Chemical Engg economics

 To make profits
 Process economics has three basic roles:
 Evaluation of design options
 Process optimization
 Overall project profitability

 Above are the combination of technical feasibility and economic feasibility

 To find above cost estimation are done:

 Detailed cost estimation
 Approximate cost estimation
Capital investment:
• Stock of the accumulated wealth
• Purchase land
• Purchase equipments
• Utility service facilities
• Construction and erection of plant
• Working capital
• Contingency charges
Total Capital investment for new design and plant
• Inside battery limit investment
• Utility investment
• Offside battery limit investment
• Engg and construction cost
• Contigency charges
• Working capital

Battery limit is geographical boundary of manufacturing area

Inside limit means cost required for equipments, bldg., structure etc
Offside means boiler house, pollution control, storages, WTP, workshop etc
Capital investment classification:
• FCI: fixed capital investment (mfg and plant facility build up)
• WCI: Working capital investment (required for operation)
• TCI= FCI + WCI

• FCI is subdivided into :

• Manufacturing FCI: Direct cost
• Non manufacturing FCI: Indirect cost
• Manufacturing FCI: Expenses for Installation of process equipment, site
preparation, foundation, piping, insulation cost

• Non mfg FCI: Not directly related to process operation. Cost in land,
bldg., admin, warehouse, transport etc

• WCI: Start up operation, maintenance, cash in hand, taxes etc

• Cash flow for industrial operation

• Annual sales income Annual Cash income net profit after tax

innual op
cost
Income
+
• In any particular year:
• Gross profit before depreciation:
Income from sales – op cost
• Gross profit after depreciation:
Income from sales – op cost – depreciation charge
Cash flow diagram:
Break even chart:
• The point where total production cost equals the total income is known as break even
point. The objective of break even analysis is to find the cut off production rate from
where a plant will make profit.

Sales in Rs

production rate
• Breakdown of FCI: Direct cost
Equipment cost
Instalation cost
Electrical system
Site development
Land, instru and control
Pipingbldgs
Sercive facility

• Breakdown of FCI : Indirect cost

Engg and supervision
Legal expenses
Contingency
Construction expenses
Contractor fee
• Types of cost estimates: (depend on accuracy are classified as
• Preliminary estimate:
• Budget authorization estimate, scope estimate, Class 3
• Based on sufficient data required to prepare the estimate.
• Accuracy is +- 20 %.
• Used for authorization of funds.

• Definitive estimate:
• Project control estimate, class 2
• Based on data before the completion of drawings, specification.
• Accuracy is +- 10%.
• Used for baseline against all costs

• Detailed estimate:
• Contractor's estimate, class 1
• Based on complete data
• Accuracy +-5%
Cost components in capital investment:
• The foundation of FCI estimate in equipment cost data. From this
information, through application of factors or % values FCI is developed.
These cost data reported as purcgased, delivered, installed cost.
• Purchased cost: Purchased equipment: 15-40% of FCI
• Delivered cost: Delivery of Purchased equipment: 10 % of purchase cost
• Installed cost: Installation of purchased cost: 20-60% purchase cost

• Estimating purchased cost: accurate method to determine cost is

Get quotation from supplier,
Cost values from past values

Capacity correction?? Inflation correction??

• Direct cost = 60-85% FCI and indirect cost = 15-35% FCI

Instru and control cost = 8-50% delivery cost = 26 %=5% TCI

Piping cost = 80% delivery cost = 20% FCI
Electrical cost = 15-30% of delivery cost = 4-8% FCI
Start up cost = 8-10% FCI
• Six tenth rule: factor rule: used in the absence of information.

