Problems v variable; subscript j designates variable j; subscript 0 designates initial variable value: subscript min designates value at minimum objective function value; slack variable: bold type indicates vector of values Vv = volume, m°; subscript A designates species A volume; subscript B designates species B volume; subscript W designates water volume; linear velocity, m/s W, = mechanical work added to system from an extemal mechanical source, kI/kg x = independent variable; insulation thickness, m; fraction of stream sent to exchanger y = independent variable x = purchase cost for new pipe per meter of length if pipe diameter is 0.0254 m, $/m AH = enthalpy change rate, ki/s AT = temperature difference, K or °C; subscript 1 designates the difference at one point; subscript 2 designates the difference at another point; subscript min designates the smaller of AT, and AT; subscript log mean designates the logarithmic mean of two temperature differences z = objective function; subscript j corresponds to variable j fractional rate of return Greek Symbols a = Lagrange multiplier, dimensionless; subscript i designates multiplier for variable i; subscript min designates value at minimum obective function value # = weighting variable, dimensionless; subscript designates weighting variable i; subscript min designates value at minimum objective function Me fluid viscosity, Pa-s o cost function, $ per time; superscript ‘ designates heat loss ® = income tax rate, fraction/yr » fluid density, kg/m? a = operating time, s; subscript b designates boiling time; subscript c designates recharging time; subscript i designates total time for boiling and recharging time; subscript f designates filtering time; subscript designates otal time per complete cycle; subscript ‘opt denotes optimum value v = gradient operator PROBLEMS 9-1 Amultiple-effect evaporator is to be used for evaporating 200,000 kg of water per day from a salt solution. The total initial cost for the first effect is $18,000, and each additional effect costs $15,000. The service life of the evaporator is estimated to be 10 years, and the salvage or scrap value at the end of the life period may be assumed to be zero. ‘The straight-line depreciation method is used. Fixed charges minus depreciation are 15 percent yearly, based on the first cost of the equipment, Steam costs $0.0033/kg. Annual maintenance charges are 5 percent of the initial equipment cost. All other costs are independent of the number of effects. The unit will operate 300 days/yr. Ifthe kilograms of water evaporated per kilogram of steam equals 0.85(number of effects), determine the optimum number of effects for mini mum annual cost.436 CHAPTER 9 Optimum Design and Design Strategy 9-2, 9-3 9-4 98 Determine the optimum economic thickness of insulation that should be used under the following conditions: Saturated steam is being passed continuously through a steel pipe with an outside diameter of 0.273 m. The temperature of the steam is 480 K, and the steam is valued at $0.004/kg. The pipe is to be insulated with a material that has a thermal conductivity of 5.2 x 10-2 Wink. The cost of the installed insulation per meter of pipe length is $180/,, where 1; is the thickness of the insulation in meters. Annual fixed charges including maintenance amount to 20 percent of the initial installed cost. The total length of the pipe is 300 m, and the average temperature of the surroundings may be taken as 295 K. Heat-transfer resistances. due to the steam film, scale, and pipe wall are negligible. The air-film coefficient at the outside of the insulation may be assumed constant at 11.4 W/(m?K), for all insulation thicknesses. An absorption tower containing wooden grids is to be used for absorbing SO, in a sodium sulfite solution, A mixture of air and SO; will enter the tower at a rate of 33 m*/s, temperature of 400 K, and pressure of 111 kPa. The concentration of SO> in the entering gas is specified, and a given fraction of the entering SO» must be removed in the absorption tower. The mole- cular weight of the entering gas mixture may be assumed to be 29.1. Under the specified design conditions, the number of transfer units necessary varies with the superficial gas, velocity as follows: Number of transfer units = 1.05G2:'* where G, is the entering gas velocity in kg/m?-s based on the cross-sectional area of the empty tower. The height of a transfer unit is constant at 4.5 m. The cost for the installed tower is $40/m’ of inside volume, and annual fixed charges amount to 20 percent of the initial cost. Variable operating charges for the absorbent, blower power, and pumping power are repre- sented by the following equation: 0.1098 0.0244 Gu The unit is to operate 8000 hv/yr. Determine the height and diameter of the absorption tower at conditions of minimum annual cost. ‘Total variable operating costs, $/s = 9.78 x 10°G? + Derive an expression for the optimum economic thickness of insulation to put on a flat surface if the annual fixed charges per square meter of insulation are directly proportional to the thick- ness, (a) neglecting the air film and (b) including the air film. The air-film coefficient of heat transfer may be assumed constant for all insulation thicknesses. A continuous evaporator is operated with a given feed material under conditions in which the concentration of the product remains constant, The feed rate at the start of a cycle after the tubes have been cleaned has been found to be 5000 kg/h. After 48 h of continuous operation, tests have shown that the feed rate decreases to 2500 kg/h. The reduction in capacity is due to true scale formation. If the downtime per cycle for emptying, cleaning, and recharging is 6 h, how long should the evaporator be operated between cleanings in order to obtain the maxi- mum amount of product per 30 days? Asolvent extraction operation is carried out continuously in a plate column with gravity flow. The unit is operated 24 h/day. A feed rate of 40 m*/day must be handled 300 days/yr. The allowable velocity per square meter of cross-sectional tower area is 12.2 m’ of combined sol- vent and charge per hour. The annual fixed costs for the installed equipment can be predicted from the following equation: Cr = 8800F 7, — 51,000F,, + 110,000 Syr where F,; is the cubic meters of solvent per cubic meter of feed, Operating and other variable costs depend on the amount of solvent that must be recovered, and these costs are $1.41 for97 98 9.9 9-10 9-1 