Lecture # 5
Cost estimation
Capital and Total Product Cost – part 1
1
Dr. A. Alim
ANALYSIS OF COST ESTIMATION
• Capital and Products costs estimation
• Depreciation / Depletion
• Taxes and EVA
• Disposal ...
ANALYSIS OF COST ESTIMATION
Capital Costs
• Fixed capital
•Manufacturing (direct)
•Nonmanufacturing
(indirect)
• Working c...
ANALYSIS OF COST ESTIMATION
Analysis of Capital costs
Manufacturing fixed capital ( direct):
Investment needed for the ins...
ANALYSIS OF COST ESTIMATION
Breakdown of fixed capital investment items for a chemical process
Table 6-1, page 234, Peters...
6
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th
ed. McGraw Hill, © 2...
7
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th
ed. McGraw Hill, © 2...
8
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed.
McGraw Hill, © 2...
9
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers",
5th ed. McGraw Hill, © 2...
10
Material used in this lecture is sourced from "Plant Design and Economics
for Chem. Engineers", 5th ed. McGraw Hill, © ...
11
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed.
McGraw Hill, © ...
COST ESTIMATION
Cost Components in Capital Investment
It is most common, and most important to develop as accurate
as poss...
COST ESTIMATION
CAPACITY FACTOR - Converting the historical capital cost
data to the current equipment using the power law...
COST ESTIMATION
CAPACITY FACTOR
n
B
A
B
A
FACTOR
FACTOR
COST
COST







What is the correct factor for a shell
and...
COST ESTIMATION
n
B
A
B
A
FACTOR
FACTOR
COST
COST







What is the correct factor for a
shell and tube heat excha...
Rough guideline, n = 0.6
COST ESTIMATION
CAPACITY FACTOR - The power n < 1.0 (usually) !
n
B
A
B
A
FACTOR
FACTOR
COST
COST...
COST ESTIMATION
17
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th
ed....
COST ESTIMATION
Purchased Equipment Costs
Extensive graphs of various equipment cost/capacity charts
Are found in Peters, ...
19
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th
ed. McGraw Hill, © ...
20
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th
ed. McGraw Hill, © ...
COST ESTIMATION
INFLATION FACTOR (COST INDEXES) TABLES
21
Material used in this lecture is sourced from "Plant Design and ...
COST ESTIMATION
Values for Selected Indexes
22
Material used in this lecture is sourced from "Plant Design and Economics f...
23
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th
ed. McGraw Hill, © ...
24
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed.
McGraw Hill, © ...
COST ESTIMATION
Types of Cost Estimates
We must balance the needed accuracy with the cost to perform.
Name Accuracy Applic...
COST ESTIMATION
This useful table is available
in Peters,Timmerhaus, and
West and in Perry’s
Handbook.
It gives a summary ...
COST ESTIMATION
CAPITAL COST ESTIMATION
1) Detailed-Item estimate.
2) Unit cost estimate.
3) Percentage of delivered equip...
COST ESTIMATION
CAPITAL COST ESTIMATION
1) Detailed-Item estimate:
Most detailed. Often prepared by contractors. Accuracy ...
29
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th
ed. McGraw Hill, © ...
COST ESTIMATION
In the previous table (6-9) costs are expressed as percentage
of purchased equipment cost. These costs are...
31
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed.
McGraw Hill, © ...
COST ESTIMATION
CAPITAL COST ESTIMATION
5) Power factor estimate:
If C is the fixed capital, then
C (new) = C (old). f. (c...
33
Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed.
McGraw Hill, © ...
COST ESTIMATION
CAPITAL COST ESTIMATION
6) Turnover ratio estimate:
TR = (gross annual sales)/(fixed capital)
values of 0....
COST ESTIMATION
CAPITAL COST ESTIMATION - Summary
1) Detailed-Item estimate.
2) Unit cost estimate.
3) Percentage of deliv...
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Lecture # 5 cost estimation i

