Mindfulness

COST ESTIMATION
TECHNIQUE
 Content

- Review
- Cost Estimation
- Estimating Capital Investment
- Estimating Product Cost
REVIEW
 Capital Investment Production Cost

Total amount of money needed - Estimation of cost for

to supply the necessary plant operating the plant and
and manufacturing facilities selling the products
plus the amount of money
required as working capital for
operation of the facilities
Manufacturing Cost General Expense

Fixed Capital Working Capital

ESTIMATION OF CAPITAL
INVESTMENT & COST
 Types of Capital Cost Estimates

- Order-of-magnitude estimate (ratio estimate)

- Study estimate (factored estimate)
- Preliminary estimate (budget authorization estimate; scope
estimate)
- Definitive estimate (project control estimate)
- Detailed estimate (contractor’s estimate)
COST INDEXES
 Cost Indexes

Index value for a given point in time showing the cost at that time relative
to a certain base time

𝐼𝑛ҧ 𝐶 = Cost or price of item

𝐶𝑛 = 𝐶𝑘 𝐼 = Index value
𝐼𝑘ҧ 𝑘 = reference year
𝑛 = year for which cost or price to be estimated
 Types of Cost Index

Marshall and Swift Equipment Cost Indexes

• All-Industry Equipment Index
• Process-Industry Equipment Index
Engineering News-Record Construction Index
• Variation in labor rates and material costs

Nelson-Farra Refinery Construction Index

• Construction costs in the petroleum industry

Chemical Engineering Plant Cost Indexes

• Construction costs for the chemical plants
Plant Design and
Economics for
Chemical
Engineer
(4th Edition)
M.S Peters
K. D. Timmerhaus
Estimating Equipment Costs by
Scaling
 Estimating Equipment Costs by Scaling

To estimate cost of a piece equipment when no cost data are

available for particular size of operational capacity involved.
𝑋
𝑐𝑎𝑝𝑎𝑐. 𝑒𝑞𝑢𝑖𝑝. 𝒂
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑝 𝒂 = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑝 𝒃
𝑐𝑎𝑝𝑎𝑐. 𝑒𝑞𝑢𝑖𝑝. 𝒃

We can used six-tenths-factor rule for simplification (X=0.6)

Cost-capacity concept should not be used beyond a tenfold range of capacity

Plant Design and
Economics for
Chemical
Engineer
(4th Edition)
M.S Peters
K. D. Timmerhaus
 Estimating cost of equipment using scaling factors and cost index.

The purchased cost of a 50-gal glass-lined, jacketed reactor (without

drive) was $8350 in 1981. Estimate the purchased cost of a similar 300-
gal, glass-lined, jacketed reactor (without drive) in 1986. Use the annual
average Marshall and Swift equipment-cost index (all industry) to
update the purchase cost of the reactor.
 PROBLEMS

- The purchased cost of a shell-and-tube heat exchanger (floating

head and carbon-steel tubes) with 100 ft2 of heating surface was
$3000 in 1980. What will be the purchased cost of a similar heat
exchanger with 200 ft2 of heating surface in 1980 if the purchased-
cost-capacity exponent is 0.60 for surface area ranging from 100 to
400 ft2?
- If the purchased-cost-capacity exponent for this type of exchanger
is 0.81 for surface areas ranging from 400 to 2000 ft2, what will be
the purchased cost of a heat exchanger with 1000 ft2 of heating
surface in 1985?
METHODS FOR ESTIMATING
CAPITAL INVESTMENT
Fixed Capital Investment Percentage
Detailed-Item Estimate

Unit-Cost Estimate

Percentage of Delivered-Equipment Cost

Power Factor Applied to Plant-Capacity Ratio

Investment Cost per Unit of Capacity

Turnover Ratios
Detailed-
Item
Estimate
Unit-Item
Estimate
𝐶𝑛 = ෍ 𝐸 + 𝐸𝐿 + ෍ 𝑓𝑥 𝑀𝑥 + 𝑓𝑦 𝑀𝐿 + 𝑓𝑒 𝐻𝑒 + 𝑓𝑑 𝑑𝑛 𝑓𝐹

