CHEMICAL ENGINEERING

DESIGN & SAFETY

CHE 4253

Prof. Miguel Bagajewicz

Process Engineering Economics

1-Plant Cost Estimation
 ECONOMIC DESIGN CRITERIA

BASIC ECONOMIC TERMS

• Total Capital Investment, TCI or I
Total Capital Investment=Fixed Capital Investment+
Working Capital
TCI = FCI + WC

• Fixed Capital Investment, FCI or IF

FCI = (Direct Costs) + (Indirect Costs)

• Working Capital, WC or IW
Cash, raw materials, stock, etc. About 10-20% of TCI.

ChE 4253
 BASIC ECONOMIC TERMS
• Product Cost C
C=CI+CQ+CO +CG
• Fixed Charges, CI
Do not depend on production level (insurance,
property taxes, depreciation, rent etc.)
• Direct Production Cost, CQ
Labor, utilities, raw materials, maintenance,
supplies, royalties etc.
• Plant Overhead, CO
Recreation, employee facilities, packaging etc.
• General Expenses, CG
Administration, marketing, R&D, distribution.
ChE 4253
 BASIC ECONOMIC TERMS
• Income from Sales, S in ($/yr)
• Gross Earnings, R in ($/yr)
R=S-C
• Net Earnings, P in ($/yr)
P = R - (R - d IF) t

(Net Profit) = (Gross) - (Taxes)

• Depreciation rate

Taxation purposes, d IF

ChE 4253
 BASIC ECONOMIC TERMS
S, Income from sales
WC
Working
Capital C
Product
CI Cost
Indirect R
Costs
FCI (R-d IF) t
CD Taxes
CF
Direct
Costs D=e IF
Depreciation
Total Capital
Investment, TCI
P, Net Earnings
ChE 4253
 NET PROFIT

ChE 4253
DESIGN STAGES
1. Inception
2. Preliminary evaluation of economics and market
3. Data gathering
4. Basic Engineering & Final economic evaluation
5. Detailed engineering design
6. Procurement
7. Erection
8. Start-up
9. Production

Che 4253
 BASIC ECONOMIC TERMS
Salvage Value
Net cash obtainable from the sale of used property (above
charges for removal and sale)
Scrap value: Salvage value after dismantling a unit.

Present Value
Book Value : (Total Capital Investment) - (All Depreciation)

Market Value : Cash obtainable from selling the unit.

Replacement Value : Cost of obtaining the same property.

ChE 4253
 BASIC ECONOMIC TERMS
Depreciation

Reduction in value due to any causes.

Example: Pump

Cost : CV = $12,000
Scrap value : VS = $2,000

Depreciation : CV - VS = $10,000

For engineers, depreciation is considered as a cost for

using the equipment.
ChE 4253
 DEPRECIATION

Types Of Depreciation

Physical: Wear and Tear, corrosion, accidents,

age deterioration.

Functional: All other causes.

Obsolescence:Due to technological advances.

Depletion: Loss due to materials consumed. Applicable to

Natural Resources (timber, mineral, oil deposits)

IRS: “A reasonable allowance for the exhaustion, wear and tear

of property used in the trade or business including a reasonable
allowance for obsolescence”

ChE 4253
 BASIC ECONOMIC TERMS
Service Life
The IRS has determined various values
(See Peters et al., 2003, for complete list).
Group 1: General Business Assets. (Office furniture,
Land, Buildings, etc)
Group 2: Non-manufacturing activities: (Agriculture,
Fishing, Mining, etc.)
Group 3: Manufacturing, e.g. Petroleum Refining: 16
years. Chemicals 11 years.
Group 4: Transportation, Communication and Public
Utilities: (Electrical, Gas, Motor transport, Radio and TV
broadcasting, railroad, etc.)
ChE 4253
BASIC ECONOMIC TERMS (break-even chart)

