Economic consideration

It is the economic consideration like cost estimation,capital investment,profitability and total product cost. It also includes various types of each, calculation and ratios

1. Economic Considerations Cost Estimation Total Product Cost Profitability Capital Investment Malavika M R 2015-09-013

2. Cost Estimation

3. Cost estimation procedures are meant to support The costs of purchasing Installing equipment Operating and maintaining this equipment

4. Private costs -reflect the private choices and decisions of the owners and operators of the facilities. Broader costs- impacts on society e.g., changes in prices to consumers due to the impact on a producer are analyzed using methods that assess the social costs of regulatory intervention.

5. Information on social cost estimation can be found in the EPA(Environmental Protection Agency) Economic Guidelines and the U.S. Office of Management According to Perry’s Chemical Engineer’s Handbook , a study estimate is used to estimate the economic feasibility of a project before expending significant funds for piloting, marketing, land surveys, and acquisition. It can be prepared at relatively low cost with minimum data.

6. To develop a study estimate, the following must be known: Location of the plant; Location of the source within the plant; Design parameters, such as source size or capacity rating, uncontrolled pollutant concentrations, pollutant removal requirements, etc. Rough sketch of the process flow sheet (i.e., the relative locations of the equipment in the system); Preliminary sizes of, and material specifications for, the system equipment items; Approximate sizes and types of construction of any buildings required to house the control system; Rough estimates of utility requirements (e.g. electricity, steam, water, and waste disposal); Quantity and cost materials consumed in the process (e.g., water, reagents, and catalyst); Preliminary flow sheet and specifications for ducts and piping; Approximate sizes of motors required; Economic parameters (e.g. annual interest rate, equipment life, cost year, and taxes.)

7. Besides the labor requirements for construction and operation of a project Estimate of the labor hours required for engineering and drafting activities because the accuracy of an estimate (study or otherwise) depends on the amount of engineering work expended on the project.

8. Total Product Cost

9. The sum of direct materials costs, direct labor costs and manufacturing overhead costs. Using the actual costing method, we can determine your small business’s overall product costs and product costs per unit based on the actual costs you incurred during a period.

10. Direct Materials Costs Direct materials are the materials your small business uses to manufacture a product that you can trace directly to the product, such as the bicycle tires on a specific bicycle.  Direct Labor Costs Direct labor costs are the total costs you incur to employ the workers that directly assemble or manufacture your products. These costs include wages, payroll taxes, pension contributions and contributions for life, health and worker’s compensation insurance

11. Manufacturing Overhead Costs Manufacturing overhead costs are those necessary to making a product, but that you cannot trace directly to a specific product . Examples such as masking tape, and indirect labor costs, such as the costs to employ a maintenance worker Product Cost and Product Cost per Unit Add together the total direct materials costs, your total direct labor costs and your total manufacturing overhead costs that you incurred during the period to determine your total product costs. Divide your result by the number of products you manufactured during the period to determine your product cost per unit

12. Capital Investment

13. Total capital investment (TCI) includes Costs of purchased equipment costs Costs of labor and materials for installing that equipment Costs for site preparation and buildings, and certain other costs ( indirect installation costs ). TCI also includes costs for land, working capital, taxes, permitting costs, and other administrative costs

14. Direct installation costs include costs for foundations and supports, erecting and handling the equipment, electrical work, piping, insulation, and painting. Indirect installation costs include such costs as engineering costs; construction and field expenses contractor fees (for construction and engineering firms); start-up and performance test costs (to get the control system running and to verify that it meets performance guarantees); contingencies

15. Contingencies is a catch-all category that covers possible redesign and modification of equipment, increases in field labor costs, and delays encountered in start-up The sum of the purchased equipment cost, direct and indirect installation costs, site preparation, and buildings costs comprises the battery limits estimate .

16. A battery limit is the geographic boundary defining the coverage of a specific project. Usually this encompasses all equipment of interest, but excluding provision of storage, utilities, administrative buildings, or auxiliary facilities unless so specified

17. Off-site facilities include units to produce steam, electricity, treated water; laboratory buildings; other transportation infrastructure items. Some pollution control systems do not generally have off-site capital units dedicated to them since these pollution control devices rarely consume energy at that level.

18. The capital cost of a device does not include routine utility costs (which can include the cost of steam, electricity, process and cooling water, compressed air, refrigeration, waste treatment and disposal, and fuel), even if the device were to require an offsite facility.

19. For systems located at higher elevations (generally over 500 feet above sea level), the purchased equipment cost and balance of plant cost should be increased based on the ratio of the atmospheric pressure between sea level and the location of the system, i.e., (Atmospheric pressure at sea level)/ (atmospheric pressure at the elevation of the unit)

20. Total Cost (TC) refers to costs that are incurred yearly. TC has three elements: direct costs (DC), indirect costs (IC), and recovery credits (RC), which are related by the following equation: TC = DC + IC − RC

21. Capital is depreciable , indicating that, as the capital is used, it wears out and that lost value cannot be recovered. Economic depreciation, which is the lost value due to wear and tear Depreciation costs are a variable or semi-variable cost that is also included in the calculation of tax credits (if any) and depreciation allowances whenever taxes are considered in a cost analysis.

22. Profitability

23. Explicit cost A direct payment made to others in the course of running a business, such as wages, rent, and materials Implicit cost The opportunity cost equal to what a firrm must give up in order to use factors which it neither purchases nor hires. A paper production firrm may own a grove of trees. Sold it as lumber instead of using it for paper production is economic profit

24. Accounting profit is the monetary costs a firm pays out and the revenue a firm receives. It is higher than economic profit. Accounting profit = total monetary revenue- total costs. Economic profit is the monetary costs and opportunity costs a firm pays and the revenue a firm receives. Economic profit = total revenue – (explicit costs +implicit costs) The biggest difference between accounting and economic profit is that economic profit reflects explicit and implicit costs, while accounting profit considers only explicit costs.

25. Accounting profit is the difference between total monetary revenue and total monetary costs, and is computed by using generally accepted accounting principles (GAAP) . The monetary revenue is what a firm receives after selling its product in the market. Accounting profit is also limited in its time scope; Accounting profit only considers the costs and revenue of a single period of time,

26. Economic profit can be positive, negative, or zero If positive, there is incentive for firms to enter the market. If negative, there is incentive for firms to exit the market. If zero , there is no incentive to enter or exit. For a competitive market , economic profit can be positive in the short run. In the long run, economic profit must be zero, which is also known as normal profit For an uncompetitive market, economic profit can be positive.

27. Normal profit : The opportunity cost of an entrepreneur to operate a firm; the next best amount the entrepreneur could earn doing another job The amount of economic profit a firm earns is largely dependent on the degree of market competition and the time span under consideration.

28. Competitive markets, where there are many firms and no single firms can affect the price of a good or service, Uncompetitive markets – characterized by firms with market power or barriers to entry – can make positive economic profits. The reasons for the positive economic profit are barriers to entry, market power, and a lack of competition

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