Problems each cubic meter of solvent passing through the tower. What tower diameter should be used for optimum conditions of minimum total cost per yeer? Prepare a plot of optimum economic pipe diameter versus the flow rate of fluid in a steel pipe under the following conditions Costs and operating conditions ordinarily applicable in industry may be used. ‘The flow of the fluid may be considered to be in the turbulent range. ‘The viscosity of the fluid may range from 0.1 to 20 cP. Express the diameters in meters and use inside diameters. ‘The plot should cover a diameter range of 2.5 x 10-3 to 2.5 m. Express the flow rate in kg/s. The plot should cover a flow rate range of 1 x 10" to 10 kgis. ‘The plot should be presented on log-log coordinates. ‘One curve on the plot should be presented for each of the following fluid densities: 1600, 800, 160, 16, 1.6, 0.16, and 0.016 kg/m? For the conditions indicated in Prob. 9-7, prepare a log-log plot of fluid velocity in meters per second versus optimum economic pipe diameter in meters. The plot should cover a fluid velocity range of 0.1 to 30 m/s and a pipe diameter range of 0.01 to 0.25 m. A continuous evaporator is being used to concentrate a scale-forming solution of sodium sulfate in water. The overall coefficient of heat transfer decreases according to U~? = 6.88 x 107°, + 0.186 where U = overall coefficient of heat transfer, (kI/s)/(m?-K) and , = time in operation, s. The only factor which affects the overall coefficient is the scale formation. The liquid enters the ‘evaporator at the boiling point, and the temperature and heat of vaporization are constant. At the operating conditions, 2300 kI is required to vaporize 1 kg of water, the heat-transfer area is 37 m?, and the temperature-difference driving force is 40°C . The time required to shut down, clean, and get back on stream is 4 h for each shutdown, and the total cost for this cleaning op- eration is $100 per cycle. The labor costs during operation of the evaporator are $20 per hour. Determine the total time per cycle for minimum total cost under the following conditions: a. An overall average of 30,000 kg of water per 24-h day must be evaporated during each 30-day period. b. An overall average of 37,000 kg of water per 24-h day must be evaporated during each 30-day period. ‘An organic chemical is produced by a batch process. In this process, chemicals X and ¥ react to form chemical Z. Since the reaction rate is very high, the total time required per batch has been found to be independent of the amounts of the materials, and each batch requires 2h, including time for charging, heating, and dumping. The following equation shows the relation between the kilograms of Z produced (kgz) and the kilograms of X (kgy) and Y (kgy) supplied: key = 1S(1Ikgykgz + 1.3kgykg, ~ keykey)"> Chemical X costs $0.2/kg. Chemical ¥ costs $0.1/kg, Chemical Z sells for $1.75 per kg. If one-half of the selling price for chemical Z is due to costs other than for raw materials, what is the maximum profit obtainable per kilogram of chemical Z? Derive an expression similar to Eq. (9-87) for finding the optimum exit temperature of cooling water from a heat exchanger when the temperature of the material being cooled is not constant. Designate the true temperature-difference driving force by Fg ATim. where Fo is aCHAPTER 9 Optimum Design and Design Strategy 9-12 9-13 9-14 correction factor with a value dependent on the geometric arrangement of the passes in the exchanger. Use primes to designate the temperature of the material that is being cooled. Under the following conditions, determine the optimum economic thickness of insulation for 4 0.038-m (14in, standard) pipe carrying saturated steam at 800 kPa. The line is in use con- tinuously. The covering specified is light carbonate magnesia, which is marketed only in 0.025-m increments (0,025 m, 0.05 m, 0.075 m, etc.). The cost of the installed insulation may be approximated as $700 per cubic meter of insulation. Annual fixed charges are 20 percent of the initial investment, and the heat of the steam is valued at $1.42/GJ. The temperature of the surroundings may be assumed to be 300 K. L. B. McMillan [Trans. ASME, 48: 1269 (1926)] has presented approximate values of ‘optimum economic insulation thickness versus the group (kb, H, AT /a.)"*, with pipe size as, a parameter. k = thermal conductivity of insulation, (ki/s)/(m-K) be = cost of heat, $/kJ ‘Hy = operation per year, s/yr AT = overall temperature-difference driving force, K a, = cost of insulation, ($/m*)/yr The following data are based on the results of McMillan, and these data are applicable to the conditions of this problem: Optimum economic thickness of insulation, for a nominal pipe diameter of KbH, AT)" 9.013 m 0.025 m 0.051 m 0.102 m a G in) (1.0 in.) (2.0 in.) (4.0 in.) 0.08 = 0010 0.013 0015 0.06, 0.020 0.024 0.028 0.033 0.09 0.030 0.036 0.041 0.048 O15 0.047 0.053 0.062 0.074 0.24 0.070 0.079 0.091 0.109 037 0.097 0.109 0.124 = A catalytic process uses a catalyst which must be regenerated periodically because of redue- tion in conversion efficiency. The cost for one regeneration is constant at $800. This figure in- cludes all shutdown and start-up costs as well as the cost for the actual regeneration. The feed. rate to the reactor is maintained constant at 70 kg/day, and the cost for the feed material is $5.50 per kilogram. The daily costs for operation are $300, and fixed charges plus general overhead costs are $100,000 per year. Tests on the catalyst show that the yield of product as kilograms of product per kilogram of feed during the first day of operation with the regener ated catalyst is 0.87, and the yield decreases as 0.87/32, where Op is the time in operation expressed in days. The time necessary to shut down the unit, replace the catalyst, and start-up the unit is negligible. The value of the product is $31.00 per kilogram, and the plant operates 300 days/yr. Assuming no costs are involved other than those mentioned, what is the maxi- ‘mum annual profit that can be obtained under these conditions? Derive the following equation for the optimum outside diameter of insulation on a wire for maximum heat loss: 2k © he thie Dorn9-15 9-16 9-17 9-18 9-19 Problems where ky, is the mean thermal conductivity of the insulation and (h, + ty). is the combined convection and radiation heat-transfer coefficient. The values of ky, and (h, +h) can be considered as constants independent of temperature level and