L.

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ECONOMIC ANALYSIS
COST ANALYSIS (PETERS & TIMMERHAUS)

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The purpose of producing Economic
Analysis in Preliminary Design :
- to know if a proposed plan will be
reliable or not in term of economy

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Estimating Total Production Cost

Total Production Cost (TPC) :

1. Manufacturing Cost (MC)
2. General Expense (GE)
TPC = MC + GE

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Manufacturing Cost (MC) :
a. Direct Production Cost (DPC)
b. Fixed Charge (FCh)
c. Plant Overhead Cost (POC)

MC = DPC + FCh + POC

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a. Direct Production Cost (DPC)
1) Raw Materials (10-50% TPC)
2) Operating Labour (OL = 10-20% TPC)
3) Direct Supervision & Clerical Lab (10-25% OL)
4) Utility (10-20% TPC)
5) Maintenance & Repair (MR = 2-10% FCI)
6) Operating Supplies (10-20% MR, 0.5-1 FCI)
7) Laboratory Charge (10-20% OL)
8) Patent & Royalties (0-6% TPC)

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Fixed Capital Investment (FCI) :
(1). Direct Cost (DC)
(2). Indirect Cost (IDC)

FCI = DC + IDC

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(1). Direct cost (DC)
A. Equipment, Installation, Instrumentation, Piping,
Electrical, Insullation, Painting (50-60% FCI)
1. Purchase equipment cost (PEC=15-40% FCI)
2. Installation, insullation, painting (25-55% PEC)
3. Instrumentation & control (6-30% PEC)
4. Electrical installation (10-40% PEC)
5. Piping (10-80% PEC)
B. Building, process & auxilliary (10-70% PEC)
C. Service facility & yard improvement (40-100%PEC)
D. Land (1-2% FCI, 4-8% PEC).

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(2). Indirect cost (IDC)
a) Technical & supervision (5-30% DC)
b) Construction & contractor (6-30% DC)
c) Contingency (5-15% FCI).

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b. Fixed Charge (FCh)
i. Depreciation (FCI/n)
ii. Local taxes (1-4% FCI)
iii.Insurance (0.4-1% FCI)

c. Plant Overhead Cost (POC)

POC = 50-70% OL supervision & maintenance
or 5-15% TPC
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Total Capital Investment (TCI)
TCI = FCI + WC

Working Capital (WC):

WC = 10-20% TCI

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General Expense (GE)
A. Administrative Cost (15% OL supervision &
maintenance, or 2-6% TPC)
B. Distributing & Selling Cost (2-20% TPC)
C. Research & Development (2-5%, depend on
dollar, or 5% TPC)
D. Financing (0-10% TCI).

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 Breakdown of Total Production Cost (TPC), diagram
Total Production Cost (TPC)

Manufacturing Cost (MC) General Expense (GE)

Direct Fixed Charge Plant A. Administrative Cost

Production (FCh) Overhead B. Distributing &
Cost (DPC) Cost (POC) Selling Cost
C. Research &
Development
- Raw Materials i Depreciation 50-70% OL
D. Financing
- Operating Labour (OL) ii Local taxes supervision &
- Direct Supervision & Clerical iii Insurance maintenance
Labour or 5-15% TPC
- Utility
- Maintenance & Repair (MR)
- Operating Supplies
- Laboratory Charge
- Patent & Royalties
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 Other Diagram of Breakdown of Total Production Cost (TPC)
Total Production Cost (TPC)

Manufacturing Cost (MC) General Costs (or administrative costs

or overheads)

Direct Cost Fixed Costs Indirect Costs Administration Distribution

Development Accounting Advertising

Materials Labour Energy Other Depreciation
General Clerical wages Sales offices
Insurance
overheads Communication Salesmen
Interest on
Health salaries and
Operating Air Catalyst and investment
Inspection expenses
supervision Electricity solvent Maintenance
Laboratories Transportation
Fuel Interest on Rates, rent
Packaging Technical sales
Refrigeration working and taxes
Plant services
Steam capital superintendance
Vacuum Laboratorium Recreation
Maintenance Research
Packaging Restaurant
Royalties Safety
Salvage
Storage 13
Waste handling
Other formulation of Total Production Cost (TPC)
- for calculating BEP
1. Fixed Cost (FC)
2. Variable Cost (VC)
TPC = FC + VC
with :
FC = FCh + POC + GE
= fixed charge + plant overhead cost + general
expense
VC = DPC
= direct production cost.
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 Other formulation of Total Production Cost (TPC), diagram

Total Production Cost (TPC)

Fixed Cost (FC) Variable Cost (VC)

Fixed Charge Plant Overhead Cost General Expense Direct Production Cost
(FCh) (POC ) (GE) (DPC)

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 Reliability study
(Prelim. Design: Economic Analysis)
1. Profitability
2. POT
3. ROR
4. DCF-ROR
5. Net profit
6. BEP.

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Profitability (ACF)

- Selling Price
- TPC
- Net Profit Before Tax
- Tax (30%)
- Net Profit After Tax
- Depreciation (FCI/n)
- Annual Cash Flow.

Criterion :
if ACF/TCI x 100% > i% (bank rate) reliable
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 POT
POT = (FCI + interest of TCI) / ACF, years.
If POT < service life reliable.
Calculating POT :
Year TCI (loan) Interest Total loan ACF (payment) Loan left

(1) (2) (3) (4) (5) (6)

1 TCI i%(TCI) TCI+i%(TCI) ACF (4)1-(5)1
2 (4)1-(5)1 i%(2)2 (2)2+(3)2 ACF (4)2-(5)2
3 (4)2-(5)2 i%(2)3 (2)3+(3)3 ACF (4)3-(5)3
n (4)3-(5)3 i%(2)n (4)3-(5)3+i%(2)n (4)3-(5)3+i%(2)n 0.00

Total interest of TCI payment for TCI

and its interest
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Note:
If we calculate the time needed to return the TCI
including its interest, then
formula :
n = (TCI + interest of TCI) / ACF
= ( payment for TCI and its interest) / ACF

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ROR
ROR = NPAT/TCI x 100%
If ROR > i% reliable.

DCF-ROR,
is the interest, that TCI will give ACF for the whole service life and
WC and SV by the end of service life.
or
DCF-ROR is the interest, that the present value of ACF for the
whole service life and the present value of WC and SV at the end
of service life, is the same as TCI.
Equation for calculating DCF-ROR, i% is:
TCI = ACF[{1/(1+i)}+{1/(1+i)}+...+{1/(1+i)}]+(WC+SV)/(1+i)
Criterion : if DCF-ROR > i% reliable.
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Net Profit :
1. Net Profit Over Total Life of the Project (NPOTLP)
2. Total Capital Sink (TCS).
NPOTLP = the profit after payment of TCI without
interest
= Cummulative Cash Position (CCP) + Capital
Recovery (CR)
CCP = sum of ACF for the whole service life minus TCI
= ACF TCI
CR = Working Capital (WC) + Salvage Value (SV) + Land (L)

Criterion : If NPOTLP > (TCI + interest of TCI) reliable.

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TCS
TCS = profit after payment of TCI and its
interest
= ACF (TCI + interest of TCI)
= ACF payment of TCI and its interest

Criterion : if TCS > TCI reliable.

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Break Even Point (BEP)
The BEP shows the percentage of production
capacity should be operated that all the
modal (TPC) will return (by SP).
or
BEP shows the production capacity when
TPC = SP.

Criterion on BEP : if the BEP is in the range of

20% < BEP < 40% reliable.
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Methods for BEP determination:
1. Graphical method
2. Mathematical method.
Graphical method
1. Draw FC as a function of production capacity
2. Draw VC as a function of production capacity
3. Draw TPC as a function of production
capacity with TPC = FC + VC
4. Draw SP as a function of production capacity
5. Intersection of TPC and SP gives BEP.
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Mathematical method
Use the equation:
BEP = {FC / (SP-VC)} X 100%.

FC = fixed cost
= FCh + POC + GE
= fixed charge + plant overhead cost + general expense
SP = selling price
VC = variable cost
= DPC
= direct production cost.

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