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Engineering Economics

II-Capital Cost and Estimation


Date:
16/09/2016

Capital Cost and Estimation


Contents
Components of Capital Cost (CC)
Estimation of Fixed Capital Cost (FC)
Estimation of Working Capital Cost (WC)

Components of Capital Cost


Fixed Capital Investment (the total cost of
designing, constructing and installing a plant
and the associated modifications needed to
prepare the plant site):
The inside battery limits (ISBL) investment the
cost of the plant itself
(Direct and Indirect costs).
The modifications and improvements that must
be made to the site infrastructure, known as offsite or OSBL investment.
Engineering and construction costs.
Contingency charges.

Components of Capital Cost


The inside battery limits (ISBL) investment the
cost of procuring and installing all the process equipment
that makes up the new plant.
It is important to define the ISBL scope carefully, as other
project costs
are often estimated from ISBL cost.
Direct Cost:
1. All the major process equipment, such as vessels,
reactors, columns, furnaces, heat exchangers, coolers,
pumps, compressors, motors, fans, turbines, filters,
centrifuges, driers, etc., including field fabrication and
testing if necessary
2. Bulk items, such as piping, valves, wiring, instruments,
structures, insulation, paint, lube oils, solvents,

Components of Capital Cost


The inside battery limits (ISBL) investment the
cost of procuring and installing all the process equipment
that makes up the new plant.
Indirect Cost:
1. Construction costs such as construction equipment
rental, temporary construction (rigging, trailers, etc.),
temporary water and power, construction workshops,
etc.
2. Field expenses and services such as field canteens,
specialists costs, overtime pay, and adverse weather
costs.
3. Construction insurance
4. Labor benefits and burdens (social security, workers
compensation, etc.)
5. Miscellaneous overhead items such as agents fees,

Components of Capital Cost


Off-site or OSBL investment The costs of the
additions that must be made to the site infrastructure to
accommodate adding a new plant or increasing the
capacity of an existing plant.
1. Electric main substations, transformers, switchgear, power
lines generation plants, turbine engines, standby generators
2. Power generation plants, turbine engines, standby
generators
3. Boilers, steam mains, condensate lines, boiler feed water
treatment plant, supply pumps
4. Cooling towers, circulation pumps, cooling water mains,
cooling water treatment
5. Water pipes, water demineralization, waste water treatment
plant, site drainage and sewers
6. Air separation plants to provide site nitrogen for inert gas,

Components of Capital Cost


Off-site or OSBL investment The costs of the
additions that must be made to the site infrastructure to
accommodate adding a new plant or increasing the
capacity of an existing plant.
7.
8.
9.

Dryers and blowers for instrument air, instrument air lines


Pipe bridges, feed and product pipelines
Tanker farms, loading facilities, silos, conveyors, docks,
warehouses, railroads, lift trucks
10.Laboratories, analytical equipment
11.Offices, canteens, changing rooms, central control rooms
12. Workshops and maintenance facilities
13. Emergency services, firefighting equipment, fire hydrants,
medical facilities, etc.
14. Site security, fencing, gatehouses, landscaping

Components of Capital Cost


Engineering and construction costs Home office
costs or contractor charges, include the costs of detailed
design and other engineering services required to carry
out the project.
1. Detailed design engineering of process equipment, piping
systems, control systems and offsites, plant layout,
drafting, cost engineering, scale models, and civil
engineering
2. Procurement of main plant items and bulks
3. Construction supervision and services
4. Administrative charges, including engineering supervision,
project management, expediting, inspection, travel and
living expenses, and home office overheads
5. Bonding
6. Contractors profit

Components of Capital Cost


Contingency Charges Extra costs added into the
project budget to allow for variation from the cost
estimate.
1.
2.
3.
4.
5.
6.

Minor changes in project scope


Changes in prices (e.g., prices of steel, copper, catalyst, etc.)
Currency fluctuations
Labor disputes
Subcontractor problems
Other unexpected problems

Components of Capital Cost


Contingency Charges Extra costs added into the
project budget to allow for variation from the cost
estimate.
1.
2.
3.
4.
5.
6.

Minor changes in project scope


Changes in prices (e.g., prices of steel, copper, catalyst, etc.)
Currency fluctuations
Labor disputes
Subcontractor problems
Other unexpected problems

Components of Capital Costs


Working Capital (The additional money needed, above
what it cost to build the plant, to start the plant up and
run it until it starts earning income) and Estimation:
1. Value of raw material inventory: usually estimated as 2
weeks delivered cost of raw materials.
2. Value of product and by-product inventory: estimated
as 2 weeks cost of production.
3. Cash on hand: estimated as 1 weeks cost of
production.
4. Accounts receivable products shipped but not yet
paid for: estimated as 1 months cost of production.
5. Credit for accounts payable feedstocks, solvents,
catalysts, packaging, etc: estimated as 1 months
delivered cost.

Total Capital Cost


Total Capital Cost = Fixed Capital + Working Capital +
Land Cost

Land
Although Land is a small part of the total capital
investment, it should be included.
Local chambers of commerce or real estate agents
may be able to give information on land costs. In the
absence of such data, and for preliminary estimates
only, about 3% of the capital investment may be
used to estimate land costs.

Estimation of Capital Cost


ISBL: Cost of procuring and installing
equipment (need to calculate/estimate this)

all

process

Offsite or OSBL: Usually between 20% and 50% of ISBL


costs, depending on the project scope and its impact on
site infrastructure. Typically, 40% if no details of the site
are known.
Engineering costs: 10% of ISBL+OSBL costs for larger
projects
30% of ISBL+OSBL costs for smaller
projects
Contingency Charges: 10% of ISBL+OSBL
Working Capital: (see previous slide).

OSBL
Although typically 40% of ISBL,
but

Estimation of Capital Cost


A quick capital cost estimate
without completing a plant
design:
Initially
50%
accuracy for preliminary study
The quickest way: Use Cost
curve method to scale from
known plant
For petrochemical process,
n=0.7 otherwise it is 0.6
Economy of scale
higher
profit
for
production
Cost

per

unit

of

means
higher
product

S is the plants capacities


C is ISBL capital cost
a=2.775 , n=0.6 (syngas
prod.)

Approximate capital cost data for


various licensed processes, a rearranged form of previous equation

Values of the parameters a and n for


some fuels and commodity chemical
processes are given in Table 7.1
Towler et al. (next slide)
These correlations are only valid
over a range of plant sizes between
Slower and Supper

Estimation of Capital Cost

(2006 U.S. Gulf Coast basis)

Estimation of Capital Cost

Estimation of Capital Cost

Estimation of Capital Cost

Estimation of Capital Cost: If cost data for a


similar process are not available
Step Count Method: Need an
order-of-magnitude estimate,
by adding contributions for
different plant sections or
functional units.
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

(USGC Jan, 2010)

Exercise
Using Bridgewaters method, the process for making
cyclohexane by saturation of benzene consists of a
saturation reactor, and a product stabilizer column.
Estimate the cost of a plant that produces 200,000
metric tons per year (200 kMTA) of cyclohexane
(assuming that the reactor conversion is 1.0).

Exercise
Solution:
Using Bridgewaters method, we have two functional
units (the reactor and product stabilizer) and the
reactor conversion of 1.0, thus:
C = 4320 2 (Q/S)0.675
= 4320 2 (Q)0.675
= 4320 2 (2 105)0.675
= $33 MM expressed on a Jan, 2010 USGC basis
Using the correlation in Table 7.1, the cost correlation
for the Axens process for benzene saturation gives:
C = 0.0061 (S)0.6
= 0.0061 (2 105)0.6
= $9.2 MM expressed on a Jan, 2006 USGC basis

Estimation of Capital Cost: Other methods


Reverse Engineering Methods: In some situations, a
very rough estimate of capital cost can be backed out
from operating costs or product prices.
Pay-back Method:

Turnover Ratio Method:

Typically 1.0-1.25
simpler, but less accurate

TCOP Method:
For large-scale production of formed or assembled
components (>500,000 pieces per year)