insulation thickness, Derive Eq. (9-80) for the optimum economic pipe diameter, and compare this to the equiva- lent expression presented as Eq. (5-90) in Perry's Chemical Engineers’ Handbook, Sth ed. G.H. Perry and C. H. Chilton, eds., McGraw-Hill, New York, 1973, p. 5~32). Using a direct partial derivative approach for the objective function, instead of the Lagrangian multiplier L(x, y) = xy + A(x? + y? — 10), determine the optimum values of x and y in this equation. Find the values of x,y, and z that minimize the function x +2y? + z? subject to the constraint that x + y +z = 1, making use of the Lagrangian multiplier. To continue the operation of a small chemical plant at the same capacity, it will be necessary to make some changes on one of the reactors in the system. The decision has been made by management that the unit must continue in service for the next 12 years, and the company pol- icy is that no unnecessary investments are made unless at least an 8 percent rate of return (end-of-year compounding) can be obtained after income taxes. Two possible ways for mak- ing a satisfactory change in the reactor are as follows: 1. Make all the critical changes now at a cost of $5800 so the reactor will be satisfactory to use for 12 years, 2. Make some of the changes now at a cost of $5000 which will permit operation for 8 years, and then make changes costing $2500 to permit operation for the last 4 years. a. Which alternative should be selected if no infiation is anticipated over the next 12 years? b. Which alternative should be selected if inflaton at a rate of 7 percent (end-of-year compounding) is assumed for all future costs? As noted in Example 9-8 on heat integration, the heat exchange network that was developed was based on a predetermined value of ATpin of 20°C. However, this particular value may not yield a global optimum. Therefore, it is necessary to investigate other values of ATin ‘until this global optimum is obtained. In this evaluation, use the network that was recommended with a single cooler C-1, exchangers E-1 and E-2 corresponding to the single cooler, match 3 network for the section above the pinch point, and heater H-1 for the hot utility section. Use the cost data for the hot oil and cooling water given in Example 9-8. Use an overall heat transfer coefficient of 1 kW/m?-K. for each exchanger, including utilities. Heat exchanger purchase price = $1,000A°°, where A is the heat exchange area in m?, No single exchanger should exceed 500 m? in area. Use straight-line depreciation for 7 years, with no salvage value. Use an income tax rate of 35 per- cent per year. As the objective function, use the following relation that is based on the net return, Eq. (8-3c) Minimize; annual cost, Cr = (annual cost of heating oil and cooling water) (1 — ©) + (annual depreciation) (1 — ©) + maTix) where 7),, is the total investment in the heat exchanger system assumed to be five times the exchanger purchase price. The minimum acceptable rete of return may is 15 percent per year after income tax. Obtain the optimal A Tjxiq for this network. Plot the results of the optimization Process to show what effect a small change in the AT in value has on the economic analysis.Problems Np = annual net profit, dollars; subscript p,ave refers to average annual net profit; subscript ,j indicates net profit in year j NPW = net present worth, dollars PD price of product, dollars/kg, P, product rate, kg/yr PBP payback period, years PWF present worth factor, most forms are dimensionless r nominal interest rate for compounding other than annual, percent/100 = ‘minimum acceptable rate of return for continuous compounding that corresponds to mar, percent/100 r nominal rate of interest for continuous compounding that corresponds to i’, percent/100 rec recovery of working capital and physical assets in year j, dollars Ry net return, dollars; subscript ave designates average net return ROL = return on investment, percent or percent/100 5 value of sales in year j, dollars F = total capital investment, dollars v manufacturing capital investment, dollars Greek Symbol ° income tax rate, percent/100 PROBLEMS 8-1 What total amount of funds before taxes will be available 10 years from now if $10,000 is placed in a savings account earning an interest rate of 6 percent compounded monthly’? How many years will be required for this amount to double at the same interest rate compounded semiannually? What is the shortest time in years for the doubling to occur if continuous com- pounding is available? 8-2 A proposed chemical plant will require a fixed-capital investment of $10 million. It is esti ‘mated that the working capital will be 25 percent of the total investment. Annual depreciation costs are estimated to be 10 percent of the fixed-capital investment, If the annual profit will be ‘$3 million, determine the percent return on the total investment and the payout period. 8-3 An investigation of a proposed investment has been made. The following result has been pre- sented to management: The payback period is 5 years. Annual depreciation is 10 percent per year of the fixed-capital investment; and fixed-capital investment is 85 percent of total capi- tal investment. Using this information, determine the rate of return on the investment. 8-4 ) Two pumps are being considered for pumping water from a reservoir. Installed cost and salvage value for the two pumps are given below: Pump A Pump B Installed cost $20,000 $25,000 Salvage value 2,000 4,000 Pump A has a service life of 4 years. Determine the service life of pump B at which the two pumps are competitive if the annual effective interest rate is 15 percent. CompetitivenessCHAPTER & Profitabilty, Alternative Investments, and Replacements. 