Capital needed to supply the necessary manufacturing and plant facilities. Estimation of capital investment. Order-of-magnitude estimates, 6-10th's rule, Price indices,

1. Estimation of
Capital Investments
Dr. K. Shahzad Baig
Memorial University of Newfoundland (MUN) Canada

2. Capital Investments
Capital : Amount required to start a business

3. Fixed-Capital Investment
The capital needed to supply the necessary manufacturing and
plant facilities is called the fixed-capital investment

4. Working Capital:
Working Capital
required to utilize
fixed assets
Working Capital refers to
short term funds, to meet
operating expenses.
In simple ‘Working Capital is
a fund required by firm
to finance day-to-day operations

5. Estimation of Capital Investment
Direct Costs
1. Purchased equipment
2. Purchased-equipment
installation
3. Instrumentation and controls
4. Piping
5. Electrical equipment and
materials
6. Buildings (including services)
7. Yard improvements
8. Service facilities
9. Land

6. • Indirect Costs
1. Engineering and supervision
2. Construction expenses
3. Contractor’s fee
4. Contingency

7. Types of Capital Cost Estimate
1. Order-of-magnitude estimate (ratio estimate)
2. Study estimate (factored estimate)
3. Preliminary estimate (budget authorization estimate;
scope estimate)
4. Definitive estimate (project control estimate)
5. Detailed estimate (contractor’s estimate)

8. Order-Of-Magnitude Estimates
This estimate is generally used by management in feasibility
studies, for evaluating the best process, the establishment of
plant size and the economic feasibility of the project.
• For the preparation of the OOM, the estimator requires the
following general and engineering information:
– Plant capacity
– General Scope Description
– Process Block Diagrams
– General geographic location
– The cost of a similar previous project

9. Method of estimation:
The cost of the present project is determined by the ratio
method.
The price of the previous project is adjusted for size (capacity)
by using the 6-10th's rule. The size adjusted cost is then adjusted
for inflation by using published price indices.
– Other Methods
Turn over ratio method, fixed investments per ton of capacity
6-10th rule is given next

10. Cost Capacity Relation.
The six-tenths or 0 .6, rule. This equation permits the user to
obtain a cost for an equipment item of a different size when the
cost for given size is known.
The 6-10ths rule
𝐶2 = 𝐶1
𝑆2
𝑆1
𝑛
C1 = Cost for equipment Capacity S1
C2 = Cost for equipment Capacity S2
n = an exponent t
The exponent varies between 0.30 to 1.20
depending upon the cost of equipment

11. Cost Capacity Exponent
For most process equipment, the exponent varies between 0.4
and 0.8 with an average value of about 0.6. When the exponent
is unknown, this value may be used.
If we assume that for an equipment item, a cost-capacity
exponent is 0.6, doubling the capacity will increase the cost
about 50–60%, not 100%. The economy of scale is reflected in
the exponent.
If the exponent is less than 1.0, there is an economy of scale. As
n approaches the value of 1, the economy of scale disappears.
• An exponent greater than 1.0 is a negative economy of scale
and multiple equipment units should be used.

12. Problem Statement:
Recently a cast iron leaf pressure filter with 100 ft2 was
purchased for clarifying an inorganic liquid stream for
$15,000. In a similar application, the company will need a
450 ft2 cast iron leaf pressure filter. The size exponent f
or this type filter is 0.6. Estimate the purchased price of
the 450 ft2 unit.

13. 𝐶𝑜𝑠𝑡450 = 𝐶𝑜𝑠𝑡100
𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦450
𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦100
0.6
= 15000
450
100
0.6
= $ 37050

14. Following books were used in preparation of notes
 Blank, L., Tarquin. A. 2005. Engineering Economy. 6th Edition, McGraw-Hill.
 Eschenbach, T. G. 2003. Engineering Economy”, 2nd Edition, Oxford University Press
 Riggs, J. L., Bedworth, D. D., Randhawa, S. U. 1996. Engineering Economics”, 4th Edition, Tata
McGraw-Hill.
 Riggs, J. L., West. T. M. 1986. Essentials of Engineering Economics”, 2nd Edition, McGraw-Hill.
 Peter, M. S., Timmerhaus, K. D. 1991. Plant Design and Economics for Chemical Engineers. 4th
Edition, McGraw-Hill.