𝐶𝑛 = new capital investment

𝐸 = purchased equipment cost
𝐸𝐿 purchased equipment labor cost
𝑓𝑥 = specific material cost
𝑀𝑥 = specific material quantity in compatible units
𝑓𝑦 = specific material labor unit cost per employee hour
𝑀𝑦 = labor employee – hours for specific material
𝑓𝑒 = unit cost engineering
𝐻𝑒 = engineering employee hours
𝑓𝑑 = unit cost per drawing or specification
𝑑𝑛 = number of drawing or specification
𝑓𝐹 = construction expense factor
Percentage of
Delivered-Equipment
Cost
Example :
Prepare a study estimate of the tied-
capital investment for the process plant
a process plant handling both solids and
fluids if the delivered-equipment cost is
$100,000
 Power Factor Applied to Plant-Capacity Ratio

Method for study or order-of-magnitude estimate fixed-capital

investment
𝐶𝑛 = 𝐶 𝑅 𝑋
𝐶𝑛 = 𝑓 𝐷 𝑅 𝑋 + 𝐼
R = capacity of the new facility divided by capacity of the old facility
D = Direct Cost
I = Indirect Cost
f = cost index factor rellative to the original installation cost
x = average between 0.6 and 0.7 for many process facilities
 Investment Cost per Unit of Capacity

- An order-of-magnitude estimate of the fixed-capital investment for

a given process
- Using data fixed-capital investment required for various process
per unit of annual production capacity

𝐹𝑖𝑥𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

= 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦
𝑃𝑙𝑎𝑛𝑡 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦

- Necessary correction for change of cost with time can be made with
the used of cost indexes
 Turnover Ratio

Rapid evaluation method for order-of-magnitude estimates

𝑔𝑟𝑜𝑠𝑠 𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠

𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 =
𝑓𝑖𝑥𝑒𝑑 − 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

Gross annual sales = annual product rate x average selling price

Rule of thumb for chemical industry: Ratio = 1

 PRODUCT COST

Commonly calculated using daily basis, unit-of-product basis, or annual basis

 • Direct Production Cost
• Fixed Charges
Manufacturing • Plant Overhead Cost
Cost

• Administrative
• Distribution & Marketing Expenses
• R&D Expenses
General • Financing Expenses
Expenses • Gross-earning Expenses
 Manufacturing Cost
All expenses directly connected with the manufacturing operation or
physical equipment of a process plant itself
Direct Production Cost

• Expenses directly associated with the manufacturing operation

Fixed Charges

• Expenses which remain practically constant from year to year

and do not vary widely with changes in production rate

Plant-overhead

• Expenses needed for plant to function as an efficient unit

 Manufacturing Cost
Direct Plant Overhead
Production Cost Fixed Charges
Cost
- Raw Material - Medical
- Operating labor
- Depreciation
- Safety and protection
- Operating supervision - Taxes (property) - General plant overhead
- Steam
- Electricity Power - Insurances - Payroll overhead
- Fuel and Refrigeration utilities - Packaging
- Rent
- Water - Restaurant
- Maintenance & repairs - Recreation
- Operating supplies - Salvage
- Laboratory charges
- Control laboratories
- Royalties (If not on lump-sum
basis) - Plant superintendence
- Catalysts and solvents - Storage facilities
 General Expenses

Administrative Expenses Distribution and marketing

- Excecutive Salaries
- Clerical Wages
- Engineering and legal costs
- Office maintenance
- Communications
Expenses
- Sales Offices
- Salesmen expenses
- Shipping
- Advertising
- Technical sales service
 Estimation of labor requirements.

Consider a highly automated processing plant having a capacity of 100

tons/day of product and requiring principal processing steps of heat
transfer, reaction, and distillation. What are the average operating
labor requirements for an annual operation of 300 days?
Break-even point, gross earnings, and net profit for a process
plant

- The annual direct production costs for a plant operating at 70

percent capacity are $280,000 while the sum of the annual fixed
charges, overhead costs, and general expenses is $200,000. What is
the break-even point in units of production per year if total annual
sales are $560,000 and the product sells at $40 per unit? What
were the annual gross earnings and net profit for this plant at 100
percent capacity in 1988 when corporate income taxes required a
15 percent tax on the first $50,000 of annual gross earnings, 25
percent on annual gross earnings of $50,000 to $75,000, 34 percent
on annual gross earnings above $75,000, and 5 percent on gross
earnings from $100,000 to $335,000?