86 refers to the requirement that the installed cost of the pumps plus the amount that must be invested at the time of installation so that sufficient interest will be earned over the service life (when added to the salvage value) to replace the pumps at the original cost. A heat exchanger has been designed, and insulation is being considered for the unit. The in- » sulation can be obtained in thicknesses of 0.025, 0.051, 0.076, or 0.102 m. The following data have been determined for the differzent insulation thicknesses: ——— rr 0,025m 0.051m 0.076m 0.102 m ki/s energy saved 88 102 108 im Cost for installed insulation $8,000 $10,100 $11,100 $11,500 Annual fixed charges, % of installed cost 10 10 10 10 ‘What thickness of insulation should be used? The value of heat is $1.50/GJ. An annual after- tax return of 15 percent on the fixed-capital investment is required for any capital utilized in this type of investment. The income tax rate is 35 percent/yr. The exchanger operates for 300 days/yr. A design engineer is evaluating two pumps for handling a corrosive solution. The information on the pumps is the following: Pump A Pump B Installed cost $15,000 $22,000 Service life, years 2 5 Determine the annual interest rate at which the two pumps are competitive. Neglect salvage value. See Prob. 8-4 for the definition of competitiveness. Which pump would you recommend? : af) ‘A company must purchase one reactor to be used in an overall operation, Four reactors have 88 been designed, all of which are equally capable of giving the required service. The following data apply to the four designs: =— Design Design Design Design 1 2 3 4 Fixed-capital investment $10,000 $12,000 $14,000 $16,000 ‘Sum of after-tax operating and fixed costs per year (all other costs are constant) 3,000 2,800 2,350 2,100 If the company demands a 15 percent return after taxes on any unnecessary investment, which of the four designs should be accepted? In the design of a chemical plant, the following expenditures and revenues arc estimated after the plant has achieved its desired production rate: Total capital investment $10,000,000 Working capital $1,000,000 ‘Annual sales $8,000,000/yr Annual expenditures $2,000,000/yr89 \ we 8-11 Problems Assuming straight-line depreciation over a 10-year project analysis period, determine a. The return on the investment after taxes b. The payback period An existing warehouse is worth $500,000, and the average value of the goods stored in the warehouse is $400,000. The annual insurance rate on the warehouse is 1.1 percent, and the insurance rate on the stored goods is 0.95 percent. If a proposed sprinkling system is installed in the warehouse, both insurance rates will be reduced to three-quarters of the original rate. The installed sprinkler system will cost $20,000, while the additional annual cost of mainte- nance, inspection, and taxes will be $300. The required depreciation period for the entire investment in the sprinkler system is 20 years. The capital necessary to make the investment is available. The operation of the warehouse is now providing an 8 percent return on the original investment. Give reasons why you would o: would not recommend installing the sprinkler system, A proposed chemical plant has the following projected revenues and operating expenses in millions of dollars Annual operating expenses Year Annual revenue (excluding depreciation) 1 70 40 2 100 56 3 15.0 68 4 20.0 18 5 22.5 88 6 24.0 96 7 25.0 10.0 ‘The fixed-capital investment for the plant is $50 million with a working capital of $7.5 million. Using a MACRS depreciation schedule with a class life‘of 5 years, determine a. The annual cash flows b. The net present worth, using a nominal discount rate of 15 percent ¢. The DCFR ‘Apower plant for generating electricity is part of a plant design proposal. Two alternative power plants with the necessary capacity have been suggested. One uses a boiler and steam turbine while the other uses a gas turbine, The following information applies to the two proposals: Boiler and steam turbine Gas turbine Initial investment, $ 600,000 400,000 Fuel costs per year, $ 160,000 230,000 Maintenance and repairs per year, $ 12,000 15,000 Insurance and taxes per year, $ 18,000 12,000 Depreciation recovery period, yr 20 10 Salvage value at end of service life, $ 0 0 All other costs are the same for either type of power plant. A 12 percent return is required on any investment. If one of these power plants must be accepted, which one should be recommended?CHAPTER & Profitabiity, Alternative Investments, and Replacements s 8-12) The facili \ 8-13 8-14 8-15 8-16 es of an existing chemical company must be increased if the company is to con- tinue in operation. There are two alternatives. One of the alternatives is to expand the present plant. The expansion would cost $130,000. Additional labor costs would be $150,000 per year, while additional costs for overhead, depreciation, property taxes, and insurance would be $60,000 per year. ‘The second alternative requires construction and operation of new facilities ata location about 50 mi from the present plant. This alternative is attractive because cheaper labor is available at this location, The new facilities would cost $200,000. Labor costs would be $120,000 per year. Overhead costs would be $70,000 per year. Annual insurance and property taxes would amount to 2 percent of the initial cost. All other costs except depreciation would be the same at each location. If the minimum acceptable return on any unnecessary inves ment is 9 percent per year after an income tax of 35 percent, determine the minimum recov- ery period for the facilities at the distant location for this alternative to meet the required incremental return, The salvage value should be assumed to be zero, and straight-line depre- ciation may be used. A chemical company is considering replacing a batch reactor with a continuous reactor. The old unit cost $40,000 when new 5 years ago, and depreciation has been charged on a straight- line basis using an estimated service life of 10 years with a final salvage value of $1000. The new unit would cost $70,000. It would save $15,000 per year in expenses not in- cluding depreciation. The straight-line depreciation period is taken to be 10 years with a zero salvage value, All costs other than those for labor, insurance, taxes, and depreciation may be assumed to be the same for both units. The old unit can now be sold for $5000. Income tax is 35 percent per year. If the after-tax minimum acceptable retum on any investment is 15 per- cent, should the replacement be made? A project is being considered that requires $1,000,000 for fixed-capital investment and $100,000 for working capital. The fixed capital is depreciated on a straight-line basis to @ book value of zero at the end of the fifth year. The annual revenue in those 5 years $500,000. The total product cost not including depreciation is $100,000 annually. The di count rate is 10 percent, and the income taxation rate is 35 percent. Develop a spreadsheet that shows the annual cash flow, the discounted cash flow, and the net present worth for each year. ‘Treat the investments as occurring in a lump sum at zero time. The