• Cost of equipment A =
cost of equipment B (Capacity of A/Capacity of B)^0.6

The cost capacity concept preferable used within 10 fold range of

capacity. Two pieces of equipment should be similar with regard type
of construction, MoC, temp and pr conditions, etc
Prob: If cost of distillation column in year 2000 is x. what is the cost of
column in year 2010. cost index for column in year 2000 and 2010 is 480
and 520.
Soln: Cost in 2000/cost index in 2000 = cost in 2010/Cost index in 2010
Cost in year 2010 = x (13/12)
Prob: in a desalination plant an evaporator of area 200m2 was
purchased in 1996 at a cost of Rs 300000. in 2002 another evaporator of
area 50 m2 was added. What was the cost of 2nd evaporator? Assume
that the cost of evaporator scale as (capacity)^0.54. the marshall and
swift index was 1048.5 in 1996 and 1116.1 in 2002.
Soln: cost of 200 m2 evaporator in 2002 =
cost in year 1996 (CI in 2002/CI in 1996)

Now using capacity scale: the cost of 50 m2 evaporator

Evaporator in 2002= cost in year 1996 (CI 2002/CI 1996) (50/200)^0.54
= 151166
• Correlations used for preliminary cost estimate:
• Ce = a + b.s^n ……. Ce = purchased equipment cost
a, b = cost constants
s = size parameter
n = exponent for that type of equipment

Prob: Estimate the purchased equipment cost of a plain CS STHE with area
300 m2.
Unit for size S lower S upper a b n
Area m2 10 1000 28000 54 1.2
Soln: Ce= 78692
Prob: The purchased cost of STHE with 10 m2 of heating surface was Rs 4220
in 1990. what will be the purchased cost of similar exchanger with 100 m2 area
in 2000. use both mashall and swift index and chemical engg plant cost index
for comparison.
The purchased cost capacity exponent is
0.6 for surface area range from 10 to 40 m2
0.81 for area range from 40 to 200 m2

Year marshall swift index chemical engg CI

1990 929.3 357.6
2000 1097.7 394.1
Soln: First step is capacity correction, then inflation correction-
Cost in 1990 for 100 m2 = cost in 1990 for 10 m2 x capacity correction
=4200 (40/10)^0.6 (100/40)^0.81
=20268

Using marshall and swift index:

Cost in 2000 for 100m2 = cost in 1990 for 100 m2 x inflation factor
=20268 (1097.7/929.3) = 23941

Chemical plant CI:

=20268 (394.1/357.6) = 22337
Pro: In the year 2005, the cost of STHE with 68 m2 surface area was 12.6 L.
chem engg index for cost in 2005 was 509.4 and now 575.4. based on index
of 0.6 for capacity scaling, what will be the present cost of similar HE having
100 m2 area.
Spln: cost in 2005 for 100 m2 = (cost in 2005 of 10 m2) (capacity correction)
=12.6 (100/68)^0.6 = 15.88 L
Current cost of 100 m2 = (cost in 2005 for 10 m2) (inflation factor)
=15.55(575.4/509.4)=17.94 L
• Estimation of total product cost:
TPC depend on all costs of operating plant, selling product, recovery etc
TPC depend on two categories:
1.Manufacturing cost
2.General expenses

Manufacturing cost is subdivided into:

1.Variable production cost
2.Fixd cost
3.Plant overhead cost

TPC calculated on: daily basis, unit of product basis, annual basis (used)
• --Manufacturing cost: raw material, labor cost, supervision, labs,
chemical, utility etc
• --fixed cost: independent of production rate, taxes, insurance, loan,
depreciation, etc
• --plant overhead cost: hospital, safety, medical cost, security, retirement
plans, etc

• TPC = mfg cost + general expenses

• Mfg cost = direct production cost + fixe charges + plant overhead cost
• A) Direct production cost (66% of TPC)
Raw material 10-80% TPC
Op labor 10-20% TPC
Supervision 10-20% TPC
Utility 10-20% TPC
Maintenance 2-10% TPC
Operating supplies 0.5-1% TPC
Lab charges 10-20% op labor
Patents, royalty 0-6% TPC
• B)Fixed charges: 10-20% TPC
Depreciation depend on calculation
Local taxes 1-4%TPC
Insuarance 0.4-1%TPC
Rent 8-12% value of land / bldg.
Finance 0-10P%TPC

c)Plant overhead cost 5-15% TPC

Payroll overhead, plant upkeep and overhead, medical, safety, labs, storage
facility etc