Purchased Equipment Costs


When more design information is available, the cost of a
plant can be worked up from the cost of individual items
of process equipment.
Equipment
costs
More Exercise
derived from computer
Estimate
programs or websites.
the purchased
Otherwise, use cost
equipment cost of plain
equation.
carbon steel shell and tube
heat exchanger with area

400
size parameters

..
Such as

ICARUS Technology, Aspen Process


Economic Analyzer, www.aacei.org,
http://www.aacei.org/resources/.
(www.icoste.org)

Estimation of Purchased Equipment Costs

Estimation of Purchased Equipment Costs

Estimation of Purchased Equipment Costs

Purchased Equipment Costs


Solution:

= 28,000 + (54 4001.2) = $99,600

ESTIMATING INSTALLED COSTS:


Use Lang factor method
Total plant cost and
engineering cost. Use Table
7.4 and 7.5 in Towler et al.
(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.

Factorial Method

C = ISBL fixed capital cost of a plant is


given as a function of the total
purchased equipment cost by the
equation:

Expansion of above equation for each piece of


equipment

CS=carbon steel
Piping, equipment erection, electrical work,
instrumentation, civil, structures, lagging and
insulation

ESTIMATING INSTALLED COSTS


Langs installation factors:
F = 3.1 for solids processing plant
F = 4.74 for fluids processing plant
F = 3.63 for mixed fluids-solids processing
plant

ESTIMATING INSTALLED COSTS

ESTIMATING INSTALLED COSTS

Summary of Factorial Method


1. Estimate the purchased cost of the major equipment items; as
before.
2. Calculate the ISBL installed capital cost, using the factors given
in Table 7.5 and Table 7.6.
3. Calculate the OSBL, engineering, and contingency costs using
the factors given in Table 7.5.
4. The sum of ISBL, OSBL, engineering, and contingency costs is
the fixed capital investment.
5. Estimate the working capital as a percentage of the fixed capital
investment; 10% to 20% is typical or better, calculate it from the
cost of production if this has been estimatedwill be explained
in next meeting.
6. Add the fixed and working capital to get the total investment
required (and land).

Cost Escalation:
Relating present cost to past costs..
Indices published
in Oil and Gas
Journal.

Variation of major cost indices.

Variation of major cost indices


relative to 1990 = 1.0.

Cost Escalation:
Relating present cost to past costs..
1. Example: The purchased cost of a shell and tube heat
exchanger, carbon shell, 316 stainless steel tubes, heat
transfer area 500 m2, was $64,000 in January 2003;
estimate the cost in December 2010. Use the M&S
Equipment Cost Index.
Solution:
From Figure 7.2 (or by looking up the index in Chemical
Engineering):
Index in 2003 = 1123.6
Index in 2011 = 1476.7
So, the estimated cost in December 2010 = $64,000 1477/1124
= $84,000.
2. Example: The purchased cost of a distillation column was
$136,000 in 2004. Estimate the cost in 2014. Use the
Nelson-Farrer index.

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

Location factor

Location factor
Example: The cost of constructing a 30,000 metric tons per
year (30 kMTA) acrolein plant was estimated as $80
million ($80MM) on a 2006 U.S. Gulf Coast basis.
What would be the cost in U.S. dollars on a 2006
Germany basis?
Solution:
From Table 7.7, the 2003 location factor for Germany was
1.11.
The exchange rate in 2003 averaged about 1 = $1.15 and
in 2006 it averaged about 1 = $1.35.
The 2006 location factor for Germany is thus 1.11
1.35/1.15 = 1.30
The cost of building the acrolein plant in Germany in 2006 is
$80 MM 1.30 = $104 MM.

A homework to end todays lecture


Adipic acid is used in the manufacture of nylon 6,6. It is made by
hydrogenation of phenol to a mixture of cyclohexanol and
cyclohexanone (known as KA oilketone and alcohol), followed by
oxidation with nitric acid. Estimate the fixed capital cost for a
400,000 metric ton per year (400 kMTA) adipic acid plant located in
Japan.
Solution
ISBL capital cost = (2006 U.S. Gulf Coast basis)
ISBL capital cost = (2010 Japan, see location factor)
Then, OSBL capital cost = .
Engineering cost and contingency costs =
The total fixed capital cost = (2010)