Lecture _Analysis of Cost Estimation.pptx

process ecomonics

1. PROCESS ECONOMICS Lecture # 4 Analysis of Cost Estimation

2. After completing this chapter, students should be able to understand the following: 2 INSTRUCTIONAL LEARNING OBJECTIVES Introduction Factors Affecting Investment Estimation of Capital Investment Classifications of Capital Cost Estimates Methods for Estimating Capital Investment Cash Flow for Industrial Operations Direct, Indirect, Fixed, & Variable cost Components of capital cost Cost Indexes Estimating Cost by Scaling Estimating fixed costs

3. COST ESTIMATION E stimat ion (or estimating) i n general, computation of a price with regard to time and resource requirements upon which a firm quotation is b ased . For the most part, engineers generally have the responsibility of cost estimation. Future costs are very critical to the analysis of a project. Revenue generation generally comes from marketing or sales areas.

4. COST ESTIMATION What is the purpose of estimating? Quoting, bidding, or evaluating bids; Profitability analysis; Basis for make versus buy decisions; Investment justification; Basis for comparing manufacturing methods; Basis for cost reduction; Planning new products and services; All these involve developing cash flows for feasible alternatives.

5. COSTS TO ESTIMATE What costs are to be estimated? Equipment cost Delivery charges Installation costs Insurance costs (premiums) Training of personnel for equipment use.

6. Capital Cost Estimation Capital Costs Fixed capital Manufacturing (direct) Nonmanufacturing (indirect) Working capital Product Costs Manufacturing costs Fixed costs Overhead costs General expenses Administrative expenses Distribution & m arketing costs R&D

7. Capital Cost pertains to the costs associated with construction of new plant or modifications to an existing chemical manufacturing plant . Capital investment ( new plant ) Types of costs include: Initial Costs Operating Costs Maintenance Costs Product Costs Cost of Capital (Interest Lost) Capital Cost Estimation

8. 8

9. Cumulative Cash Position

10. LD = Maximum investment N AN = Project lifetime Cash flow for a typical project The best methods of assessing the profitability of alternatives are based on projections of the cash flows during the project life. Consider Curve 1 A = Start of the project B = Design and other preliminary work. C = buildings, plant and equipment Working capital = plant between C and D. D = Production starts E = Production is below design conditions F = The project breakeven point, the cumulative cash flow is again zero. G = The end of the projects life (Design); the net rate of cash flow may decrease owing to, for example, increasing maintenance costs, a fall in the market price for the product, and so on. H = The end of the project (real). Project Cash Flow and Economic Evaluation

11. Project Cash Flow and Economic Evaluation Payback time or Pay-Back Period (PBP) = Payback time AF. A time period in which the capital itself and the interest on it must be entirely paid back. PBP = f ixed capital i nvestment (FCI)/ annual cash flow ( A j ) PBP = total investment/ average annual cash flow Return on Investment (ROI ( = ratio of average yearly income (HK) over the productive life of the project (KD) to the total initial investment (LD), expressed as a percentage. ROI = HK/KD × 100/LD % per year ROI = [net annual profit/total investment]×100% LD = Maximum investment

12. Project Cash Flow and Economic Evaluation Annual discounted cash flow (A DCF ) at the end of year 1 => A DCF1 = A CF1 /(1 + i ); at the end of year 2 => A DCF2 = A CF2 /(1 + i ) 2 and at the end of year n => A DCFn = A CFn /(1 + i ) n The sum of the annual discounted cash flows over n years Σ A DCF is known as the net present value (NPV) of the project. NPV = Σ A DCF LD = Maximum investment Net present value (NPV): The net present value of a project is the sum of the present values of each individual cash flow.