D)General expenses: 15-25%TPC

Admin cost 2.5%TPC
Distribution and selling 2-20%TPC
R n D Cost 5% TPC
• Gross profit, net profit, cash flow:
Gross profit for year j = total sales revenue (Sj) – TPC (Coj)
(w/o depr) = Gj = Sj – Coj

Gross profit for year j = total sales revenue (Sj) – TPC (Coj) – depr (Dj)
(withdepr) = Gj = Sj – Coj – Dj

Net profit = Npj = Gj (1-Ǿ) ……… after income tax at the rate Ǿ

Cash flow (Aj) = Npj – Dj

Stream factor = Sf = no of days plant operates in a year / 365

Prob: A polymer plant with a production capacity of 10000 ton/yr has an
overall yield of 70% on mass basis (kg product/kg raw material). The raw
material costs rs 50000 per ton. A process modification is proposed to increase
the overall yield to 75% with an investment of rs 12.5 Cr. In how many years
can the invested amount be recovered with additional profit?
Soln: process modification will lead to lower consumption of ra materials and
thus savings.
Annual cost of raw materials (70% yield)
(10000/0.7) ton/yr x 50000 rs/ton = 71.43 cr

Annual cost of raw materials (75% yield)

=66.67 cr
Annual saving due to modification = 71.43 – 66.67 = 4.76 cr
No of years to recover 12.5 cr = 12.5/4.76 = 2.63 yrs.
Problem: The total cost Ct of an equipment in terms of the operating
variables x and y :
Ct = 2.x + (12000/x.y) + y + 5
What is optimum Value of Ct?
Soln : differentiate wrt x : dCt/dx = 2 – 12000/x^2.y = 0 --- x^2.y = 6000
Differentiate wrt y : dCt/dy = -(12000/x.y^2) + 1 = 0…… x.y^2 = 12000

Solving for x and y, we get,

X = 14.42 and y = 28.84

On substitution,
Ct = 91.53
Profitability analysis
• Methods for calculating profitability:
Methods that don’t consider time value of money
Methods that do consider time value of money
Annualized cost method
Types of methods that don’t consider time value of money: (preliminery
quick analysis)
Rate of return on investment (ROI)
Payback period (PBP)
Net return (NR)

Types of methods that do consider time value of money:

Discounted cash flow rate of return (DCFROR)
Net present worth/value (NPW/NPV)

Annualized cost analysis

• Rate of return on investment (ROR/ROI):
Don’t consider time value of money
Depreciation is not imp to consider in evaluation, straight line method is used.
Rate of return on investment (ROI) = annual net profit/total capital investment
= Np/TCI
Depend on corporate policy,
Gross profit can be used in place of net profit.
Fixed capital investment FCI can be used in place of TCI.

Net profit is not constant from year to year.

Total investment changes if additional investment done during project.
Need to calculate avg ROI over entire project life, given by
 1 𝑁
𝑗=1 𝑁𝑃 ,𝑗 𝑁𝑝𝑎𝑣9
• 𝑅𝑂𝐼 = 𝑁
𝑁 = 𝑁
𝑇𝐶 ⊥𝑗 𝑗𝑁−𝑏
𝑇𝐿⊥𝑗
𝑗𝑁−𝑏

• N= evaluation period
• Npj= net profit in year j
• -b= the year in which investment is made wrt zero as the start up.
• TCIj= capital investment in year j
• Npavg= avg value of net profit per year

• After the plant start up the TCI for particular year may be zero or small
compared to TCI, thus denominator can be replaced by TCI for
simplification:
𝑁𝑝𝑎𝑣𝑞
• 𝑅𝑂𝐼 =
𝑇𝑐𝐼
• ROI calculated by any of the equation can be compared with MARR
values to judge profitability.
• If ROI > MARR, the project offers acceptable ROR, else project is not
desirable for investment wrt MARR.

• MARR: minimum acceptable rate of return.

