ChE3070 Spring 2015

Capital Investment - I
Chemical Engineering 3070

Process Economics & Simulation

Lecture 6
Capital Investment - I

Adjunct Professor John Myers

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Agenda
Capital

Types of Capital
Estimating

Types of Estimates
Cost Indexes
Components of Capital Investment
Scale Factors and Scaling Equation & Capacity Cost Curves

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Capital
Capital: accumulated wealth; savings that the owner can use as desired

How is Capital Used?

Financial investments (CDs, stocks, bonds)

Investment in producing assets (real estate, chemical plants, )

Lots of capital terms/definitions be careful !

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Types of Capital
Fixed Capital Investment (FCI); also called Capital Costs

Capital required to install processing equipment with all components required for
operation
Manufacturing Fixed Capital Investment (MFCI): capital required for the process
itself
Non-Manufacturing Fixed Capital Investment (NMFCI): required to support the
process; land, admin buildings, labs, shipping/receiving,
Construction Overhead (CO): construction offices, engineering expenses, etc.;
sometimes proportioned and included in MFCI and NMFCI

FCI = MFCI + NMFCI + CO

Total Capital Investment (TCI) : FCI plus Working Capital (WC)

TCI = FCI + WC
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Working Capital
Total money for a plant that is invested for:

Raw materials and supplied in stock (inventory)

Finished products in stock (inventory)
Accounts receivable
Accounts payable
Cash on-hand for operating expenses (salaries, utilities,
purchasing, )
Taxes payable

NOTE: negative CF at start-up (usually T=0) and

positive CF at end of project
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Working Capital
Common Assumptions:

Raw materials and supplied in stock: 1 month

Finished products in stock: 1 month

Accounts receivable: 1.5 month production cost

Accounts payable: 1 month of expenses
Cash on hand: 0
Taxes: 0
Companies/Business Units usually have specified assumptions
Often estimate as % of TCI (typically 10-20% TCI, but can be up to 50%)
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Working Capital
Cash Flow Implications

-CF at start-up (usually T=0)

+ CF at end of process life (which may be longer than project
evaluation assumption)
Can inflate through a series of extra mini-CFs
Not taxed
Not a Cash Expense
Not depreciated

BUT it affects NPV and IRR

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Estimating Capital Investment

Fixed Capital Investment (FCI)

Most based on cost of individual pieces equipment that are summed

or based on cost of similar plants

Direct Costs
Indirect Costs (same as Contractor Overhead CO)

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FCI Direct Costs

P&T Table 6-1 and Table 6-9
Direct Costs
Purchased equipment
Installation of above
Instrumentation and control
Piping
Electrical systems
Buildings (maint shops, operations buildings, control rooms, )
Site Improvements (sidewalks, roads, )
Service Facilities (utilities, packaging, facilities, )
Land
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FCI Indirect Costs

P&T Table 6-1
Indirect Costs
Engineering & Supervision
Legal
Construction Expenses (trailers, tools, guards, safety, training,
permits, taxes, insurance, )
Contractors Fee
Contingencies

FCI = Direct Costs + Indirect Costs

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FCI ISBL & OSBL

ISBL (Inside Battery Limits)

Process itself
OSBL (Outside Battery Limits)

Tanks, buildings, etc

Often a % of ISBL but can be location specific (0 > 20% typical)
FCI = ISBL + OSBL

Battery Limits: a geographic boundary defining a project; tankage,

buildings usually are OSBL
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Types of Capital Estimates

Based on expected accuracy; GENERALLY greater accuracy means
more work
Order of Magnitude (Scoping) Estimate: +/- 30%; usually a
generalized correlation or ratio

P&T

Factored (Study or Scoping) Estimate: +/- 30%; estimate major

equipment purchase cost and then apply a factor
Preliminary (Budget) Estimate: +/- 20%; factored and computer
models; often used for project approval
Definitive (Project Control) Estimate: +/- 5-10%; computer models

Detailed Estimate: +/- 5%; based on bids, quotes; provided by project

engineering contractor; very expensive to generate
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Types of Capital Estimates

Corporations usually have assumptions for accuracy of estimate
required:
Amount of capital required
State of process technology (risk)
R&D, initial proposals, budget approval,
Stage Gate Process
series of approvals with each requiring better process
information and better capital estimates
Appraise, Select, Define, Execute
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Types of Capital Estimates

Required Information for Different Types of Estimates

P&T Figure 6-4

Comments:

All estimates require heat material balance information (usually

from simulations); more detailed as capital estimates increase
All require process flowsheets of some sort Aspen simulator

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FCI Computer Modeling

Two major programs for chemical process capital estimation

ICARUS Suite
Richardson Process Plant Cost Estimating Standards

Can get very accurate installed capital estimates

new units & debottlenecks & retro-fits
Both from Aspen Technology (www.aspentech.com)
we wont be using these
highly specialized training reqd
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Cost Indexes
Allow escalation of capital costs with time

Inflation
Many different but the Marshall & Swift and Chemical Engineering
(CE) indices are most commonly used.
Also, refer to
For class, well use CE index. Refer to Table 6-2.