13. 13 The value of NPV is directly dependent on the choice of the fractional interest rate i and project lifetime n . Curve 1 = no discounting, i = 0, and the project NPV is equal to the final net cash position given by H. Curve 2 = effect of discounting at a fixed rate of interest, and the corresponding project NPV is given by J . Curve 3 shows a larger rate of interest, but it is chosen such that the NPV is zero at the end of the project. A project with a negative NPV is not a profitable proposition. Project Cash Flow and Economic Evaluation

14. Gross earnings (gross profit = total income - total product cost); a general range for gross profit cost is 15-40% of gross earnings Net annual profit = gross annual earnings - income taxes In the production Breakeven = Point when Total revenues (R) = Total costs (TC) Cash flows =Total income (R) Operating costs (TC) Gross or Total profit (R - TC) Depreciation charge (d) Net profit (R - TC – d) Project Cash Flow and Economic Evaluation

15. 15 Project Cash Flow The flow of cash for the fixed capital investment is usually spread over the entire construction period. Because income from sales and cost of operations may occur on an irregular time basis, a reservoir of working capital must be available to meet these requirements.

16. 16 Direct, Indirect, Fixed, & Variable cost Net profit = Total income – all expenses Direct plant expenses raw materials, labor, utilities Indirect expenses administrative salaries, product sales, distribution cost Fixed cost Variable cost Breakdown of fixed capital investment items for a chemical process  Table 6-1

17. 20 y = a + bX The Dependent Variable: The cost that is being predicted The Independent Variable: The cost driver The Intercept: Fixed Costs The slope of the line: variable cost per unit Fixed and Variable Cost Variable Costs – costs that change in total in relation to some chosen activity or output Fixed Costs – costs that do not change in total in relation to some chosen activity or output Units of Output Production Cost Variable Cost Total Cost Fixed Cost $/kg; $/m3; $/m2; $/m The linear cost function

18. 21 TC = FC + VX Total Cost ( TC ) is the dependent variable. The activity ( X ) is the independent variable. The X term coefficient ( V ) is the estimate of variable cost per unit of activity, the slope of the cost line. The intercept term ( FC ) is the estimate of fixed costs. The linear cost function in cost terms Example : A college student pays SR1000 per month to rent a two-bedroom apartment, and SR500 for other monthly expenses. The monthly rent will be a fixed cost . The costs for other monthly expenses would be a   variable cost . The general cost equation: y = a + bx Activity Total Cost The general cost equation: Y = a + bX in cost terms TC = FC + VX Fixed cost Variable cost Total cost Revenues

19. 22 The linear cost function Example

20. Linear Breakeven Analysis Cost Product Quantity (Q) Fixed Cost ( FC) Total Cost (TC) Revenues (R) Q ’ Variable Cost (VC) Breakeven point Making is better Profits (P) : P = R – TC Breakeven: P = 0 => R = TC Total income Loss

21. Breakeven chart for chemical processing plant Maximum gross earnings

22. COMPONENTS OF CAPITAL COST The total investment required for a new plant (design) can be broken down into five main parts : Inside Battery Limits (ISBL) investment; Off-site Battery Limits (OSBL ) investment; Engineering fees ; Utility investment ; Working capital ; Capital cost for new design We want to estimate the entire amount of money that the investor has to put into the project to get it started. This has several components:

23. COMPONENTS OF CAPITAL COST Chapter2: Plant Location & plant Layout Components of Capital Cost

24. Inside Battery Limits (ISBL) plant investment The battery limit is a geographic boundary that defines the manufacturing area of the process ( system that converts raw materials into products ). This is the cost of the plant “ inside the fence ”: Includes equipment, bulk materials, installation costs, foundations, roads, etc. It includes process equipment and buildings or structures to house it but excludes boiler-house facilities, site storage, pollution control, site infrastructure, and so on; COMPONENTS OF CAPITAL COST

25. Total Capital Investment (TCI or C T ) The term Capital Investment has two usages in business: Firstly , Capital Investment refers to money used by a business to purchase fixed assets , such as land, machinery, or buildings ( Fixed-capital investment, FCI or C F ) . Secondly , Capital Investment refers to money invested in a business with the understanding that the money will be used to purchase fixed assets, rather than used to cover the business' day-to-day operating expenses ( working capital, WC or C W ). ⟶ C T = C F +C W

26. Total Capital Investment (TCI or C T ) Total capital cost breakdown

27. Total Capital Investment (cont.) Fixed-capital investment = direct costs + indirect costs C F = C D +C I The fixed capital C F includes the cost of the purchased equipment, installation, piping, instrumentation and control, electrical, site improvement and foundations, auxiliary facilities, land, processing buildings, off-site facilities (administrative and other offices, warehouses, laboratories, shops), engineering, start-up, contractors fee, and contingency.