Turnover ratio
• TR = Gross sales / FCI
• The reciprocal of TR is called capital ratio
• For chemical industries TR is 1. value upto 5 are common for efficient
process.
• Reducing FCI increases TR. And same can be obtained by compact
design, higher productivity, process intensification.
• Or can be achieved by low working capital like computer integrated
mfg.
Payback period
• PBP = TCI / annual cash flow
• Payback period is the length of time necessary for the total return of the
capital investment.
• Initial capital investment and annual cash flow are used to calculate PBP.
• The cash flow changes from time to time-year to year. Using avg value
PBP = (V + Ax) /Aj avg
Calculated PBP compared with value obtained by MARR.

PBP = TCI / annual cash flow = FCI / ACF = (V + Ax) / Aj

Where, V =mfg FCI, Ax = non mfg FCI, Aj = annual cash flow.
• Payback period calculation by MARR:
Usually working capital is 15% TCI
(V + Ax) = 0.85 TCI and Ajavg = Npavg + Djavg

= MARR . TCI + 0.85TCI/N ……….. MARR = Npavg / TCI

PBP = 0.85 TCI / (MARR.TCI + 0.85TCI/N) = 0.85 / (MARR + 0.85/N)

To be acceptable, payback period should be less than or equal to

reference value calculation by MARR. Shorter the PBP , more attractive
the project is.
Large scale projects = 7 to 10 yrs
Small scale projects = 2 to 3 yrs
• Net return method:
Rn is the amount of cash flow over and above the required to meet the
minimum acceptable ROR and to recover the TCI.

Equation is:

Above eq divided by N is :
Rn avg = avg net return = Npavg – (MARR.TCI)

If
Rn >0 --- cash flow to the project is greater, obtain return that matches
MARR. Earns greater than MARR
Rn=0 ---project repaying investment and matching MARR.
Rn<0 --- project obtains less than MARR, project not favorable.
• Prob: proposed chemical plant will require a FCI of 10 Cr. It is estimated that
the working capital will be 25% TCI. Annual depreciation cost is 10% of FCI.
If annual profit is 3 Cr, determine % return on total investment and payout
period.
Soln: total investment = TI = FCI + WC = 10 + 0.25 TCI
TI = 13.33 Cr.

ROI % = Annual net profit / TCI x 100= 3/13.33 x 100 = 22.5%

PBP = FCI / annual cash flow = FCI / (annual profit + annual depreciation)
=10 / (0.1 x 10) = 2.5 yrs
• Methods that do consider time value of money:
Net present worth/value
The discounted cash flow ROR (DCFROR)

Used by large scale industries for economic analysis.

• Net present value:
Evaluates project by converting all future cash flows into their present
equivalent.
NPV is total of the present worth of all cash flows minus the present worth of
all capital investment.
By NPV analysis, the cash flow CFn earned in different years n is brought to
the present value CFn,o by using compound interest formula.

CFn,o = CFn / (1 + i)^n

Besides the current expenses, CF must pay the TCI. If the project lifetime is N
and the interest is i, the cumulative CF expressed as NPV will be :
• Eqn

• Value of NPV depend on MARR , I, N. Now NPV calculated as:

