1. Process Economics
Factors that affect profitability
Capital cost estimation
Manufacturing – operating expenses
Other economic topics: optimal scheduling
choice among alternatives
replacement analysis

2. Capital Cost Estimation
Land
Fixed Capital Investment: Grass – roots
Battery-limits
3. Working Capital
4. Start-up Expenses
General reference for cost estimation data:

3. Capital Cost Estimation Fixed Capital Investment
Quality of Estimates
Study estimate (preliminary estimate). This type requires knowledge of preliminary material and energy balances as well as major equipment items. It has a probable accuracy of −25 to +30%
Definitive estimate (budget authorization estimate). The data needed for this type of estimate are more detailed than those for a preliminary estimate and include the preparation of specifications and drawings. The probable accuracy is −10 to +15 %.
Detailed estimate (firm estimate). Complete specifications, drawings, and site surveys for the plant construction are required, and the estimate has an accuracy of −5 to +10 percent.

4. Fixed Capital Investment – Equipment Cost Data
These cost data are reported as purchased, delivered, or installed
cost.
Purchased cost is the price of the equipment FOB (Free on board) at the manufacturer’s plant.
Delivered cost is the purchased price plus the delivery charge to the purchaser’s plant FOB.
Installed cost means the equipment has been purchased, delivered, uncrated, and placed on a foundation.

5. Fixed Capital Investment – Equipment Cost Data
The six-tenths rule:
n = 0.6

6. Fixed Capital Investment – Equipment Cost Data
Cost-capacity equations are used to account for temperature, pressure, material of construction, equipment type etc. For example for a shell-and tube heat exchanger:
The various factors are included in cost-estimation programs and in tables

7. Fixed Capital Investment – Equipment Cost Data

8. Fixed Capital Investment – Equipment Cost Data
Cost Indices:

9. Estimation of the Fixed Capital Investment
The Seven-Tenths Rule
A company is considering the manufacture of 150,000 tons annually of ethylene oxide by the direct oxidation of ethylene. It is known that the cost capacity exponent for such a plant is A subsidiary of the company built a 100,000-ton annual capacity plant for $70 million fixed capital investment in Using the seven-tenths rule, estimate the cost of the proposed new facility in the third quarter 2004.

10. Estimation of the Fixed Capital Investment
The Lang Factor Method
This method begins with collecting the delivered cost of various items of equipment and applying one factor to obtain the battery-limits (BL) fixed capital (FC) investment or total capital investment
The single factors include piping, automatic controls, insulation, painting, electrical work, engineering costs, etc.

11. Capital Cost Estimation - Other Items
Working capital is the funds necessary to the day-to-day operation of the process: purchase raw materials, supplies, etc. The working capital is covered eventually by income from sales, however it is used as a buffer in case of delays, strikes etc. It is calculated as percent the total capital investment ( %) or percent of the yearly sales ( %).
Start-up Expenses Start-up expenses are defined as the total
costs directly related to bringing a new manufacturing facility onstream (normal operation).
Experience has shown that start-up costs are a percentage of the battery-limits fixed capital investment of the order on average
of 3 percent.

12. Project Financial Evaluation Computation of Cash Flow

13. Manufacturing-Operating Expenses
Raw Material Expense: Estimates of the amount of raw material consumed can be obtained from the process material balance. Normally, the raw material expense is the largest expense item in the manufacture of a product.
Approximate prices of chemicals (not up to date) are available at:
Operating Labor The most reliable method for estimating labor
requirements is to prepare a table of shift, weekend, and vacation coverage. For round-the-clock operation of a continuous process, one operator per shift requires 4.2 operators, if it is assumed that 21 shifts cover the operation and each operator works five, 8-h shifts per week.

14. Indicative Chemical Prics A-Z

15. Preliminary Operating Cost Estimates
Direct production cost
Materials
a. Raw materials-estimate from price lists
b. By-product and scrap credit-estimate from price lists
2. Utilities-from literature or similar operations
3. Labor-from manning tables, literature, or similar operations
Supervision-10 to 25% of labor
Payroll charges-30 to 45% of labor plus supervision
Maintenance-2 to 10% of investment per year
Operating supplies-0.5 to 1.0% of investment per year or 6 to 10% of operating labor
Laboratory-10 to 20% of labor per year
Waste disposal-from literature or similar operations
Contingencies-1 to 5 % of direct costs

16. Preliminary Operating Cost Estimates
B. Indirect costs
1. Depreciation-10 to 20% of investment per year
2.Real estate taxes-l to 2 % of investment per year
3.Insurance-0.5 to 1.0% of investment per year
4.Interest-10 to 12% of investment per year
5.General plus overhead-50 to 70% of labor, supervision, and maintenance, or 6 to 10% of sales
C. Distribution costs
Packaging-estimate from container costs
Shipping-from carriers or 1 to 3 % of sales

17. Operating Cost Estimation Rates for Industrial Utilities

18. Operating Cost Estimation Rates for Industrial Utilities

19. Optimal Production Scheduling
A chemical plant makes three products (E, F, G) and utilizes three raw materials (A, B, C) in limited supply. Each of the three products is produced in a separate process (1,2,3); The available materials A, B, and C do not have to be totally consumed. The reactions involving A, B, and C are as follows:
Process 1: A + B → E
Process 2: A +B → F
Process 3: 3A + 2B + C → G

20. Optimal Production Scheduling
Schedule the production of A, B and C to maximize the operating profit per day
Notation: x1 - kg/day of A; x2 - kg/day of B; x3 - kg/day of C
x4 - kg/day of E; x5 - kg/day of F; x6 - kg/day of G

21. Optimal Production Scheduling
The daily profit is found by subtracting daily operating cost from the daily income:

22. Optimal Production Scheduling
Material balance constraints
Row material constraints

23. Optimal Production Scheduling

24. Optimal Production Scheduling

25. Replacement Policy
A company is using a piece of equipment which originally cost $30,000. The equipment has been in use for 5 years, and it now has a net realizable value of $6000. At the time of installation, the service life was estimated to be 10 years and the salvage value at the end of the service life was estimated to be zero. Operating costs amount to $22,000/year. At the present time, the remaining service life of the equipment is estimated to be 3 years.
A proposal has been made to replace the present piece of property by one of more advanced design. The proposed equipment would cost $40,000, an operating costs would be $ 15,000/year. The service life is estimated to 10 years with a zero salvage value. All costs other than those for operation and depreciation will remain constant. The company will not make any unnecessary investments in equipment unless it can obtain an annual return on the necessary capital of at least 10 percent.

26. Replacement Policy
Annual variable expenses on the new equipment:
Operating cost:
Depreciation:
Total
Annual variable expenses on the present equipment:
Operating cost:
Depreciation:
Total
Savings: Yearly interest on initial investment: