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2
ECONOMIC EVALUATION
1.- Economic aspects of the preliminary design
2.- Cost Estimates
3.- Capital Investment
4.- Manufacturing cost
5.- Simple measures to estimate earnings and return on investment
6.- Profitability Measures
7.- Further Reading and References
3
1.- Economic aspects of the preliminary design
Maximum
Potential Profit
(MPP)
Maximum Potential Profit
Design using hierarchical levels of decision (Levels of Douglas)
Use of hierarchical levels to estimate the potential profit
Profitability
criteria
Process
alternatives
analysis
Different
estimation levels
Based on t, ,
interest rate
* Non-Discounted
* Discounted
(time value of money)
4
1
st
Estimation (PP1):
[Incomes from product
sale]-[Annual cost of raw
materials]
2
nd
Estimation (PP2):
[Incomes from product sale] -
[Annual cost of raw materials]
[Manufacturing costs]
3
rd
Estimation (PP3): [Incomes
from product sale] - [Annual
cost of raw materials]
[Manufacturing costs]
[Capital costs]
Importance of the stoichiometry
Levels 1 and 2 of Douglas decision
Knowledge of PFD
Knowledge of energetic needs
Levels 1-5 of Douglas decision
Capital investment and
manufacturing cost estimation
PP1 > 0
PP2 > 0
1.- Economic aspects of the preliminary design
5
2.- Cost Estimates: Costs related to the process
CAPITAL INVESTMENT or CAPITAL COST (Inversion de Capital). []
Fixed Capital (Capital Fijo o Inmovilizado)
portion of the total fixed capital that is invested in fixed assets to build the
physical process itself, that stay in the business almost permanently, or at the
very least, for more than one accounting period.
land, buildings, machinery, vehicles and equipment, patents, incidental expenses
(estimation adjustments)
Working Capital (Capital Circulante)
represents funds required to operate the plant due to delays in payment
and maintenance of inventories
the money available to fill the tanks (solvents, catalysts, industrial and configured consumer
products) and meet the initial payroll and expenses
Startup Cost (Coste de Arranque)
MANUFACTURING COSTS (Costes de fabricacion). [/t]
Direct Costs (Costes de Fabricacin Directos): Vary with the rate of production
Fixed Costs (Costes de Fabricacin Fijos): Not affected by the production level
General Expenses (Gastos Generales): Associated with management level and
administrative activities not directly related with the manufacturing process.
6
(CAPITAL INVESTMENT or CAPITAL COST C
TCI
-) (Inversion de capital). []
A- Guthries modular method, based on individual factors, to preliminary design:
* Updated Bare Module Cost = BMC = UF
.
BC
.
(MPF + MF -1)
+ Contingencies and Contractors fee = 18% BMC
* C
TBM
(Total bare-module cost): (BMC) of the process equipment
* C
TCI
= C
TPI
+ C
WC
= 1.18 (C
TBM
+ C
site
+ C
buildings
+ C
offsite facilities
) + C
WC
* C
TCI
= 1.18 (1.35 C
TBM
) + C
WC
C
TBM
: Total Bare-module Investment; C
TCI
: Total Capital Investment; C
TPI
: Total Permanent Investment;
C
WC
: Working Capital; C
site
: Cost of site preparation = 10%-20% C
TBM
C
buildings
: Process and non-process buildings = 10% C
TBM
and 20% C
TBM
C
offsite facilities
: Utility plants and pollution control = 5% C
TBM
B- Method of Lang, bases on overall factor, to study estimate:
C
TCI
= 1.05 f
LTCI
(I
i
/I
bi
) C
Pi
1.05: to account for delivery of the equipment to the plant site
f
LTCI
: Lang Factors in function of the processing plant (solids, solids-fluids, fluids)
(I
i
/I
bi
) C
Pi
: Total purchase cost as sum of the updated equipment cost data
C- Method based in estimation of the capital cost components
3.- Capital investment
7
3.- Capital investment
C- Method based in estimation of the capital cost components:
Base
cost for
equip-
ment
BC
On-Site Cost
- Installation
- Supervision
- Taxes
BC(MF-1); 4 BC
Indirect Costs
-Construction
overhead
-Own Engineering
0.25 x (on-site + off-
site)
Off-site Cost
-Equipment to supply
process utilities
- Site development,
Auxiliary buildings
0.45 (on-site)
= Fixed Capital =
1.8x(on-site) = 7.2 BC
Fixed Capital
1.8 x (on-site) =
7.2 BC
Plant startup costs
- Equipment
performance and
personnel
0.1 x Fixed Capital
Working Capital
- Early plant
operation. Cost of
raw materials and
value of products
0.15 x Capital Costs
= Capital Costs =
1.3 x Fixed Capital =
9.4 x BC
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Equipment life
10 years
Annual Interest
15%
Annualized Total
Capital Costs
CT/10 (1.15)
10
=
4 x BC [/year]
Capital Costs
TCI = 9.4 x BC
N
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N
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- -
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4.- Manufacturing Cost