28. EXAMPLE 6-1 Make a study estimate of the fixed-capital investment for a process plant if the purchased-equipment cost is $100,000. Use the ranges of process-plant component cost outlined in Table 6-3 for a process plant handling both solids and fluids with a high degree of automatic controls and essentially outdoor operation. Do not include land. Estimation of Fixed-Capital Investment Using Ranges of Process-Plant Component Costs

29. SOLUTION The estimated cost for a component cost is calculated as $100,000 multiplied by the normalized percentage for the component, and then divided by the normalized percentage for the purchased equipment. All values are rounded to the nearest $1000. 25×100/109 8.3×100,000/22.9 9.2×36,000/8.3

30. Working Capital, W C or C W The working capital C W , is necessary for the operation of the plant. The working capital C W in an industrial plant consists of the total amount of money invested in: Raw materials; Supplies carried in stock (Usually 1-month supplies valued at delivery prices); Finished semi-finished products (for 1 month’s production); Accounts receivable payable ; Cash kept on hand for monthly payment of operating expenses (salaries, wages and raw materials purchases) Accounts payable Taxes payable WC = varies with different companies; Most chemical plants used 10-20% (it may increase to as much as 50% or more for companies producing products of seasonal demand)

31. COST INDEXES Cost indexes can be used to give a general estimate from published data; Cost index is based on time in the past (Historic Cost Data); An index value for a given time showing the cost at that time relative to a certain base time. We can project costs forward by using extrapolated values of an index or an expected inflation rate . Inflation = rising prices for goods & services ( Future dollars less valuable than present dollars ) Costing for inflationary effects

32. COST INDEXES An index is a dimensionless number that indicates how a cost or a price has changed with time (typically escalated) with respect to the base year. C n = C k (I n / I k ) C n = cost or selling price of an item in year n C k = cost or price of the item at an earlier point in time (say year k ) I n = index value in year n I k = index value in year k

33. COST INDEXES Most common indexes: Marshall and Swift all-industry Process-industry equipment indexes Engineering News-record construction index Nelson-Farrar refinery construction index The Chemical Engineering Plant Cost Index (CEPCI) or “CE” Nelson-Farrer Refinery Construction Index or “NF index” Journal of Engineering News Record Construction cost index Journal of Process Engineering Monthly cost indices

34. Marshall & Swift Equipment Cost Indexes The Marshall and Swift (formerly known as Marshall and Stevens) equipment index is found in each issue of the magazine Chemical Engineering and is normally divided into two categories: All-industry equipment index - arithmetic average of indexes for 47 different types of industrial , commercial, and housing equipment. Based on an index value of 100 for the year 1926. Account for cost of machinery and major equipment plus costs for installation, fixtures, tools, office, and minor equipment. COST INDEXES

35. COST INDEXES CHEMICAL ENGINEERING www.chemengonline.com December 2010

36. COST INDEXES

37. The Chemical Engineering Plant Cost Index (CEPCI or CE) The four major components of this index are weighted by percentage in the following manner: equipment, machinery, and supports: 61 erection and installation labor: 22 buildings, materials, and labor: 7 engineering and supervision: 10 The major component, equipment: fabricated equipment: 37 process machinery: 14 pipe, valves, and fittings; 20 process instrument and controls; 7 pumps and compressors: 7 electrical equipment an materials: 5 structural supports, insulation, and paint: 10 COST INDEXES