revenues and expenses ‘occur continuously and utilize continuous compounding. ‘Now assume an inflation rate of 5 percent on both the revenues and the expenses. Again, develop another spreadsheet that shows the annual cash flow, the discounted cash flow, and the net present worth for each year: ‘The owner of a small antifreeze plant has a small canning unit which cost him $5000 when he purchased it 10 years ago. The unit has completely depreciated, but the owner estimates that it will still give him good service for 5 more years. At the end of 5 years the unit will have a salvage value of zero. The owner now has an opportunity to buy a more efficient canning unit for $6000 having an estimated service life of 10 years and zero salvage value. This new unit would reduce annual labor and maintenance costs by $1000 and increase annual expenses for taxes and insurance by $100. All other expenses except depreciation would be unchanged. If the old canning unit can be sold for $600, what replacement return on his capital investment will the owner receive if he decides to make the replacement? ‘An engineer in charge of the design of a plant must choose either a batch or a continuous sys- tem. The batch system offers a lower initial outlay but, because of higher labor requirements,817 848 8-19 Problems exhibits a higher operating cost, The cash flows relevant to this decision have been estimated as follows: a aan Discounted 1-10 cash flow rate Net present 0 (after taxes) of return worth at 10% Batch system $20,000 -$5600/year 25% $14,400 Continuous system $30,000 $7650/year 22% $17,000 Check the values given for the discounted cash flow rate of return and net present worth. If the company requires a minimum rate of return of 10 percent, which system should be chosen? An oil company is offered a lease of a group of oil wells on which the primary reserves are close to exhaustion, The major condition of the purchase is that the oil company agree to un- dertake a water flood project at the end of 5 years to undertake possible secondary recovery. No immediate payment by the oil company is required. The relevant cash flows have been estimated as follows i Discounted a Log cash flow Net present 0 1-4 5 6-20 Fate of return’ worth at 10% © $50,000 $650,000 $100,000 2 $242,000 Continuous, constant cash flows were used except for the expenditure that occurs in one sum at the end of year 5. Continuous discounting at 10 percent per year was used forall cash flows. Check the net present worth value. Should the lease and flood arrangement be accepted? How should this proposal be presented to the company board of directors who understand and make it a policy to evaluate proposals by using the discounted cash flow rate of return method? A process with a depreciable capital investment of $100 million is to be constructed over a 3-year period. At start-up, $20 million of working capital is required. The plant is expected to operate for 10 years. At full capacity expected for the third and subsequent years of operation, the sales revenues are projected to be $150 million per year, and the total operating expenses, excluding depreciation, are projected to be $100 million per year. During the first and second years of operation, the sales revenues are anticipated to be 50 and 75 peicent of the sales rev- enues projected in the third and subsequent years, respectively. The operating expenses dur ing the first and second years will be the same as in the third and subsequent years, Assume that the income tax rate is 35 percent. Using the third year as a basis, determine a, The return on the investment after taxes b. The payback period Assuming that the construction of the plant in Prob. 8-18 requires investments of $20 million during the first year, $30 million in the second year, and $50 million during the third year, evaluate the annual net present worth and the total net present worth of the project. Assume that the construction costs are continuous throughout the 3 years of construction. Use contin- uuous, constant cash flows and continuous discounting, 387316 CHAPTER 7 interest, Time Value of Money, Taxes, and Fixed Charges Greek Symbol ® fractional income tax rate, percent/100 PROBLEMS ae 72 13 7-4 15" 16 047 18 ‘What funds will be available 10 years from now if $10,000 is deposited at present at a nomi- nal interest rate of 6 percent compounded semiannually? ‘The original cost for a distillation tower is $50,000, and the useful life of the tower is esti- mated to be 10 years. How much must be placed annually in an annuity at an interest rate of 6 percent to obtain sufficient funds to replace the tower at the end of 10 years? If the scrap value of the distillation tower is $5000, determine the asset value (., the total book value of the tower) at the end of 5 years based on straight line depreciation. With total yearly payments of $10,000 for 10 years, compare the compound amount accumu- lated at the end of the 10 years if the payments are (1) at the end of the year, (2) weekly, and (3) continuous. The effective (annual) interest rate is 8 percent, and the payments are uniform. Also determine the oben worth at time zero for each of the three types of payments. Derive two expressions for capitalized cost based on (1) annual discrete interest compound- ing and (2) continuous interest compounding. Capitalized cost is defined as the sum of the original cost C, of the equipment or asset plus the amount P that must be invested when the. original equipment or asset is purchased so that when the original equipment or asset is replaced in N years at a cost Cz, the value of the investment equals P plus Cx ‘A heat exchanger is to be used in a heating process. A standard type of heat exchanger with a negligible scrap value costs $20,000 and will have a useful life of 6 years. Another type of heat exchanger with equivalent design capacity is priced at $34,000 but with a useful life of 10 years and a scrap value of $4000. Assume an effective compound interest rate of 6 percent per year and that the replacement cost of each exchanger is the same as that of the original exchanger. Determine which heat exchanger is cheaper by comparing the capitalized cost of each. See Prob. 7-4 for a definition of capitalized cost. ‘A new storage tank can be purchased and installed for $10,000. The estimated service life of this tank is 10 years. It has been proposed that an available tank with the capacity equivalent to the new tank be used instead