Eqn

An = net cash flow at end of period n

i = MARR
N = service life
Larger the NPV, more favorable the investment.
If
NPV>0… project provides return greater than MARR
NPV=0… return matches MARR
NPV<0… return is unfavorable.
• Prob: a proposed chemical plant is estimated to have a FCI of 24 Cr. Assuming other
costs to be small, the total investment may be taken to be same as FC. After
commissioning at t = 0 yrs, the annual profit before tax is rs 10 cr/yr. (at the end of
each year).and expected life of plant is 10 yrs. The tax rate is 40% per year and a
linear depreciation is allowed at 10% per year. Tha salvage value is zero. If annual
interest rate is 12% per year, what is the NPV of the plant.
Soln: FCI=TCI=24 cr
Profit before tax = 10 cr
Plant life = 10 years
Tax rate = 40 % per year
Depreciation = linear 10% per year
Salvage value = 0
Interest rate = 12%
NPV = ?
The annual depreciation = d = V-Va / N = 24-0/10 = 2.4 cr
Taxable profit = profit before tax – depreciation = 10-2.4=7.6 cr
Amount of tax = 0.4 x 7.6 = 3.04 cr / year
Profit after tax = 7.6 – 3.04 = 4.56 cr / year
Annual cash flow =A = net profit + depreciation = 4.56 + 2.4 = 6.96 cr/yr
Now,
P = A [(1+i)^n – 1) / i(1+i)^n] = 39.326 cr
NPV = P – initian investment = 39.326 – 24 = 15.326 cr
• Discounted cash flow ROR:
It is measure of max interest rate that a project afoord just by paying TCI at
the end of its life
It is also known as internal ROR.
Mathematically, DCFROR can be determined as the interest rate for which the
NPV is at the end of project life becomes zero.
𝑁
𝐶𝐹𝑖 𝑛 𝐶𝐼
𝑁𝑝𝑣 = − 𝑇
1+𝑖 𝑛
𝑖=1
Higher the DCFROR, more profitable will be the project is.
• A company has the alternative of investing in one of two projects A or B. the
capital cost of both projects is 10 mn. The predicted annual cash flow for
both projects are shown in table . Which project should be chosen on the
basis of DCFROR based on 5 yr lifetime.
Year cash flow mn
A B Project A:start with initial guess
0 -10 -10 DCFROR 20% and find NPV
1 1.6 6.5 NPV will be zero between 20-25%
2 2.8 5.2 interpolating = DCFROR = 25%
3 4.0 4.0
4 5.2 2.8 Project B:
5 6.4 1.6 NPV will be zero between 35 to 40%
Interpolating = DCFROR = 38%
• A car is brought for Rs 10 L. salvage value is Rs 0. The expected early
income after paying all expenses and applicable taxes is Rs 3L. The
compound interest rate is 9% per annum. What will be discounted
payback period?

• FCI=P=10 L, Salvage value=0, Profit=A=3L, Int=9%

• We have
• P = A [(1+i)^n – 1) / i(1+i)^n]
• N=4.41 yrs
 Annualized cost method
• In this method, cash flow over time is converted to an equivalent uniform
annual cost (EUAC) or benefit. A is regular annual payment that must be
made to generate the same amount of money over n years as would be
earned by investing P at int rate I for n yrs.

• The annual capital charge ratio (ACCR) is as (A/P):

• A/P= [i.(1+i)^n / (1+i)^n - 1]

• And annualized capital charge = ACCR * total fixed capital cost

• Total annualized cost=TAC=operating cost + (ACCR*total fixed capital cost)

• A pump (pump A) cost Rs 1,40,000 and is expected to have a service life 5
yrs, before it requires replacement. Another pump (pump B) is available at
Rs 1,82,000 and is expected to have increased service life of 10 yrs. Which
pump is most economical if the cost of capital is 12%.

• Pump A = 12 % int rate and 5 yrs life, the ACCR is

• A/P= [i.(1+i)^n / (1+i)^n - 1] = 0.277
• Annualized capital cost = 140000 * 0.277 = Rs. 38780 / year
• And for pump B = 32210 / year

• Economical to buy Pump B.

• Find ou economical equipment-
Details Equipment A Equipment B
Initial cost 10000 18000
Salvage value 0 3000
Service life 20 yr 35 yr
Annual cost of operation 4000 3000
Int rate 10% 10%
More economical ?

Equipment A= ACC = 5175

Equipment B = ACC = 4855

A/P= [i.(1+i)^n / (1+i)^n - 1]

A = F[i/[(1+i)^n – 1]]
• Annualized cost:
• CA = C + imin (CTCL)
• C=annual prod cost
• CTCL = total capital investment
• Imin = rate on investment
• CA = annualized cost

• Total FCI of chemical plant is 10 L. Int rate is 15%. Annualized operating cost
is 2 L. What is annualized cost of plant.

• CA = 2 + 0.15 (10) = 3.5 L