8.1 CHAPTER VIII ECONOMIC ANALYSIS 8.0 INTRODUCTION Economic analysis is a continuation of market analysis which had been done in design project one. Economic analysis is a process done to determine whether the plant will give profit or loss to the company by analyzing the strengths and weaknesses of the economy. 8.1 CAPITAL COST ESTIMATION Capital costs are the total cost needed to build a plant. Capital cost are fixed and it is not depends on the level of output. The cost other than the purchased cost of equipment must take into consideration in order to calculate the capital cost. Table 8.1 show the factors that affecting the cost associated with evaluation of capital cost of chemical plants. Estimation of capital cost can be classified into three types according to their accuracy and purpose:
Transcript
8.1
CHAPTER VIII
ECONOMIC ANALYSIS
8.0 INTRODUCTION Economic analysis is a continuation of market analysis which had been done in design
project one. Economic analysis is a process done to determine whether the plant will
give profit or loss to the company by analyzing the strengths and weaknesses of the
economy.
8.1 CAPITAL COST ESTIMATION
Capital costs are the total cost needed to build a plant. Capital cost are fixed and it is
not depends on the level of output. The cost other than the purchased cost of
equipment must take into consideration in order to calculate the capital cost. Table 8.1
show the factors that affecting the cost associated with evaluation of capital cost of
chemical plants.
Estimation of capital cost can be classified into three types according to their accuracy
and purpose:
8.2
Table 8.1: Factors affecting the cost associated with evaluation of capital cost of chemical plants Factor Associated With The
Installation Of Equipment Symbol Comments
1. Direct project expenses
(a) Equipment f.o.b. cost
(f.o.b.= free on board)
퐶 Purchased cost of equipment at manufacturer's site
(b) Material required for
Installation
퐶 Includes all piping, insulation and fireproofing, foundation and structural support,
instrumentation and electrical, and painting associated with equipment
(c) Labor to install equipment
and material
퐶 Includes all labor associated with installing the equipment and material mentioned in
(a) and (b)
2. Indirect project expenses
(a) Freight, insurance and taxes 퐶 Includes all transportation cost for shipping equipment and materials to the plant
site, all insurance on the items shipped, and any purchase taxes that may be
applicable
(b) Construction overhead 퐶 Includes all fringe benefit such as vacation, sick leave retirement benefit, etc.; and
salaries and overhead for supervisory personnel
(c) contractor engineering
expenses
퐶 Includes salaries and overhead for the engineering, drafting, and project
management personnel on the project
3. Contingency and fee
8.3
(a) Contingency 퐶 A factor to cover unforeseen circumstances. These may include loss of time due to
storms and strikes, small changes in the design, and unpredicted price increases.
(b) Contractor fee 퐶 This fee varies depending on the type of plant and a verity of other factors
4. Auxiliary facilities
(a) Site development 퐶 Includes the purchase of land, grading and excavation of the site; installation and
hook-up of electrical, water and sewer systems; and construction of all internal
roads, walkways, and parking lots
(b) Auxiliary buildings 퐶 Includes administration offices, maintenance shop and control rooms, warehouses,
and service buildings (e.g., cafeteria, dressing rooms, and medical facility)
(c) Off-sites and utilities 퐶
Includes raw material and final product storage; raw material and final product
loading and unloading facilities; all equipment necessary to supply required process
utilities (e.g., cooling water, steam generation, fuel distribution systems, etc.); central
environmental control facilities (e.g., waste water treatment, incinerators, flares,
etc.); and fire protection systems
(Source:Turton,2003)
8.4
Preliminary ( approximate) estimates
Authorization (budgeting) estimates
Detailed ( quotation) estimates
There are a few techniques in estimating the cost of a new chemical plant. There are:
1. Lang factor technique
Lang factor technique is a simple technique to estimate the capital cost. The
total cost is calculated by multiplying the total purchased cost for all major items of
equipment by a constant, which is called the Lang Factor. Values for Lang Factors,
FLang are given in Table 8.2 below.
Table 8.2: Lang Factors for the Lang factor technique Type of chemical plant Lang Factor= FLang
Distillation Column DC (T-100) Carbon steel 10,253,895.70 7,753,898.47
DC(T-101) Carbon steel 9,409,710.45 7,115,533.83
Waste treatment Cast steel 62,523.44 82,379.03
Totals 32,847,222.38 24,875,157
8.1.3 Grass roots and total module cost
According to Turton et al, (2003), the term grass roots refers to a completely new facility
in which we start the construction on essentially undeveloped land, a grass field. The
term total module cost refers to the cost of making small to moderate expansions or
alterations to an existing facility. It is necessary to account for other costs in addition to
the direct and indirect costs (item 1 and 2 respectively) which are equivalent to bare
module cost costs to estimate these costs. These additional costs are contingency and
fee costs as well as auxiliary facilities costs as shown in Table 8.1 (item 3 and 4
respectively).
8.18
The total module cost can be evaluated from the following formula
퐶 = ∑ 퐶 , = 1.18∑ 퐶 , (8.9)
and the grass roots cost can be evaluated from
퐶 = 퐶 + 0.5∑ 퐶 (8.10)
Where n is represents the total number of pieces of equipments. Inserting the values
into the equations above equations gives the following
퐶 = 1.18 퐶 ,
= 1.18푥(32,847,222,38)
= 푅푀38,759,722.41
퐶 = 퐶 + 0.5 퐶
= 38,759,722.41 + 0.5푥(24,875,157.00)
= 푅푀51,197,300.91
8.2 ESTIMATION OF MANUFACTURING COSTS The cost associated with the day-to-day operation of a chemical plant must be
estimated before economic feasibility of a proposed process can be assessed. There
are many elements that influence the manufacturing cost. A list of important costs
involved, including a brief explanation of each cost, is given in Table 8.11. The cost
information provided in the table is divided into three categories.
8.19
Table 8.11: Factors affecting the cost of manufacturing(COM)
FACTOR DESCRIPTION OF FACTOR
1. Direct costs Factor that vary with the rate of production
A. Raw materials (CRM)
Cost of chemical feed stocks required by the process.
Flow rates obtained from the PFD
B. Waste treatment (CWT)
Costs of waste treatment to protect environment
C. Utilities (CUT) Costs of utility streams required by process. Includes
but not limited to
a. Fuel gas, oil, and/ or coal b. Electric power c. Steam (all pressures) d. Cooling water e. Process water f. Boiler feed water g. Instrument air h. Inert gas (nitrogen) etc. i. Refrigeration Flow rates for utilities found on the PFD/PIDs
D. Operating labor (COL)
Costs of personnel required for plant operations
E. Direct supervisory and clerical labor
Cost of administrative/ engineering and support
personnel.
F. Maintenance and repairs
Costs of labor and material associated with the
maintenance
G. Operating supplies Costs of miscellaneous supplies that support daily
operation not considered to be raw materials. Example
include chart paper, lubricants, miscellaneous
chemical, filters, respirators and protective clothing for
operators, etc.
H. laboratory charges Costs of routine and special laboratory test required for
product quality control and troubleshooting.
I. Patents and royalties
Cost of using patented or licensed technology.
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2. Fixed cost Factors not affected by the level of production
A. Depreciation Costs of associated with physical plant (buildings,
equipment, etc.). Legal operating expense for tax
purposes.
B. