A PRESENTATION ON

CHAPTER TEN
OF PRELIMINARY CHEMICAL ENGINEERING PLANT

DESIGN
(WILLIAM D. BEASEL, ELSEVIER PUBLICATIONS 1974)

PROCESS DESIGN (CHE 505) GROUP TEN TASK Department of Chemical Engineering, Obafemi Awolowo University, Ile- ife, Nigeria.

May 2012.

GROUP TEN MEMBERS OGUNGBENRO Adetola Elijah CHE/2007/083 ADENIRAN Joshua Adewumi CHE/2007/012

ADEREMI Oluwadamilola Idayat CHE/2007/014 AKINDURO Olumuyiwa Gregory CHE/2007/023

NMEROLE Austin Chidiebiere CHE/2007/075 FAMILUSI Funso Oluwaseun CHE/2007/055

AJAYI Babajide Ezekiel CHE/2007/018

NAJIMU Musa Olajide CHE/2007/074

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CHAPTER 10 ECONOMICS
The chapter discusses methods of determining how much it costs to produce a pound of product and whether the expected profit is enough to justify building a plant. The Objectives of this presentation are as follows: To determine the amount of money that must be invested to produce the product; To investigate all the costs that are involved in producing and selling a chemical; To consider a number of different ways of evaluating the profitability of a plant.

AMOUNT

NEEDED

FOR

INVESTMENT:

CAPITAL
Capital refers to the amount of money that must be invested if any product is to be produced. The capital is made up of the

fixed capital needed to construct the plant

and the working capital needed to operate it. The fixed capital is the cost of building

and

equipping

the

plant

and

all

its

peripheral buildings and operations. The working capital is made up of all items not included in the fixed capital e.g. accounts payable, raw materials inventory, work in progress, and product and byproduct inventories.
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COST OF PRODUCING A CHEMICAL

A chemical plant has every type of cost associated with the operation of a car and many more. The major categories are raw materials, conversion costs, depreciation, sales, research, taxes and insurance, and general administration costs. A method for determining the magnitude of each of these is hereby presented.

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 Raw Material Costs

These are the costs delivered to the plant of all the various
chemicals that are used in producing the products. The prices of the raw materials can be obtained from the manufacturer, and the amount of each chemical required is given by

the unit ratio material balance.

Conversion Costs The conversion costs are those that occur between the time the raw materials enter the plant and the time the product leaves, and that are a direct result of processing. These consist of labor, utilities, supplies, maintenance, waste treatment charges, royalties, and packaging. Depreciation Depreciation is the means by which the capital cost involved in constructing the plant is prorated over its prospective life. A rough estimate is 9% of the cost of constructing the plant.
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Research Costs Research expenses are those associated with the administration and running of research projects. Research expenses average 3-4% of sales for the chemical industry. For the large pharmaceutical companies this is nearly 10%. Taxes and Insurance This category includes property and franchise taxes and all insurance costs. They depend on the value of the physical plant. They may be assumed to be between 2 and 3% of the cost of building the plant.

General Administrative Costs

These are the overhead costs that it takes to operate a company. The item consists of all the administrative costs that cannot be assigned to a given project. It includes the expenses and salaries of the president, board of

directors,

treasurer,

division

managers,

long-range

planners

and

accountants. These costs average about 4% of the total sales.

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EVALUATING PROFITABILITY OF A CHEMICAL PLANT: MEASURES AND ECONOMIC INDICATORS Measures Return on Investment (R.O.I.) The return on investment is the expected profit divided by the total capital invested. This is the percentage return that an investor may expect to eventually earn on his money. Payout Time The payout time or payback period is the number of years from the time of startup it would take to recover all expenses involved in a project if all the pretax profits were used for this purpose.

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Net Present Value (NPV) - A Good Profitability Measure The net present value of a project is what is obtained when the sum of the present values of all expenditures is subtracted from the sum of the present values of all incomes. This places all costs and incomes on a comparable basis. Whenever the net present value (NPV) is positive this means the project will yield more money i.e. the plant appears to be a winner. If the net present value is negative the project should be dropped.

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Indicators
Time Value of Money When comparing projects having different time durations, discrepancies in results is often encountered because the economic indicator(s) used fail to take into account the timing of payments and receipts and the magnitude of the profits. To resolve these problems a different economic indicator which emphasizes time value of money needs to be developed. Such indicators include Compound Interest, Present Value, Annuity etc. PROPER INTEREST RATES The key to the discounted cash flow methods is the determination of a proper interest rate. For this, two factors must be known. One is: how much

does it cost to obtain money? The second is: what is a reasonable amount of
profit to expect from a plant? The first depends on the source of money. This can be corporation earnings, the sale of stock, the issuance of bonds, the selling of assets, or borrowing from some outside source. The second

depends on economic conditions.

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CASE STUDY: ECONOMIC EVALUATION FOR A

150,000,000
PLANT PROCESS.

LB/YR
THE

POLYSTYRENE
SUSPENSION

USING

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