38. COST INDEXES The Chemical Engineering Plant Cost Index (CEPCI or CE)

39. COST INDEXES The Chemical Engineering Plant Cost Index (CEPCI or CE)

40. COST INDEXES The Chemical Engineering Plant Cost Index (CEPCI or CE)

41. COST INDEXES The Chemical Engineering Plant Cost Index (CEPCI or CE)

42. For oil refinery and petrochemicals projects, the Oil and Gas Journal publishes the Nelson-Farrer Refinery Construction Index (NF index): http://www.ogj.com The Nelson-Farrer index is on a U.S. Gulf Coast basis rather than U.S. average and is more reliable than the CE index for the types of equipment used in hydrocarbon processing. Base year 1946 =100 The Nelson-Farrar refinery construction index has shown a very large increase with time and should be used with caution and only for refinery construction. COST INDEXES Nelson- Farrer Refinery Construction Index

43. Other Cost Indexes Other cost indexes for materials and labors for various types of industries are published monthly by The US Bureau of Labor Statistics in the Monthly Labor Review http://www.bls.gov/opub/mlr/mlrhome.htm North Carolina Department of Revenue: Cost Index and Depreciation Schedules http://www.dor.state.nc.us/publications/cost_archive/99archive/costindex.html Ministry of Labor in the Saudi Arabia http://portal.mol.gov.sa/Sites/default.aspx

44. EXAMPLE (0.35*115.9)+(0.35*127)+(0.2*121.5)+(0.1*109.8)=

45. COST INDEXES All cost indices should be used with caution and judgment. The longer the period over which the correlation is made, the more unreliable the estimate. Between 1970 and 1990, prices rose dramatically. Prices then grew at a more or less steady 2 to 3% per year until 2003, when high demand for fuels projects and high energy prices caused another period of steeper price inflation. For use with chemical-plant investment estimates, the Marshall and Swift equipment cost indexes and the Chemical Engineering plant cost indexes are recommended .

46. COST INDEXES – Using Excel `

47. EXAMPLE A certain index for the cost of purchasing and installing utility boilers is keyed to 1974, where its baseline value was set at 100. Company X installed a 50,000 lb / hr in 1989 for $350,000 when the index had value of 312. This same company must install another boiler of the same size in 1996. The index in 1996 is 468. What is the cost of new boiler? Approximate cost of new boiler = C 1996 = $350,000 (468/312) = $525,000

48. EXAMPLE The purchased cost of a heat exchanger of 500 m 2 area in 1990 was $25,000. a. Estimate the cost of the same heat exchanger in 2010 using the two indices Marshal and Swift Index, and Chemical Engineering Plant Cost Index . b. Compare the results.

49. SOLUTION From Tables: 1990 2010 Marshal and Swift Index 915 1473.3 Chemical Engineering Plant Cost Index 358 550.8 a . Marshal and Swift: Cost = ($25,000)(1473.3/915) = $40,254 Chemical Engineering: Cost = ($25,000)(550.8/358) = $38,464 b. Average Difference: ($ 40,254 - 38,464)/($ 40,254 + 38,464)/2)(100) = 4.54%

50. EXAMPLE A centrifuge cost $95,000 in 1998. What is the cost of the same centrifuge in third quarter of 2004? Use the CE index.

51. Estimating Equipment Cost by Scaling Sometimes referred to as the exponential model Often used to cost industrial plants and equipment C A /C B = (S A /S B ) n => or C A = C B (S A /S B ) n C A = cost for plant A C B = cost for plant B S A = size of plant A S B = size of plant B n = cost-capacity factor to reflect economies of scale

52. Purchased Equipment The cost of purchased equipment is the basis of several predesign methods for estimating capital investment. The various types of equipment can often be divided conveniently into: Processing equipment Raw-materials handling and storage equipment Finished-products handling and storage equipment The most accurate method for determining process equipment costs is to obtain firm bids from fabricators or suppliers. Second best in reliability are cost values from the file of past purchase orders. When used for pricing new equipment, purchase order prices must be corrected to the current cost index.

