LECTURE 5

PROCESS ECONOMICS

 Economics is ever present in our lives because we earn money from our job and we spend money allocated by our personal budget e.g entertainment, food, house etc. In engineering we learn many subjects of science so as to utilize the phenomena in our design and operation of

Economics Basic Economic course Process design course Basic chemical Engg course

Business course

Sociopolitic al

Technical scientific Social science course Environment al impact course Physical chemistry

FINANCING THE VENTURE

Most important responsibilities of Management Capital budgeting Planning

Business Plan
Strategic planning: setting of goals, objectives and broad business plans for next 5-10 years Tactical planning: detailing strategic plan for next 2 years of

Capital budgeting: request, analysis and approval of expenditure for the coming year

Business plans
Perceived goals and objective of Projected share of company market Fixed capital Market data Market price investment Market growth Working capital Capital requirement Manufacture expenses Markets the company Sales expenses Profit after taxes Operating expenses serves Effect of change in General overhead Cash flow revenue Competition expenses Profitability Payout period Effect Project/product of change life in Rate of return direct/indirect taxes Projected risk Return on equity/ Effect of cost of capital assets Project life Effect of potential
changes in market

Sources of FUND
Internal Sources: External Sources: Retained Debt Current debt earnings Intermediate Commercial loan Reserves
Commercial paper Bankers acceptance Deferred payment contract Revolving credit Term Mortgage loans Debenture Income Convertible bonds

debt Long term Stockholders debt equity Preferred stock Common stock

Engineering Economics Analysis of Chemical Process

Estimation of capital cost Estimation of Manufacturing costs Engineering Economic analysis Profitability analysis

Process Economics
Role of process economics: Evaluation of design options Process optimization Overall project profitability

A plant-design project moves to completion through a series of stages such as is shown in the following: 1. Inception 2. Preliminary evaluation of economics and market 3. Development of data necessary for final design 4. Final economic evaluation 5. Detailed engineering design 6. Procurement 7. Erection 8. Startup and trial runs 9. Production

Capital cost for new design

Total investment cost can be divided in following parts Battery limit investment Utility investment Offsite investment Engineering fees Working capital

Estimating purchased Equipment cost

Effect of capacity on purchased equipment cost Ca/Cb = (Aa/Ab)n OR Ca = K (Aa)n

The value of n is mostly around 0.6 and thus the relationship referred to as sixtenths rule Equipment Range of Units of Cost

Type

capacity correlation

capacity

Exponent

Compressor Shell and tube heat exchanger Vertical tank CS

220-3000 5-50 1-40

kW m2 m3

0.70 0.44 0.52

 Graphical Presentation. Equipment cost data are presented in the literature by Guthrie , Hall et al., Hall et al., Peters and Timmerhaus, Garrett, and Page as logarithmic plots of cost as a function of equipment capacity.

Problem Statement: Recently a cast iron leaf pressure filter with 100 ft2 was purchased for clarifying an inorganic liquid stream for $15,000. In a similar application, the company will need a 450 ft2 cast iron leaf pressure filter. The size exponent for this type filter is 0.6. Estimate the purchased price of the 450 ft2 unit.

Cost Indexes
Cost data are presented as of a specific date. They are adjusted through the use of cost indexes that are based upon constant dollars in a base year and actual dollars in a specified year. The base year selected for each index was a period in which inflation was flat and the economy stable. Many cost indexes are published on a regular basis. Some indexes can be used for estimating equipment costs while other indexes apply only to labor and materials in specialized fields.

 Effect of time purchased capacity C2 = C1 (I2/I1) I = cost index Marshall and Swift Equipment Cost Index The Chemical Engineering Plant Cost Index NelsonFarrar Index

M and S index
Based on two major components, namely, a process-industry equipment average and all industry equipment average. The processindustry equipment average is based upon selected process industries. The percentages used for this average are cement, 2; chemicals, 48; clay products, 2; glass, 3; paint, 5; paper, 10; petroleum products, 22; and rubber, 8. Related industries such as electric power, mining and milling, refrigeration, and steam power are also included. The M&S Index tracks equipment costs and installation labor, thereby reflecting changes in

The basis for CEPCI

This index is intended for use in escalating process plant construction costs and is designed to reflect trends in chemical process equipment costs. Four major components of this index are

 The dominant components, equipment, machinery, and supports consist of the following subcomponents:

NelsonFarrar Indexes
The original indexes were established in 1946 with a value of 100 and are heavily weighted towards the petroleum and petrochemical industries. The NF Indexes are based upon the following components:

 Problem Statement: A stainless steel centrifuge cost $85,000 in 1990. What is the cost of that same centrifuge in 2001? Use the CE Index. Solution: CE Index in 1990 = 357.6 CE Index in 2001 = 396.8