ChE 4253
 BASIC ECONOMIC TERMS
Cumulative Cash Position
Economic Life of Project
$
Land, salvage,
and WC Net
profit
Cumulative cash position= over n
Net profit + depreciation - TCI

Construction
Period
n
0
Land Land, salvage, time
and WC (yrs)
FCI Annual net
TCI profit

WC Annual
depreciation
ChE 4253
 COST ESTIMATION
Fixed Capital Investment: Cost of equipment and facilities
FCI = Direct Costs + Indirect Costs
Direct Costs:
1. Purchased equipment: Columns, Heat Exchangers, pumps,
tanks, etc.
2. Equipment Installation
3. Piping (includes insulation)
4. Instruments and Control
5. Electrical Equipment.
6. Buildings: Process, Administration, Maintenance shops, etc.
7. Site Preparation
8. Service Facilities: steam, water, air, fuel, etc. Waste
treatment, fire control, offices, etc.
9. Land

ChE 4253
 COST ESTIMATION

Indirect Costs:

1. Engineering and Supervision: Administrative and

Design. Supervision and Inspection.
2. Construction Expenses
3. Contractor's fee
4. Contingency.
5. Start up expenses (sometimes in WC)

ChE 4253
 COST ESTIMATION
Types Of Cost Estimates

1. Order of Magnitude estimate. Extrapolate similar plant cost

Accuracy: over 30%
2. Study Estimate. Knowledge of major pieces of equipment
Accuracy:  30%
3. Preliminary Estimate. Enough for budget authorization.
Accuracy:  10-20%
4. Definitive Estimate. Based on basic Engineering and quotes
from suppliers and contractors.
Accuracy:  10%
5. Detailed Estimate.Based on Detailed Engineering.
Accuracy:  5%

ChE 4253
 COST ESTIMATION
Cost Indexes
 index value now 
Present Cost=(original cost at time t)*  
 index value at time t 
• Marshall and Swift.
1. All industry-equipment index. Arithmetic average of 47
equipment types.
2. Process-industry equipment index. Weighted average of
8 of these:
cement 2% paint 5%
chemicals 48% paper 10%
clay products 2% petroleum 22%
glass 3% rubber 8%

M&S was 100 in 1926. Published in “Chemical Engineering”.

ChE 4253
 COST INDEXES
• Engineering News-Record Construction Cost index.
Steel, lumber, labor, concrete.
Published in “Engineering News-record”.
ENR value reported based on 100 in 1913, 1949 or 1967.
• Nelson-Farrar Refinery Construction Cost index.
Skilled and common labor, iron and steel, building
materials, miscellaneous equipment.
Published in “Oil and Gas Journal”.
N-R value of 100 in 1946.
• Chemical Engineering Plant Cost Index. Chemical Plants.
Equipment, machinery Engineering and supervision
supports 61% 10%
Installation labor 22% Buildings, material, labor 7%

Published in “Chemical Engineering”.

PCI value of 100 in 1957-59.
ChE 4253
 COST INDICES (as inflation indicators)

ChE 4253
From Turton et al., 2009
 Methods For Estimating Capital Investment

Detailed-Item Estimate
All items in the direct and indirect cost are evaluated with as much
detail as possible. All specs are known.
( 5% accuracy, contractor’s estimate)

PRIOR LIST
1. Order of Magnitude estimate. Extrapolate similar plant cost
2. Study Estimate. Knowledge of major pieces of equipment.
3. Preliminary Estimate. Enough for budget authorization.
4. Definitive Estimate. Based on basic Engineering and quotes from suppliers and contractors.
5. Detailed Estimate. Based on Detailed Engineering.