of buying the new tank. If the latter tank were repaired, it would have a service life of 3 years before similar repairs would be needed again, Neither tank has any scrap value. Money is worth 6 percent compounded annually. On the basis of equal capitalized costs for the two tanks, how much can be spent for repairing the existing tank? See Prob. 7-4 for a definition of capitalized cost. ‘The total investment required for a new chemical plant is estimated at $20 million. Fifty per- cent will be supplied from the company’s noncapital resources. Of the remaining investment, one-half will come from a loan at an effective interest rate of 8 percent, and one-half will come from an issue of preferred stock paying dividends at a stated effective rate of 8 percent. ‘The income tax rate for the company is 35 percent of pretax earnings. Under these conditions, how many dollars per year does the company lose (i.., after taxes) by issuing preferred stock at 8 percent dividend instead of bonds at an effective interest rate of 6 percent? thas been proposed that a company invest $1 million of its own funds in a venture which will yield a gross income of $1 million per year. The total annual costs will be $800,000 per year. In an alternate proposal, the company can invest a total of $600,000 and receive annual net earnings of $220,000 from the project. Depreciation and income tax effects are not to be7-10 TH TAS Problems considered. The remaining $400,000 can be loaned at an effective 6 percent annual interest rate, What alternative would be more profitable for the company with regard to investing its available funds? ‘The fixed-capital investment for an existing chemical plant is $20 million. Annual property taxes amount to I percent of the fixed-capital investment, and state income taxes are 5 percent of the gross earnings. The net income afterall taxes is $2 million, and the federal income taxes amount to 35 percent of gross earnings. If the same plant had been constructed for the same fixed-capital investment but at a location where property taxes were 4 percent of the fixed- capital investment and state income taxes were 2 percent of the gross earnings, what would be the net income per year after taxes, assuming all other ccst factors were unchanged? Self-insurance is being considered for one area of a chemical company. The fixed-capital in- vestment involved is $50,000, and insurance costs for complete protection amount to $500 per year. If self-insurance is used, a reserve fund will be set up under the company’s jurisdic- tion, and annual premiums of $400 will be deposited in this fund under an ordinary annuity plan. All money in the fund can be assumed to eam interest at a compound interest rate of 6 percent. Neglecting any charges connected with administration of the fund, how much money must be deposited in the fund at the beginning of the program in order to have suffi- nt funds accumulated to replace a $50,000 loss after 10 years? The initial installed cost for a new piece of equipment is $10,000. After the equipment has been in use for 4 years, itis sold for $7000. The company that originally owned the equipment employs a straight-line method for determining depreciation costs. If the company had used the MACRS 5-year method for determining depreciation costs, the asset or book value for the piece of equipment at the end of 4 years would have been $1728. The total income tax rate for the company is 35 percent of all gross earnings. Capital gains taxes amount to 20 percent of the gain, How much net savings would the company have achieved by using the MACRS method instead of the straight-line depreciation method? Solve Prob. 7-8 on an after tax basis employing depreciation at 20 percent per year over the project investment and an income tax rate of 35 percent per year of gross earnings. A piece of equipment having a negligible salvage and scrap value is estimated to have a MACRS and straight line recovery period of 5 years. The original cost of the equipment was $50,000. Determine (1) the depreciation charge for the second year if straight-line deprecia- tion is used and the percent of the original investment paid off in the first 2 years, and (2) the depreciation charge for the fifth year if the modified acceleration cost recovery system. (MACRS) is used, and the percent of the original investment paid off in the first 2 years. chemical company has a total income of $1 million per year and total expenses of $600,000 not including depreciation. At the start of the first year of operation, a composite account of all depreciable assets shows a value of $850,000 with a MACRS recovery period of 5 years, and a straight-line recovery period of 9.5 years. Thirty-five percent of all profits before taxes must be paid out for income taxes. What would be the reduction in income tax charges for the first year of operation if the MACRS method were used for the depreciation accounting instead of the straight-line method? The total value of a new liquefied natural gas plant is $10 million, A certificate of necessity to meet a national need has been obtained, permitting a wri:e-off of 60 percent of the initial cost. of the plant in the first 5 years. The balance of the plant investment requires a write-off period of 10 years. Using the straight-line depreciation method and assuming negligible salvage and scrap value, determine the total depreciation cost during the first year. If the MACRS method of depreciation (15 yr recovery period for this type of plant) had been selected, what would have been the total depreciation cost during the first year? 317318 CHAPTER 7 Interest, Time Value of Money, Taxes, and Fixed Charges A 7-16 ' A small company is using the unit-of-production method for determining depreciation costs. TAT 7-18 The original value of the property is $110,000. It is estimated that the company can produce 11,000 units before the equipment will have a salvage or scrap value of zero; that is, the de- preciation cost per unit produced is $10. The equipment produces 200 units during the first year, and the production rate is doubled each year for the first 4 years. The production rate obtained in the fourth year is then held constant until the value of the equipment is paid off. ‘What would have been the annual depreciation cost if the straight-line method based on thi: same time period had been used? A laboratory piece of equipment was purchased for $35,000 and is estimated to be used for 5 years