses methods for estimating costs and calculating key financial metrics for industrial plant design and economics. It covers total capital investment, fixed and working capital, cost estimation based on year and capacity using cost indexes and the six-tenth rule, Lang factors for fixed capital investment, turnover and capital ratios, break-even point calculation, and definitions of gross profit, net profit, and cash flow. The overall aim is to provide approaches for determining the investment needed for a new plant and analyzing its potential financial performance.

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94 views3 pages

Plant Design and Economics

This document discusses methods for estimating costs and calculating key financial metrics for industrial plant design and economics. It covers total capital investment, fixed and working capital, cost estimation based on year and capacity using cost indexes and the six-tenth rule, Lang factors for fixed capital investment, turnover and capital ratios, break-even point calculation, and definitions of gross profit, net profit, and cash flow. The overall aim is to provide approaches for determining the investment needed for a new plant and analyzing its potential financial performance.

Uploaded by

Anonymous Nayak
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Plant Design and Economics

1. Total Capital Investment/Total Initial Investment


Money that is required to set-up an industrial plant and put it into
operation.
Total Capital Investment = Fixed Capital + Working Capital
Fixed Capital Investment: Capital required to set-up a plant. It is that
money that is already invested. Ex: Money given to contractor.
Two types
i) Manufacturing fixed capital investment: Money used for
manufacturing, Ex: Piping, Insulation, Installation, etc
ii) Non-Manufacturing Fixed Capital Investment: Money that is not used
for manufacturing. Ex: Administration Building, Township, Waste
disposal, ware houses, etc
Working Capital: Additional investment needed upto point of income,
necessary for operation of plant i.e. recovered after profit. Money kept
for operating expenses and emergency like monthly wages, earthquake,
etc
5-30% of Fixed Capital Investment, 10-20% of Total Capital Investment
Cost Estimation
i) Based on Year (Same Capacity)
ii) Based on Capacity (Same Year)
Based on Year
Cost Index (C.I) (Just like Refractive Index in Physics)
Two types of Indexes are followed
i) Marshall & Swift Index
ii)Chemical Engineering Plant Cost Index
NOTE: This is best suited when time period is less than 10 years.
Cost is directly proportional to Cost index
𝑪𝒐𝒔𝒕 𝑶𝒇 𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 𝒊𝒏 𝒀𝒆𝒂𝒓 (𝒀𝟏) 𝑪𝒐𝒔𝒕 𝒊𝒏𝒅𝒆𝒙 (𝑪𝟏)
=
𝑪𝒐𝒔𝒕 𝑶𝒇 𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 𝒊𝒏 𝒀𝒆𝒂𝒓 (𝒀𝟐) 𝑪𝒐𝒔𝒕 𝒊𝒏𝒅𝒆𝒙(𝑪𝟐)

Based on Capacity
Six-Tenth Rule
𝑪𝒐𝒔𝒕 𝑶𝒇 𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 (𝒀𝟏) 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚(𝑸𝟏) 𝒏
=( )
𝑪𝒐𝒔𝒕 𝑶𝒇 𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 (𝒀𝟐) 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚(𝑸𝟐)
n = 0.6 if nothing is given
n = 1 if linear
Else variation will be mentioned in question like square root of or ¾ times
etc
If both capacity and index is varied
𝑪𝒐𝒔𝒕 𝑶𝒇 𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 (𝒀𝟏) 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚(𝑸𝟏) 𝒏 𝑪𝒐𝒔𝒕 𝑰𝒏𝒅𝒆𝒙(𝑪𝟏)
=( ) ( )
𝑪𝒐𝒔𝒕 𝑶𝒇 𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 (𝒀𝟐) 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚(𝑸𝟐) 𝑪𝒐𝒔𝒕 𝑰𝒏𝒅𝒆𝒙(𝑪𝟐)

Fixed Capital Investment or Total Capital Investment = Lang Factor X S.P of


equipment
𝑮𝒓𝒐𝒔𝒔 𝑨𝒏𝒏𝒖𝒂𝒍 𝑺𝒂𝒍𝒆𝒔
Turnover Ratio =( )
𝑭𝒊𝒙𝒆𝒅 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑰𝒏𝒅𝒆𝒙
Reciprocal of turnover ratio is Capital ratio or Investment Ratio
Break-Even Point
Total Production Cost = Total Income
Total Production Cost = Fixed Cost + Variable Cost
= F.C + V.C = F.C + nCv
Cv= Production Cost per unit
At Break-Even Point
F.C + nCv=nCs
Gross profit can be calculated with or without depreciation
Gross Profit = S.P – C.P – Depreciation
Net Profit = Gross Profit (1- Income Tax Rate)
Cash Flow = Net Profit + Depreciation

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