Costing and Economics Adnan Bashir Bin Divakaransantha Prakash Poudel Semir Kelifa Department of Chemical and Bio molecular Engineering University of Maryland CHBE446 February 12, 2015

Outline Overview of process economics Methods for costing Pricing Financing Options Methods for Economic Evaluation

Process Economics  Economic Nature Of nature of Chemical Process  Raw materials to Useful Products(Higher Value)  Series of material and energy flow  Each has an economic value cost or source of income

Process Economics..  Chemical Reaction  Stoichiometry and Thermodynamics - material flow -Overall conversion and heat requirements  Unconverted feed - separated recycled or reused

Process Economics  Additional Unit operations  Utilities including electricity, steam, cooling water, refrigeration  Generation on site importing from third parties

Process Economics….  Feed Stock - Cost of feed stock- quantity and quality -Quantity from yield/desired product -Quality defined by purity  Catalyst - selection based on yield and selectivity -optimization reduces investment and operating cost

Capital costs ISBL Cos t of procuring and installing all process equipment Contingency Charges (10% of ISBL+OSBL) Minor changes in project or extra charges Engineering costs (10% of ISBL+OSBL) Home office/design Offsite costs (40% ISBL) If you want more infrastructure/ expand Working capital Money tied up in maintaining feed stock, spare parts, products etc..

Process Economics Energy -Major cost: steam for heating, electricity for pumps and motors and water for cooling - heat integration essential -choice of reaction route Products/Waste products -Major source of income that determines the economic performance -Value of product determined by its quality

Plant Estimates.. S is the plants capacities C is ISBL capital cost a=2.775, n=.6 (syngas prod.)

If similar process not available.. Need an order of magnitude estimate Add contributions of different plant sections A functional unit includes all major units needed Includes reaction, separation, or other major unit operation Pump, heaters, are not considered unless they have substantial cost

Equipment Equipment costs derived from computer programs or websites Otherwise, use cost equation Ex. Problem

Installed costs Use Lang factor method Total plant cost and engineering cost Use table 7.4 and 7.5 (based off of carbon steel plant) If we use other material, then we need a Lang factor for it Not a ratio of metal prices* Now use new equation with table 7.4 and 7.5 based of carbon CS=carbon steel Piping,equipment erection,electrical work, instrumentation,civil,structures,lagging

Relating present cost to past costs.. Based on data for labor, material, and energy costs published Indices published in Oil and Gas Journal

Location factor Most plant and equipment costs are given in U.S. gulf coast or Northwest Europe Otherwise it will depend on fabrication, labor, shipping, import duties etc.

Variable Costs of Production Variable costs are costs that increase in direct proportion to production volume Raw materials Utilities Fired heater fuel Steam Cooling water Electricity Consumables Solvents Acids and bases Additives (inhibitors, stabilizers, antifoams, nutrients, ….) Packaging & delivery costs Waste Disposal costs

Fixed Costs of Production Some costs are incurred regardless of the level of production Labor wages paid to Operators, supervisors, direct salary overhead Maintenance Property taxes & Insurance Interest Payments Corporate Overhead Charges Research and development, Marketing, General and administrative License Fees and Royalties

Revenues, Margins and Profits Revenues are the income generated from sales of main product and byproduct Gross margin = Revenues – Raw materials costs Cash cost of production CCOP = variable costs (VCOP) + fixed costs (FCOP) Gross profit = Revenues - CCOP Net profit = Gross profit - taxes Total cost of production = CCOP + annual charge to allow for capital recovery

Pricing Price is determined by demand and supply. The price is the mechanism used by the market to bring supply and demand into dynamic equilibrium. If the wrong prices are used then optimization is worthless.

Source of Price Data Internal Company Forecast Trade Journals ICIS Chemical Business Americas, The Oil and Gas Journal, Chemical Week Consultants Purvin and Gertz, Cambridge Energy Research Associates, Chemical Market Associates Inc. Online Brokers and Suppliers Good for small quantity order for high quality materials Reference books

Time Dependence of Prices The prices of raw materials, product, energy and consumables can be expected to vary over the life of the project Price forecast is very important for the project optimization Most price forecasts are based on an analysis of historic price data Price forecasting method must be chosen with care – if the wrong prices are used then optimization is worthless

Price Forecasting Methods Assume Current Prices Linear Regression Non-Linear Regression Forecast margins instead of prices Model statistical distribution of price or margin

Economic Evaluation Want to make more money Need to compare different projects Different Methods are used

Cash Flow

Project Financing Debt Financing - Long-term bonds - Payment of interest Equity Financing - Capital contributed by stockholders - Expectation of getting a return on investment 1. Dividends paid annually 2. Increase in price of stock

Project Financing

Cost of Capital Debt ratio Interest on debt Cost of equity

Cost of Capital Stockholder's equity=assets-liabilities Overall Cost of Capital sets the interest rate used in economic evaluation of projects Must meet or exceed this interest rate to achieve targeted return on equity

Taxes Gross profit Rate of taxation Sum of tax allowances

Depreciation Straight Line Depreciation -Book Value

Depreciation Declining Balance Depreciation D 1 = C F d B 1 = C – D 1 = C (1 – F d ) D 2 = B 1 F = C (1 – F d ) F d B 2 = B 1 – D 2 = C (1 – F d ) (1 – F d ) = C (1 – F d ) 2 hence : D m = C (1 – F d ) m-1 F d B m = C (1 – F d ) m

Modified Accelerated Cost Recovery System(MACRS)

Simple Methods

Present Value Methods

Discounted Cash-flow Rate of Return(DCFROR) Interest rate at which NPV is zero at the end of the project Good Projects have high DCFROR

Annualized Cost Methods

Sensitivity Analysis Sales price  20% of base (larger for cyclic commodities) Sales price  20% of base (larger for cyclic commodities) Production rate  20% of base Production rate  20% of base Feed cost- 10% to + 30% of base Feed cost- 10% to + 30% of base Fuel cost- 50% to + 100% of base Fuel cost- 50% to + 100% of base Fixed costs- 20% to + 100% of base Fixed costs- 20% to + 100% of base ISBL capital investment- 20% to + 50% of base ISBL capital investment- 20% to + 50% of base OSBL capital investment- 20% to + 50% of base OSBL capital investment- 20% to + 50% of base Construction time- 6 months to + 2 years Construction time- 6 months to + 2 years Interest ratebase to base + 2 percentage points Interest ratebase to base + 2 percentage points

Questions?

Sources Chemical Engineering Desgin, Gavin Towler and Ray Sinnott CHBE444 Notes