Professional Documents
Culture Documents
Total Capital
Investment
Transporation,
Warehouses, 3. Accounts
Insulation Foundations Shipping &
Laboraties Recieving Facilities Recievable
5. Accounts
Payable
6. taxes
payable
Fixed-Capital Investment: Capital needed to supply the necessary manufacturing and plant
facilities.
Total Capital Investment: Sum of Fixed Capital Investment and Working Capital
Manufacturing Fixed Capital: Capital used for installed process Equipment will all auxiliaries
needed for complete process operation.
Non-Manufacturing Fixed Capital: Capital used for construction overhead and for all plant
components that are not directly related to the process operation.
Note:
1. The construction overhead cost consists of Field Office & Supervision Expenses, Home-Office
Expenses, Contractor`s Fee & Contingencies.
3. The ratio of working capital to total capital investment varies with different companies, but
most chemical plant use an initial working capital investment amounting to 10 to 20 percent
of the total capital investment.
4. This percentage may increase to as much as 50 % or more for companies producing products
of seasonal demands because of large inventories which must be maintained for appreciable
periods of time.
Capital Investment
Types of Capital Cost Estimates
An estimate of the capital investment for a process may vary from a pre-design
estimate based on little information except the size of the proposed project to a
detailed estimate prepared from complete drawings and specifications.
These estimates are called by a variety of names, but the following five
categories represent the accuracy range and designation normally used for
design purposes:
Sr. Probable
Type of Estimates Based on
No. Accuracy
Preliminary Estimate
Sufficient data to permit the
3. (Budget Authorization +/- 20%
estimate to be budgeted
Estimate; Scope Estimate)
Broad Categories:
For this reason, most of the information presented in this chapter is devoted to
pre-design estimates, although it should be understood that the distinction
between pre-design and firm estimates gradually disappears as more and more
detail is included.
According to AACE International, process technology, cost data, and many other
risks affect the accuracy range. The range typically represents a 50% confidence
interval.
Moving along in increasing order of complexity and detail is the study estimate.
The study estimate uses a list of the major equipment included in the process,
such as pumps, compressors and turbines, columns and vessels, heat
exchangers, etc. After sizing is done, the cost is determined for each piece of
equipment. Also called the major equipment or factored estimate, the study
estimate usually needs cost charts and process flow diagrams.
Primary
Secondary Characteristic
Characteristic
Estimate Class
% of Project Purpose of Expected Accuracy
Methodology
Completion Estimate Range
Although the most accurate way to estimate the purchase cost of a piece of
equipment is to get a current price quote from the appropriate vendor, this may
sometimes prove difficult to obtain based on the vendor's policies. The next best
alternative would be to use cost data from previously purchased equipment of the
same type. Based on previous cost data, the current cost of equipment could change
based on differences in the equipment capacity and also differences in time.
Turton et al., and other authors in various texts, give this relationship between
purchased cost and an attribute related to units of capacity:
where A is the equipment cost attribute; C is the purchased cost and n is the cost
exponent. Subscripts ‘a’ and ‘b’ refer to equipment with the required attribute and
equipment with the base attribute respectively. The value of the cost exponent varies
based on the equipment.
The value for n, however, is often taken as 0.6. Ranges typically 0.4 - 0.6.
Using this common value for n is referred to as the six-tenths rule. 6/10th Rule can
be used to scale up an entire process
Ereev and Patel mentions that this relationship illustrates an economy of scale;
therefore, equipment at twice the capacity of another is less than twice the cost.
Effect of Time:
If cost data is collected from previous years, the cost forecast for current year and
years to come will be different due to factors such as inflation. To account for this
change, cost indexes are used and is measured by the following relationship:
where C is the purchased cost, I is the cost index. 1 and 2 refer to the base time when
cost is known and the time when cost is desired, respectively.
There are several indices used in the chemical industry to adjust for inflation.
These include:
a) Fabricated Equipment 37
b) Process Machinery 14
Various methods can be employed for estimating capital investment. The choice
of any one method depends upon the amount of detailed information available and
the accuracy desired. Seven methods are outlined in this chapter, with each method
requiring progressively less detailed information and less preparation time.
Consequently, the degree of accuracy decreases with each succeeding method. A
maximum accuracy within approximately 5 percent of the actual capital investment
can be obtained with method A.
Equipment and material needs are determined from completed drawings and
specifications and are priced either from current cost data or preferably from firm
delivered quotations.
Complete site surveys and soil data must be available to minimize errors in site
development and construction cost estimates.
Because of the extensive data necessary and the large amounts of engineering
time required to prepare such a detailed-item estimate, this type of estimate is
almost exclusively only prepared by contractors bidding on lump-sum work from
finished drawings and specifications.
This method, which is frequently used for preparing definitive and preliminary
estimates, also requires detailed estimates of purchased price obtained either
from quotations or index-corrected cost records and published data.
Costs for concrete, steel, pipe, electrical, instrumentation, insulation, etc., are
obtained by take-offs from the drawings and applying unit costs to the material
and labor needs.
E = purchased-equipment cost
The other items included in the total direct plant cost are then estimated as
percentages of the delivered-equipment cost.
Average values of the various percentages have been determined for typical
chemical plants, and these values are presented in Table 17.
For comparable plants of different capacity, this method has sometimes been
reported to yield definitive estimate accuracies.
This technique, proposed originally by Lang and used quite frequently to obtain
order-of-magnitude cost estimates, recognizes that the cost of a process plant
may be obtained by multiplying the basic equipment cost by some factor to
approximate the capital investment.
These factors vary depending upon the type of process plant being considered.
The percentages are rough approximations which hold for the types of process
plants indicated. These values, therefore, may be combined to give Lang
multiplication factors that can be used for estimating the total direct plant cost, the
fixed-capital investment, or the total capital investment. The equation is as
follows:
Where, CTM is the total direct plant cost; Cp,i is the delivered-equipment cost; n is
the total number of units and FLang is the appropriate Lang factor.
Factors for estimating the fixed capital investment or the total capital investment
are given as.
It should be noted that these factors include costs for land and contractor’s fees.
One approach is to use different factors for different types of equipment. Another
approach is to use separate factors for erection of equipment, foundations,
utilities, piping, etc., or even to break up each item of cost into material and labor
factors..
Since tables are not convenient for computer calculations it is better to combine
the separate factors into an equation similar to the one proposed by Hirsch and
Glazier
Many data have been published giving the fixed-capital investment required for
various processes per unit of annual production capacity.
Although these values depend to some extent on the capacity of the individual
plants, it is possible to determine the unit investment costs which apply for
average conditions.
The necessary correction for change of costs with time can be made with the use
of cost indexes.
Turnover ratio is defined as the ratio of gross annual sales to the fixed-capital
investment, where the product of the annual production rate and the average
selling price of the commodities is the gross annual sales figures.
The reciprocal of the turnover ratio is sometimes defined as the capital ratio or the
investment ratio.