53. Purchased Equipment Limited information on process equipment costs has also been published in various engineering journals. Costs for a large number of different types and capacities of equipment are presented in Chaps. 14 through 16. ( Peters and Timmerhaus ). It is often necessary to estimate the cost of a piece of equipment when no cost data are available for the particular size of operational capacity involved. Good results can be obtained by using the logarithmic relationship known as the six-tenths-factor rule, if the new piece of equipment is similar to one of another capacity for which cost data are available. Because of this, the 0.6 factor should only be used in the absence of other information.

54. Estimating Equipment Cost by Scaling The cost of most plant items varies with the equipment size in a non-linear manner: By taking logs, we can usually get a reasonably good correlation over a few orders of magnitude = X n => Cost of equipment A = Cost of equipment B × X . 6 The exponent n is 0.6 for many types of equipment, hence this is often known as the “ Six-tenths rule ”

55. Estimating Equipment Cost by Scaling n = cost-capacity factor to reflect economies of scale, actually, it is vary from 0.3 to 1.0 In general: 0< n <1 for single equipment 0.5< n <1 for whole plant The value of n traditionally taken as 0.6; the well known six-tenths factor rule. Predictions can be made using the six-tenths factor rule. Use only in the absence of other information. Do not use beyond 10-fold range of capacity.

56. Typical exponents in the six-tenths factor rule (n) Minimum Maximum

57. Investment Cost Per Unit Capacity

58. Estimating Equipment Cost by Scaling Figure 6.5 presents a log-log plot of capacity versus cost for shell and tube heat exchangers, the straight line with a slope =0.6

59. The purchased cost of a 0.2-m 3 glass-lined, jacketed reactor was $10,000 in 1991. Estimate the purchased cost of a similar 1.2-m 3 , glass-lined, jacketed reactor in 1996. Use the annual Chemical Engineering plant cost index to update the purchase cost of the reactor. Chemical Engineering plant cost index For 1991 361 For 1996 382 EXAMPLE 6-2

60. SOLUTION

61. Equipment Cost The cost factors for materials of construction

62. Materials Cost Factors, f M Express costs relative to plain carbon steel Carbon steel 1.0 Aluminum & bronze 1.07 Cast steel 1.1 304 stainless steel 1.3 316 stainless steel 1.3 321 stainless steel 1.5 Hastelloy C 1.55 Monel 1.65 Nickel & inconel 1.7

63. Correction factor for materials of construction, f M Note, the application of the factors from Tables 2.2 to 2.4 should only be applied to the equipment and pipework

64. Correction factor for design pressure, f P and temperature, f T Note, the application of the factors from Tables 2.5 to 2.6 should only be applied to the equipment and pipework Matches' Process Equipment Cost Estimates http://www.matche.com/equipcost/Default.html

65. The fixed-capital investment of a new process plant This method for study or order-of-magnitude estimates relates the fixed-capital investment of a new process plant to the fixed-capital investment of similar previously constructed plants by an exponential power ratio. This power has been found to average between 0.6 and 0.7 for many process facilities. Table 6-11 gives the capacity power factor (x) for various kinds of processing plants. C n is new fixed-capital investment C is the fixed-capital investment of the constructed facility f e is the cost index ratio at the time of cost C n to that at the time of C R is a ratio, defined as the capacity of the new facility divided by the capacity of the old, raised to a power X.

66. The fixed-capital investment of a new process plant A closer approximation for this relationship which involves the direct and indirect plant costs has been proposed as : The ratio R , defined as the capacity of the new facility divided by the capacity of the old, raised to a power X. f = a lumped cost index factor relative to the original facility cost, it is the product of a geographic labor cost index, area labor productivity index, and a material and equipment cost index. D = the direct cost for previously installed facility I = the indirect cost for previously installed facility

67. Location (geographic) Factors Capital Investment Location ( geographic ) Factors US Gulf Coast 1.00 US west Coast 1.25 Western Europe 1.20 Mexico 0.95 Japan 1.15 Pacific Rim 1.00 India 0.85

68. EXAMPLE 6-4: Estimating relative costs of construction labor as a function of geographical area If a given chemical process plant is erected near Dallas, Texas (Southwest area) with a construction labor cost of $100,000 what would be the construction labor cost of an identical plant if it were to be erected at the same time near Los Angeles (Pacific Coast Area) for the time when the factors given in Table 6.12 apply?