with a salvage value of $5000, Tabulate the annual depreciation allowances and year- end book values for the 5 years by using (I) the straight-line depreciation method, (2) the MACRS 5-yr recovery period depreciation method, and (3) the sum-of-the-digits deprecia- tion method. A piece of equipment with an original cost of $10,000 and no salvage value has a deprecia- tion allowance of $2381 during its second year of service when depreciated by the sum- of-the-digits method." What recovery period has been used? ‘The sum-of-the-digits deprecation method is outlined in M.S. Peters and K. D.Timmerhaus, Plant Design and Economics for Chemical Engineers, th ed, McGraw-Hill, New York, 1991, p. 283.Problems fe unit cost for engineering, dollars per engineering employee-hour fe current equipment cost index relative to cost index at time of original cost fr = construction or field labor expense factor (always greater than 1) Si indirect cost factor (normally taken as 1.4) fi -urrent labor cost index in new location relative to cost of E, and Mi Sut current material cost index relative to cost of M, dimensionless Su = cost factor for miscellaneous items, dimensionless Sp cost factor for piping materials, dimensionless fo (otal cost of field-fabricated vessels (less incremental cost of alloy), dollars fe pecific material unit cost, dollars ty = specific material labor unit cost, dollars per employee-hour 8 ‘gross profit, depreciation not included, in year j, dollars G, ross profit, depreciation included, in year j, dollars He -ngineering employee-hours I = total indirect cost of plant, dollars M material cost, dollars Mi, labor employee-hours for specific material M, direct labor cost for equipment installation and material handling, dollars M, = specific material quantity in compatible units Nps jet profit in year j, dollars P ‘otal pump plus driver cost (less incremental cost of alloy), dollars R ratio of new to original capacity 5 = total income from sales in year j, dollars ! ‘otal cost of tower shells (less incremental cost of alloy), dollars F otal capital investment, dollars v manufacturing fixed-capital investment, dollars w = working-capital investment, dollars x rower value for cost-capacity relationships, dimensionless Greek Symbol © = fractional income tax rate PROBLEMS 6-1 The purchased cost of a shetl-and-tube heat exchanger (fleating-head and carbon-steel tubes) with 100 m? of heating surface was $4200 in 1990. What will be the 1990 purchased cost of a similar heat exchanger with 20 m? of heating surface if the purchased cost capacity expo- nent is 0.60 for surface areas ranging from 10 to 40 m?? If the purchased cost capacity expo- nent for this type of exchanger is 0.81 for surface areas ranging from 40 to 200 m?, what will be the purchased cost of a heat exchanger with 100 m? of heating surface in 2000? 6-2 Plot the 2000 purchased cost of the shell-and-tube heat exchanger outlined in Prob. 6-1 as a function of the surface area from 10 to 200 m?. Note that the purchased cost capacity expo- nent is not constant over the range of surface area requested, 275276 CHAPTER 6 Analysis of Cost Estimation 63 6-4 6-5 6-6 67 68 6-10 6-11 oS, 612 ‘The purchased and installation costs of some pieces of equipment are given as a function of weight rather than capacity. An example of this is the installed costs of large tanks. The 1990 cost for an installed aluminum tank weighing 45,000 kg was $640,000. For a size range from 90,000 to 450,000 kg, the installed cost weight exponent for aluminum tanks is 0.93. [fan alu- minum tank weighing 300,000 kg is required, what capital investment is needed in the year 2000? ‘The 1990 cost for an installed 304 stainless steel tank weighing 135,000 kg was $1,100,000. The installed cost weight exponent for stainless steel tanks is 0.88 for a size range from 100,000 to 300,000 kg. What weight of installed stainless steel tank could have been obtained for the same capital investment as in Prob. 6-3? ‘The purchased cost of a S-m? stainless steel tank in 1995 was $10,900. The 2-m-diameter tank is cylindrical with a flat top and bottom. If the entire outer surface of the tank is to be covered with 0.05-m-thickness of magnesia block, estimate the current total cost for the installed and insulated tank. The 1995 cost for the 0.05-m-thick magnesia block was $40 per square meter while the labor for installing the insulation was $95 per square meter. A one-story warehouse 36 m by 18 m is to be added to an existing plant. An asphalt pavement service area 18 m by 9 m will be added adjacent to the warchouse. It will also be necessary to put in 150 linear m of railroad siding to service the warehouse. Utility service lines are already available at the warehouse site, The proposed warehouse has a concrete floor and steel frame, walls, and roof. No heat is necessary, but lighting and sprinklers must be installed. Estimate the total cost of the proposed addition. Consult App. B of the 4th ed. for necessary cost data. The purchased cost of equipment for a solid processing plant is $500,000. The plant is to be constructed as an addition fo an existing plant. Estimate the total capital investment and the fixed-capital investment for the plant. What percentage and amount of the fixed-capital in- vestment are due to cost for engineering and supervision, and what percentage and amount for the contractor's fee? The purchased-equipment cost for a plant which produces pentaerythritol (solid-fluid pro- cessing plant) is $300,000. The plant is to be an addition to an existing formaldehyde plant. The major part of the building cost will be for indoor construction. The contractor's fee will be 7 percent of the direct plant cost. All other costs are close to the average values found for typical chemical plants. On the basis of this information, estimate the total direct plant cost, the fixed-capital investment, and the total capital investment. Estimate by the tumover ratio method the fixed-capital investment required in 2000 for a pro- posed sulfuric acid plant (battery-limit) which has an annual capacity of 1.3 x 10° ke/yr of 100 percent sulfuric acid (contact-catalytic process), using the data from Table 6-11, when the selling price for the sulfuric acid is $86 per metric ton, The plant will operate 325 days/year. Repeat the calculation, using the cost capacity exponent method with data from Table 6-11 The total capital investment for a chemical plant is $1 million, and the working capital