  1. 1. Lecture # 5 Cost estimation Capital and Total Product Cost – part 1 1 Dr. A. Alim
  2. 2. ANALYSIS OF COST ESTIMATION • Capital and Products costs estimation • Depreciation / Depletion • Taxes and EVA • Disposal of assets/capital gain 2 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  3. 3. ANALYSIS OF COST ESTIMATION Capital Costs • Fixed capital •Manufacturing (direct) •Nonmanufacturing (indirect) • Working capital Product Costs • Manufacturing costs •Variable costs • Fixed costs •Overhead costs • General expenses •Administrative expenses •Distribution & Marketing costs •R&D 3 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  4. 4. ANALYSIS OF COST ESTIMATION Analysis of Capital costs Manufacturing fixed capital ( direct): Investment needed for the installed process equipment with all components needed for complete process operation Nonmanufacturing fixed capital (indirect): Investment needed for components not directly related to the process operation. Working capital: One month raw material and supplies, finished product in stock, cash for payment of startup expenses Typically, working capital is 10-20 % of total capital. 4 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  5. 5. ANALYSIS OF COST ESTIMATION Breakdown of fixed capital investment items for a chemical process Table 6-1, page 234, Peters, Timmerhaus, and West 5 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  6. 6. 6 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  7. 7. 7 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  8. 8. 8 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  9. 9. 9 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  10. 10. 10 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007. Major Item
  11. 11. 11 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  12. 12. COST ESTIMATION Cost Components in Capital Investment It is most common, and most important to develop as accurate as possible an estimate of purchased equipment cost. All other items can usually be estimated as a ratio of purchased equipment Cost. Often, we can use existing or old data for similar equipment, using the following two factors. Two important factors are: 1) Capacity factor (or scaling factor)…size effect 2) Inflation factor (or cost indexes)…time effect 12 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001- 2007.
  13. 13. COST ESTIMATION CAPACITY FACTOR - Converting the historical capital cost data to the current equipment using the power law. n B A B A FACTOR FACTOR COST COST        The “factor” is selected to be a feature of the design that correlates best with the capital cost. B = known and A = new design 13 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  14. 14. COST ESTIMATION CAPACITY FACTOR n B A B A FACTOR FACTOR COST COST        What is the correct factor for a shell and tube heat exchanger? • Heat duty • area • number of tubes • flow rate n = ?? 14 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  15. 15. COST ESTIMATION n B A B A FACTOR FACTOR COST COST        What is the correct factor for a shell and tube heat exchanger? • Heat duty • area • number of tubes • flow rate n = ?? Area has the dominant effect on manufacturing cost. Pumps -- m3/s or power agitators -- power distillation -- height*diameter 15 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  16. 16. Rough guideline, n = 0.6 COST ESTIMATION CAPACITY FACTOR - The power n < 1.0 (usually) ! n B A B A FACTOR FACTOR COST COST        16 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  17. 17. COST ESTIMATION 17 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  18. 18. COST ESTIMATION Purchased Equipment Costs Extensive graphs of various equipment cost/capacity charts Are found in Peters, Timmerhaus, and West book: Material handling equipment Chapter 12 Reactor equipment Chapter 13 Heat transfer equipment Chapter 14 Separation equipment Chapter 15 Auxiliary, utility, and instrumentation Appendix B 18 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  19. 19. 19 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  20. 20. 20 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  21. 21. COST ESTIMATION INFLATION FACTOR (COST INDEXES) TABLES 21 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  22. 22. COST ESTIMATION Values for Selected Indexes 22 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  23. 23. 23 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  24. 24. 24 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  25. 25. COST ESTIMATION Types of Cost Estimates We must balance the needed accuracy with the cost to perform. Name Accuracy Application Nature Order of magnitude estimate -40 to +40% Screen investments Predesign Study estimate -30 to +30% Finalize major choices Predesign Preliminary -20 to +20% Budget authorization Predesign Definitive -10 to +10% Project control Design Detailed -5 to +5% Contracting Design As the estimate accuracy is increased, so does the cost of obtaining the estimate 25 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  26. 26. COST ESTIMATION This useful table is available in Peters,Timmerhaus, and West and in Perry’s Handbook. It gives a summary of the type of information needed for each level of estimate. 26Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  27. 27. COST ESTIMATION CAPITAL COST ESTIMATION 1) Detailed-Item estimate. 2) Unit cost estimate. 3) Percentage of delivered equipment cost estimate. 4) Lang factor method. 5) Power factor estimate. 6) Turnover ratio estimate 27 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  28. 28. COST ESTIMATION CAPITAL COST ESTIMATION 1) Detailed-Item estimate: Most detailed. Often prepared by contractors. Accuracy is +/- 5 %. 2) Unit cost estimate: Relies on existing data, and uses index-corrected records and published data. Acc. +/- 10%. 3) Percentage of delivered equipment cost estimate: Once delivered equipment cost is determined, all other costs are determined as percentages of that. Acc. +/- 20%. 28 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  29. 29. 29 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  30. 30. COST ESTIMATION In the previous table (6-9) costs are expressed as percentage of purchased equipment cost. These costs are average values. If in a given situation costs of certain items are defined differently and/or more explicitly, the defined costs should be used. 30 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  31. 31. 31 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  32. 32. COST ESTIMATION CAPITAL COST ESTIMATION 5) Power factor estimate: If C is the fixed capital, then C (new) = C (old). f. (capacity new/capacity old) x f is the cost index ratio x is typically 0.6-0.7 32 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  33. 33. 33 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007. Short ton = 2000 pounds = 0.9 metric ton
  34. 34. COST ESTIMATION CAPITAL COST ESTIMATION 6) Turnover ratio estimate: TR = (gross annual sales)/(fixed capital) values of 0.2 to 4.0; usually 1.0 to 1.25 in process industries 34 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
  35. 35. COST ESTIMATION CAPITAL COST ESTIMATION - Summary 1) Detailed-Item estimate. 2) Unit cost estimate. 3) Percentage of delivered equipment cost estimate. 4) Lang factor method. 5) Power factor estimate. 6) Turnover ratio estimate 35 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster University © 2001-2007.
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