ChE 4253
 Methods For Estimating Capital Investment
Percentage of Delivered-Equipment Cost.
All items in the direct and indirect cost are evaluated as a
percentage of the delivered-equipment cost. Usually  30%
(definitive estimate in certain cases,  10% )
C=  E +  ( f E + f E + f E + ) f
1 2 3 I

PRIOR LIST
1. Order of Magnitude estimate. Extrapolate similar plant cost
2. Study Estimate. Knowledge of major pieces of equipment.
3. Preliminary Estimate. Enough for budget authorization.
4. Definitive Estimate. Based on basic Engineering and quotes from suppliers and contractors.
5. Detailed Estimate. Based on Detailed Engineering.

ChE 4253
Methods For Estimating Capital Investment

ChE 4253
 Methods For Estimating Capital Investment
Estimation based on “Lang” factors .
Named after Lang (1947). The Fixed Capital Investment is found by
multiplying equipment cost by a factor ( 30% accuracy, order of
magnitude estimate)


C = E (1 + f F + f p + f m ) + Ei + A f I 
fF: cost factor for field labor
fp: cost factor for piping materials
fm: cost factor for miscellaneous (insulation, foundations etc.)
E: cost of installing equipment
A: incremental cost for corrosion resistant materials
fI: indirect cost factor=4.74 PRIOR LIST
1. Order of Magnitude estimate. Extrapolate similar plant cost
(fluid processing plants) 2. Study Estimate. Knowledge of major pieces of equipment.
3. Preliminary Estimate. Enough for budget authorization.
4. Definitive Estimate. Based on basic Engineering and quotes from
suppliers and contractors.
5. Detailed Estimate. Based on Detailed Engineering.

ChE 4253
 Methods For Estimating Capital Investment
Power factor applied to plant-capacity .

Order of magnitude estimates based on the fixed capital investment for

a similar plant.
C = Cold ( R ) f
x

x: between 0.6 and 0.7

R: Capacity ratio, (new facility)/(old facility)

If the direct, D, and indirect, I, costs are known, then: 

C = D (R ) + I f
x

PRIOR LIST
1. Order of Magnitude estimate. Extrapolate similar plant cost.
2. Study Estimate. Knowledge of major pieces of equipment.
3. Preliminary Estimate. Enough for budget authorization.
4. Definitive Estimate. Based on basic Engineering and quotes from
suppliers and contractors.
5. Detailed Estimate. Based on Detailed Engineering.

ChE 4253
 Methods For Estimating Capital Investment
Power factor applied to plant-capacity .

Order of magnitude estimates based on the fixed capital investment for

a similar plant.
C = Cold ( R ) f
x
x: between 0.6 and 0.7

PRIOR LIST
1. Order of Magnitude estimate. Extrapolate similar
plant cost.
2. Study Estimate. Knowledge of major pieces of
equipment.
3. Preliminary Estimate. Enough for budget authorization.
4. Definitive Estimate. Based on basic Engineering and
quotes from suppliers and contractors.
5. Detailed Estimate. Based on Detailed Engineering.

ChE 4253
 Methods For Estimating Capital Investment
Power factor applied to plant-capacity .
The factor f is a composite of geographical labor cost index, the area
productivity index and a material and equipment index.
Example:
Plant in Dallas. What is the cost for a similar plant in Los Angeles?
LA labor rate=0.88, TX labor rate=1.22
LA productivity=0.89, TX productivity=1.04
(Tab. 6-12 in Peters et al., 2003)
Relative Labor=(TX/LA)=1.22/0.88 = 1.3864
Relative Productivity=(TX/LA)=1.04/0.89=1.17
 Rate(TX )   Rate(TX )   1.22  1.04 
f =    =   = 1.62
 Rate( LA) labor  Rate( LA)  productivity  0.88  0.89 
PRIOR LIST
1. Order of Magnitude estimate. Extrapolate similar plant cost.
2. Study Estimate. Knowledge of major pieces of equipment.
3. Preliminary Estimate. Enough for budget authorization.
4. Definitive Estimate. Based on basic Engineering and quotes
from suppliers and contractors.
5. Detailed Estimate. Based on Detailed Engineering.

ChE 4253