is $100,000. If the plant can produce an average of 8000 kg of final product per day during a 365-day year, what selling price in dollars per kilogram of product would be necessary to give a tumover ratio of 1.0? A process plant was constructed in the Philadelphia area (Mid-Atlantic) at a labor cost of $425,000 in 1990. What would be the labor cost for the same plant located in the Miami, Florida, area (south Atlantic) if it were constructed in late 19987 Assume, for simplicity, that the relative labor rate and relative productivity factor have remained constant. A company has been selling a soap containing 30 percent by weight water at a price of $20 per 50 kg fob. (ie., the customer pays the freight charges). The company offers an equally6-14 S15 16, Problems effective soap containing only 5 percent water. The water content is of no importance to the laundry, and it is willing to accept the soap containing 5 percent water if the delivered costs are equivalent. If the freight rate is $1.50 per 50 kg, how much should the company charge the Taundry per 50 kg f.0.b. for the soap containing 5 percent water? The total capital investment for a conventional chemical plant is $1,500,000, and the plant produces 3 million kg of product annually. The selling price of the product is $0.82/kg. Work- ing capital amounts to 15 percent of the total capital investment. The investment is from com- pany funds, and no interest is charged. Delivered raw materials costs for the product are $0.09%kg; labor, $0.08/kg; utilities, $0.05/kg; and packaging, $0.008/kg. Distribution costs are 5 percent of the total product cost. Estimate the following: a, Manufacturing cost per kilogram of product b, Total product cost per year ¢. Profit per kilogram of product before taxes, . Profit per kilogram of product after income taxes at 35 percent of gross profit Estimate the manufacturing cost per 100 kg of product under the following conditions Fixed-capital investment = $4 million. Annual production output = 9 million kg of product. Raw materials cost = $0.25/kg of product. Utilities 800-kPa steam = 50 kg/kg of product. Purchased electric power = 0.9 kWh/kg of product. Filtered and softened water = 0.083 m*/kg of product. Operating labor = 12 persons per shift at $25.00 per emplayee-hour. Plant operates three hundred 24-h days per year. Corrosive liquids are involved Shipments are in bulk carload lots. A large amount of direct supervision is required ‘There are no patent, royalty, interest, or rent charges. Plant overhead costs amount to 50 percent of the cost for operating labor, supervision, and maintenance, A company has direct production costs equal to 50 perceat of total annual sales, and fixed charges, overhead, and general expenses equal to $200,000. If management proposes to increase present annual sales of $800,000 by 30 percent with a 20 percent increase in fixed charges, overhead, and general expenses, what annual sales amount is required to provide the same gross earnings as the present plant operation? What would be the net profit if the ex- panded plant were operated at full capacity with an income tax on gross earnings of 35 per- cent? What would be the net profit for the enlarged plant if total annual sales remained at ‘$800,000? What would be the net profit for the enlarged plant if the total annual sales actually decreased to $700,000? A process plant making 5000 ke/day of a product selling for $1.75/kg has annual variable pro- duction costs of $2 million at 100 percent capacity and fixed costs of $700,000. What is the fixed cost per kilogram at the breakeven point? If the selling price of the product is increased by 10 percent, what is the dollar increase in net profit at full capacity if the income tax rate is 35 percent of gross earnings? Arough rule of thumb for the chemical industry is that $1 of annual sales requires $2 of fixed- ipital investment. In a chemical processing plant where this rule applies, the total capital investment is $2,500,000, and the working capital is 20 percent of the total capital investment. 277278 CHAPTER 6 Analysis of Cost Estimation 6-18 6-19 ‘The annual total product cost amounts to $1,500,000, If the income tax rates on gross earnings total 35 percent, determine the following: a. Percent of total capital investment returned annually as gross earnings b, Percent of total capital investment returned annually as net profit The total capital investment for a proposed chemical plant, which will produce $1,500,000 worth of goods per year, is estimated to be $1 million. It will be necessary to do a consider- able amount of research and development (R&D) work on the project before the final plant can be constructed, and management wishes to estimate the permissible research and devel- ‘opment costs. It has been decided that the after tax return from the plant should be sufficient to pay off the total capital investment plus all research and development costs in 7 years. A return after taxes of at least 12 percent of sales must be obtained. Because R&D is an expense and the company’s income tax rate is 35 percent of gross earnings, only 65 percent of the funds spent on R&D must be recovered after taxes are paid. Under these conditions, what is the total amount the company can afford to pay for research and development? A chemical processing unit has a capacity for producing 1 million kg of a product per year. After the unit has been put into operation, it is found that only 500,000 kg of the product can be sold per year. An analysis of the existing situation shows that all fixed and other invariant charges, which must be paid whether or not the unit is operating, amount to 35 percent of the total product cost when operating at full capacity. Raw material costs and other production costs that are directly proportional to the quantity of production (i.e., constant per kilogram of product at any production rate) amount to 40 percent of the total product cost at full capacity. The remaining 25 percent of the total product cost is for variable overhead and miscellaneous: expenses, and the analysis indicates that these costs are directly proportional to the production rate during operation raised to the 1.5 power. What will be the percent change in total cost per kilogram of product if the unit is switched from the original design rate of 10°kg/yt of product to a time and rate schedule which will produce 0.5%10° kg or “half that amount” of product per year at the least total cost?