Cost Index
PDF file

CE published regularly at end of the Chemical Engineering magazine

WyoWeb e-Journal

FCInow = FCIpast * Indexnow / Indexpast

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Cost Indexes
Example:

A plant cost $200,000,000 in 1990

CE Cost Index 1990 = 357.6

What is the cost in 2000?

CE Cost Index 2000 = 394.1

Cost2000 = 200E6 * 394.1 / 357.6 = 220.4E6

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Components of Capital Investment

General Guidelines in following P&T Tables:

Table 6-3

% of different components as f(FCI)

USEFUL

Table 6-5

Installation cost as % of purchased equipment cost

for different types of equipment

Table 6-6

Piping as a f(FCI) for different types of processes

Table 6-9

Summary of Typical Values

as f(delivered equip cost)

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Refer to
Inst Factor
XLS file

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Table 6-9
Table 6-9 is used to essentially create your own, customized
Installation Factor.
Other Tables in Chapter 6 can be used to provide adjustments to the
usual values provided in Table 6-9
Table 6-5 Installation of equipment as f(FOB)
Table 6-6 Piping labor and materials as f(FOB) and f(FCI)
Table 6-7 Buildings as f(FOB) and f(FCI) and f(site-type)
Table 6-8 Different Services as f(FCI)
Table 6-12 Relative Labor rates and productivity
Installation
Note that Installation of Purchased Equipment is a separate line item
Note that installation of Instruments, Piping, etc is included in these
individual line items
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Components of Capital Investment

P&T Table 6-3 Comments:

Purchased Equipment is 15>40% of FCI

FCI = (2.5 > 7) * Delivered Equipment

FCI = Install_Factor * Delivered Equipment

Sometimes FCI = Install_Factor * FOB
Large % Items:
Engineering
Buildings
Construction Expenses
Piping
Service facilities
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NOTE:
Purchased Cost often called
FOB (freight on board) cost;
does NOT include delivery!

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Capital Costs by Scaling

Based on graphs like below. NOTE: usually do NOT include delivery!

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Capital Costs by Scaling

Cost on y-axis

Size Basis on x-axis

Usually reference a date.

Specific diagrams for different equipment

Multi-curves for equipment options and materials of construction

Usually straight line on ln-ln plot

Costa = Costb (Sizea/Sizeb)SE
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Capital Costs by Scaling

Costa = Costb (Sizea/Sizeb)SE
SE is the Scale Exponent
usually between 0.5 and 0.8; 0.6 or 0.65 are most common
six-tenths rule (use 0.6 for SE)
economy of scale

P&T Table 6-4 has list of SEs

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Capital Costs by Scaling

Costa = Costb (Sizea/Sizeb)SE

NOTE: can include escalation indexes as:

Costa = Costb ( Sizea/Sizeb )SE ( Indextime/Indexb )

Example:
Use SE=0.6
Cost of HtEx with 2000 ft2 = 1E6
Cost of HtEx with 4000 ft2?
Cost4000 = 1E6 * (4000/2000)0.6 = 1E6 * 1.516 = 1.516E6
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Process Specific Capacity Curves

Usually Same form as above (straight line on ln-ln plot)

Cost usually $/lb or $ basis

Usually based on building many similar technology plants of differing
sizes
Can be for sections of a process or an entire process
Often very accurate (+/- 20%)
Example:
Cost/tonne = 2 * Tonne_per_year 0.5
What is cost of a 300000 tonne per year plant?
Cost/tonne = 2 * 300000 0.5 = 2 * 548 = 1096
Cost = 300000 * 1096= $328,800,000
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FCI many definitions

FCI = MFCI + NMFCI + CO

FCI = Direct Costs

+ Indirect Costs

FCI = ISBL + OSBL

FCI = Install_Factor * Delivered Equipment

FCI

is NOT

TCI

TCI = FCI + WC

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