69. SOLUTION Relative median labor rate-Southwest 0.88 from Table 6.12 Relative median labor rate-Pacific Coast 1.22 from Table 6.12 Relative labor rate ratio = 1.22/0.88 = 1.3864 Relative productivity factor-Southwest 1.04 from Table 6.12 Relative productivity factor-Pacific Coast 0.89 from Table 6.12 Relative productivity factor ratio = 0.89/1.04 = 0.8558 Construction labor cost of Southwest to Pacific Coast = (1.3864)/(0.8558) = 1.620 Construction labor cost at Los Angeles = (1.620 × $100,000) = $162,000

70. EXAMPLE 6-5: Estimation of Fixed-Capital Investment with Power Factor Applied to Plant/Capacity Ratio If the process plant described in Example 6-1 was erected in the Dallas area for a fixed-capital investment of $436,000 in 1990, estimate the fixed-capital investment in 1998 for a similar process plant located near Los Angeles with twice the process capacity but with an equal number of process units. Use the power factor method to evaluate the new fixed-capital investment, and assume the factors given in Table 6-12 apply.

71. SOLUTION Marshall and Swift all-industry index (Table 6-2)

72. Make a preliminary estimate of the cost of building a 600-MW fossil fuel power plant. It is known that a 200-MW plant cost $100 million 20 years ago when the appropriate cost index was 400. That cost index is now 1,200. The power-sizing factor is 0.79. EXAMPLE: Estimating cost of plant using scaling factors and cost index

73. SOLUTION Today’s estimated cost of a 200-MW plant = C 200-MW = C B (I A /I B ) $100 million × (1,200/400) = $300 million Today’s estimated cost of a 600-MW plant = C 600-MW = C B (S A /S B ) n $300 million × (600/200) 0.79 = $714 million C A = C B (I A /I B ) (S A /S B ) n For equipment See example 6-2

74. Purchased-equipment Purchased-equipment prices are usually quoted as f.o.b. ( free on board , meaning that the purchaser pays the freight). Pre-design estimates delivery allowance: 10% of the purchased equipment cost is recommended. The cost of purchased equipment is the basis of several predesign methods for estimating capital investment. Types of Equipment: 1. Processing equipment 2. Raw materials handling and storage equipment 3. Finished-products handling and storage equipment.

75. Purchased-equipment Sizes and specifications determined from equipment parameters fixed or calculated along with the material and energy balances ( See Chapter 12 ). Most accurate method: obtain firm bids from fabricators and suppliers. Second best: cost values from the file of past purchase orders (must be corrected with the appropriate cost index ratio). Capital investment is the total amount of money needed to supply the necessary plant and manufacturing facilities plus the amount of money required as working capital for operation of the facilities. FCI = Fixed Capital Investment

76. Purchased-equipment Installation Involves costs for labor, foundations, supports, platforms, construction expenses, etc. There is wide variations of installation labor cost depending on equipment size. Labor & materials for installation 8-9% of Purchased-Equipment . This is equivalent to approximately 2 % of t otal c apital investment.

77. Instrumentation and Controls 8-50 % of the total delivered cost (taking 26%, this is about 5% of the total capital investment). It depends on the amount of control required and may amount to 6 to 30 percent of the purchased cost for all equipment. Piping Includes labor, valves, fitting, pipe, support, etc. Can run as high as 80% of the total delivered cost (about 20 % of the total fixed capital investment).

78. Electrical Systems & Buildings Electrical Systems 15-30% of the delivered purchased equipment cost (4-8 % of fixed capital investment). Buildings Buildings including services, consist of labor, materials and supplies. Plumbing, heating, ventilation are included.