MANUFACTURING COSTS (Costes de fabricacion). [/t] (COM)
Direct Manufacturing Costs (DMC): Vary with production rate
Fixed Manufacturing Costs (FMC): Independent of changes in production rate
General Manufacturing Expenses (GE): Business functions and seldom vary
with production level
COM = DMC + FMC + GE
COM can be determined when the following costs can be estimated:
1.- Base Module Cost, BMC
2.- Operating Labor, C
OL
3.- Utilities, C
UT
4.- Waste treatment, C
WT
5.- Raw Materials, C
RM
COM = 0.304 BMC + 2.73 C
OL
+ 1.23 (C
UT
+C
WT
+C
RM
)
The Service Factor need to be known = N days in operation during the year / 365
9
9
Factor Description of Factor Value
1. Direct Costs (DC) Factors that vary with rate of production =
C
RM
+ C
WT
+ C
UT
+ 1.33C
OL
+ 0.03COM + 0.069BMC
C
RM
+ C
WT
+ C
UT
+ 1.33C
OL
+ 0.03COM + 0.069BMC
Raw materials Costs of chemical feed stocks. Flow rates from the PDF C
RM
Waste treatment Costs of waste treatment C
WT
Utilities Gas, oil, coal, electric power, steam, water, air, inert gas, refrigeration, etc. C
UT
Operating Labor Cost of personnel for plant operations C
OL
Direct supervisory Costs of administrative/engineering and support personnel, clerical labor (0.1-0.25)C
OL
Maintenance & Repairs Costs of labor & materials associated with maintenance (0.02-0.1)BMC
Operating Supplies Costs of miscellaneous supplies that support daily operation not considered
raw materials (chart paper, lubricants, protective clothing, etc.)
(0.1-0.2)BMC
Laboratory charges Costs of laboratory tests of quality control (0.1-0.2)C
OL
Patents and Royalties Costs of using patented or licensed technology (0-0.06)COM
2. Fixed Costs (FC) Factors not affected by the level of production =
0.708C
OL
+ 0.168BMC
0.708C
OL
+
0.168BMC
Depreciation Costs associated with the physical plant (buildings, equipments). Legal
operating expenses for tax purposes
0.1BMC
Local taxes and Insurance Based on plant location and severity of the process (0.014-0.05)BMC
Plant Overhead Costs Catch-all costs associated with operation of auxiliary facilities supporting
manufacturing process (fire protection, safety and medical services, etc.)
(0.5-0.7)C
OL
+BMC
3. General Expenses
(GE)
Costs associated with management level + administrative
activities = 0.177C
OL
+0.009BMC+0.16COM
0.177C
OL
+0.009BM
C+0.16COM
Administration Costs Salaries and other administration
0.325(C
OL
+(0.02-0.1) BMC
Distribution and Selling Sales and marketing required to sell products. (0.02-0.2)COM
Research & Development Costs of R&D activities related to the process 0.05COM
4.- Manufacturing Cost
10
4.- Manufacturing Cost
Cost of Raw Materials CRM
- Price quotations from prospective suppliers of feedstocks
- ICIS Chemical Business Americas (Chemical Market Reporter)
Cost of waste treatment CWT
- Legal framework, minimization, IPPC, BAT Technologies, BREF Documents.
Utility Cost - C
UT
C
UT
= a x (CE Plant Cost Index) + b x Cs,f
a,b: Coefficient cost for different kind of utilities
CE Plant Cost Index as the effective date of the estimate (Basis, 1958 = 100)
Cs,f.: Price of the fuel use to generate the utility
Cost of Operating Labor - C
OL
- Annual Operator Salary ($) = 41.600 x (1,03)
year-2003
-Operator Requirements for process equipment per shift
* 49 weeks/operator.year x 5 shifts/week = 245 shifts/opeartor.year
* 365 days/year x 3 shifts/day = 1095 shifts/year
* [1095 shifts/year] / [245 shifts/operator.year] = 4.5 operators C
OL
= (4.5) operators x ( n operators/shift) x /year
BMC
Updated Bare Module Cost = BMC = UF.BC.(MPF + MF -1)
11
5.- Simple Estimate Earnings and Returns
Earnings
- Pre-tax earnings or Gross earnings or Profit = S - C
S: Annual sales revenue; C: COM, Manufacturing Costs
- After-tax earnings or Net earnings or Profit = Gross earnings - Income taxes on
the gross earnings = (1-t) Gross earnings = 0.6 (S-C)
t: Income tax rate = Cte. in function of the local law.
Cash Flow (CF) and Depreciation (D)
-Cash flow = Net passage of money into (+) or out of (-) a company due to an
investment.
Investment (-) cash flow After-tax profits+depreciation (+)cash flow
-Annual CF for any year of the project
CF = 0.6 (S-C) + D fC
TDC
C
WC
C
land
C
startup
C
royal
+ S
equip
D: Depreciation, decrease in value of an asset over time (use, obsolescence, old age).
f: fraction of the total depreciable capital (C
TDC
)
C
WC
: Working capital; C
land
: Cost of land expended during the year of construction
C
startup
: Startup Costs; C
royal
: Cost of royalties
S
equip
: Salvage value for used equipment
CF plant operation
CF plant construction
12
6.- Profitability Measures
Approximate Profitability Measures. Useful in the early stages of
project evaluation. New small projects or revamping.
