Costing and Project Evaluation

Capital cost estimates can be broadly classified into three types according to their accuracy and purpose: Preliminary (approximate) estimates, accuracy typically ±30 per cent, which are used in initial feasibility studies and to make coarse choices between design alternatives. They are based on limited cost data and design detail. Authorisation (Budgeting) estimates, accuracy typically ± 10 - 15 per cent. These are used for the authorisation of funds to proceed with the design to the point where an accurate and more detailed estimate can be made. Detailed (Quotation) estimates, accuracy ± 5 -10 per cent, which are used for project cost control and estimates for fixed price contracts. These are based on the completed (or near complete) process design, firm quotations for equipment, and a detailed breakdown and estimation of the construction cost.

FIXED AND WORKING CAPITAL Fixed capital is the total cost of the plant ready for start-up. It is the cost paid to the contractors. It includes the cost of: 1. Design, and other engineering and construction supervision. 2. All items of equipment and their installation. 3. All piping, instrumentation and control systems. 4. Buildings and structures. 5. Auxiliary facilities, such as utilities, land and civil engineering work.

Working capital is the additional investment needed 1. Start-up. 2. Initial catalyst charges. 3. Raw materials and intermediates in the process. 4. Finished product inventories. 5. Funds to cover outstanding accounts from customers. Most of the working capital is recovered at the end of the project.

COST ESCALATION (INFLATION) All cost-estimating methods use historical data

The Process Engineering index, over a ten-year period (January to January), is shown in Figure 6.1a

The Marshall and Swift index (M and S equipment cost index), base year 1926. (published by The journal Chemical Engineering, under the name of the CPE plant cost index). The index over a ten-year period is shown in Figure 6.1b.

RAPID CAPITAL COST ESTIMATING METHODS An approximate estimate of the capital cost of a project can be obtained from a knowledge of the cost of earlier projects using the same manufacturing process The capital cost of a project is related to capacity by the equation The value of the index n is traditionally taken as 0.6; the well-known six-tenths rule.

THE FACTORIAL METHOD OF COST ESTIMATION Lang factors: The fixed capital cost of the project is given as a function of the total purchase equipment cost by the equation: Detailed factorial estimates

To make a more accurate estimate, in addition to the cost of equipment are: 1. Equipment erection, including foundations and minor structural work. 2. Piping, including insulation and painting. 3. Electrical, power and lighting. 4. Instruments, local and control room. 5. Process buildings and structures. 6. Ancillary buildings, offices, laboratory buildings, workshops. 7. Storages, raw materials and finished product. 8. Utilities (Services), provision of plant for steam, water, air, firefighting services (if not costed separately). 9. Site, and site preparation.

SUMMARY OF THE FACTORIAL METHOD 1. Prepare material and energy balances, draw up preliminary flow-sheets, size major equipment items and select materials of construction. 2. Estimate the purchase cost of the major equipment items. Use Figures 6.3 to 6.6 and Tables 6.2 and 6.3, or the general literature. 3. Calculate the total physical plant cost (PPC), using the factors given in Table 6.1 4. Calculate the indirect costs from the direct costs using the factors given in Table 6.1. 5. The direct plus indirect costs give the total fixed capital. 6. Estimate the working capital as a percentage of the fixed capital; 10 to 20 per cent. 7. Add the fixed and working capital to get the total investment required.

OPERATING COSTS An estimate of the operating costs, the cost of producing the product, 1. Fixed operating costs: costs that do not vary with production rate. These are the bills that have to be paid whatever the quantity produced. 2. Variable operating costs: costs that are dependent on the amount of product produced.

Fixed costs 1. Maintenance (labour and materials). 2. Operating labour. 3. Laboratory costs. 4. Supervision. 5. Plant overheads. 6. Capital charges. 7. Rates (and any other local taxes). 8. Insurance. 9. Licence fees and royalty payments.

Variable costs 1. Raw materials. 2. Miscellaneous operating materials. 3. Utilities (Services). 4. Shipping and packaging.

Rate of return calculations Rate of return (ROR), which is the ratio of annual profit to investment, is a simple index of the performance of the money invested. From Figure 6.8.