79. Yard Improvements Fencing, grading, roads, sidewalks, railroad sidings, landscaping: 10-20% of the delivered purchased equipment cost (2-5 % of fixed capital investment) . Service Facilities Utilities for supplying steam, water, power, compressed air and fuel. Also includes shop, first aid, cafeteria...30-80% of the delivered purchased equipment cost (55% on average for plant handling solid/liquids). This is equivalent to 8-20 % - 14% average - of fixed capital investment)

80. Health, Safety, and environmental Functions See previous table. This is an increasingly important issue. Pollution mitigation is sometimes the driving force for new process development. Land Cost factor per acre as high as 30-50% between a rural district and highly industrialized area . Average land cost for industrial plants amount to 4-8% of the delivered purchased equipment cost (1-2 % of fixed capital investment). By law, land cost cannot be depreciated – not included in the fixed-capital investment. Engineering and Supervision Considered as an indirect capital; cost investment – approx. 30% of the delivered purchased equipment cost (8 % of fixed capital investment). Legal Expenses 1-3 % of fixed capital investment

81. Construction expenses Indirect cost associated to temporary construction , and operation, construction tools and rentals, home office personnel, construction payroll, travel and living, taxes and insurance, and other construction overhead. 8-10 % of fixed capital investment. Contractor’s Fee 2-8% of direct plant cost or 1.5-6% of fixed capital investment Contingencies Unexpected events and changes (storms, floods, strikes, etc.) 5-15 % of fixed capital investment (8 % average).

82. GROSS PROFIT, NET PROFIT, AND CASH FLOW Gross profit (also called gross earnings) = the product sales revenue - the total product cost. Gross profit is expressed both with and without depreciation included as follows: where g j is gross profit, depreciation not included, in year j s j is the total income c oj is the cost for operation (not including depreciation) where G j is gross profit, depreciation included, in year j d j is the depreciation charge

83. GROSS PROFIT, NET PROFIT, AND CASH FLOW Net profit (also called net earnings) = the amount retained of the profit after income taxes have been paid: The cash flow resulting from process operations is given by where N PJ is the net profit in year j where F is the fixed income tax rate N PJ is the net profit in year j

84. The annual variable production costs for a plant operating at 70 percent capacity are $280,000. The sum of the annual fixed charges, overhead costs, and general expenses is $200,000, and may be considered not to change with production rate. The total annual sales are $560,000, and the product sells for $4/kg. What is the breakeven point in kilograms of product per year? What are the gross annual profit G j (depreciation included) and net annual profit for this plant at 100 percent capacity if the income tax rate is 35 percent of gross profit? EXAMPLE 6-7: Breakeven Point, Gross and Net Profit for a Process Plant

85. SOLUTION The breakeven point occurs when the total annual product cost equals the total annual sales. The total annual product cost is the sum of the fixed charges (depreciation included), overhead, and general expenses, and the variable production costs. Total annual sales are the product of the number of kilograms of each product and corresponding selling price per kilogram. Thus,

86. SOLUTION

87. Summary Cost Components in Capital Investment Equipment costs may be obtained from equipment vendors or from published cost data. Care should be taken as to the basis of such cost data. Free On Board (FOB) means the manufacturer pays for loading charges onto a shipping truck, railcar, barge or ship, but not freight or unloading charges. To obtain a delivered cost requires typically 5 to 10% to be added to the FOB cost. The delivery cost depends on location of the equipment supplier, location of site to be delivered, size of the equipment, and so on. The cost of a specific item of equipment will be a function of: size materials of construction design pressure design temperature . The cost of the services (utilities and off-sites) ranges typically from 20 to 40% of the total installed cost of the battery limits plant

88. A typical list of fixed-capital investment items for a chemical process Summary Cost Components in Capital Investment Range, % Indirect costs Range, % Direct Costs 4-21 Engineering and supervision 1-2 Land 4-16 Construction expenses 2-5 Yard improvements 2-6 Contractor’s fee 3-18 Buildings (including services) 5-15 Contingency 15-40 Purchased equipment     6-14 Purchased-equipment installation     2-8 Instrumentation and controls (installed)     3-20 Piping (installed)     2-10 Electrical equipment and materials (installed)     8-20 Service facilities (installed)