Non-Discounted Techniques (Time value of money is ignored
and straight-line depreciation is used )
- Return of investment (ROI), Payback period (PBP), venture profit
(VP), Annualized cost (AC)
Rigorous Profitability Measures: Useful before a final decision is made
on whether to proceed with a new venture
Discounted Techniques (involve the time value of money in
terms of discounted cash flows)
- Net Present Value (NPV), Investors rate of return (IRR) or
discounted cash flow rate of return (DCFRR)
13
6.- Profitability Measures
Non-discounted criteria
Based on time
Payback, Payout, Payoff period (PBP) / (Periodo de Retorno )
Time required for the annual earnings to equal the original investment
PBP (years) = Total Depreciable Capital ()/ Net earnings + annual
depreciation (/year) = C
TDC
/ (1-t) (S-C) + D
PBP < 3-4 y Profitable; 4< PBP < 10 y Additional assess; PBP > 10 y Non profitable
useful in early evaluations to compare alternatives
Based on interest rate
Return of Investment (ROI) / (Retorno de la Inversin )
Annual interest rate made by the profits on the original investment
ROI (%) = Net earnings / Total Capital Investment = (1-t) (S-C)/ C
TCI
ROI > 15% Profitable
provides a snapshot view of the profitability of the plant
14
6.- Profitability Measures
Non-discounted criteria
Taking into account the size of the project
Venture profit (VP)
Annual net earnings in excess of a minimum acceptable return of
investment, i
min
(20%)
VP = (1-t) (S-C) i
min
C
TCI
= net earnings - i
min
C
TCI
preliminary estimates when comparing alternative flowsheets during process synthesis
Based on interest rate
Annualized Costs (C
A
)
Sum of the production cost and a reasonable return on the original
capital investment where the reasonable return on investment, i
min
is 0.2.
C
A
= C + i
min
C
TCI
useful to comparing alternative items of equipment in a process or alternative
replacements for existing equipment
15
Discounted criteria
The time value of money recognised that an amount of money at the current
time, Present amount, P, that is invested at an interest rate, i, and the interest is
added to P, the amount of money at the future date will be a Future amount, F, P
F= P (1+i)
n
The change of the time value of money are due to:
- INTEREST, annual rate at which money is returned to investors for use of their capital
- RETURNS of competitor investments; thus the actual inversion must compensate the
lost investments opportunities in other business
- INFLATION or change in the value of a currency over time
Net Present Value (NPV) / Valor Actual Neto (VAN)
Sum of all the discounted cash flows computed for each year of the
projected lifetime (n) of the plant, including construction + startup phases
NPV = [Gross earnings x (1-(1+i)
-n
) / i ] Capital investment
provides a quantitative measure for comparing the capital required for competing
processes in current terms is an indicator of the value or magnitude of an investment
6.- Profitability Measures
16
Discounted criteria
Investors Rate of Return (IRR) or Discounted Cash Flow Rate of Return
(DCFRR)
Interest rate that gives a net present value of zero. Interest rate that can
be compared with a competing investment.
NPV {i} = [Gross earnings x (1-(1+i)
-n
) / i ] Capital investment = 0
Used to evaluate the desirability of investments or projects. It is an indicator of the
efficiency, quality, or yield of an investment. An investment is considered acceptable if
its IRR is greater than an established minimum acceptable rate of return or cost of
capital. The largest IRR is the most desirable.
NPV and IRR are effective measures especially when the alternatives have widely
disparate investments.
6.- Profitability Measures
17
Economic Assessment
Economic Assessment
Diferential
Cash Flow
NPV and IRR
NPV and IRR
Intangible aspects
Intangible aspects
Payback Period -
PBP
Payback Period -
PBP
Combined Analysis
Environmental Assessment
Environmental Assessment
Technical Assessment
Technical Assessment
<3 years >10 years
3-10 years
Figure 7. Suitability analysis of the minimization options
Design of wastes minimization
alternatives: Application of criteria
(Viguri et al., 2000)
Viguri, J., 2000, Environmental situation of the SME in Cantabria:
Minimization of the environmental impact Final Inform. Project from
the enterprise development initiative. Santander, Spain, Sep. 2000
6.- Profitability Measures
Memo 3 are to size the equipment of the flowsheet, perform
heat integration, and an economic evaluation
18
7.- Further Reading and References
Biegler, L., Grossmann, I., Westerberg , A., 1997, Systematic Methods of Chemical
Process Design, Prentice Hall.
Douglas, J.M., 1988, Conceptual Design of Chemical Processes. McGraw-Hill.
Peter, M., Timmerhaus, K., West, R., 2005, Plant Design and Economics for
Chemical Engineers, 5 Ed., McGraw-Hill.
Seider, W., Seader, J., Lewin, D., Widagdo, S., 2010, Product and Process Design
Principles. Synthesis, Analysis and Evaluation. 3
rd
Ed. John Wiley & Sons.
Turton, R., Bailie, R., Whiting, W., Shaeiwitz, J., 2003, Analysis, Synthesis and
Design of Chemical Processes, Prentice Hall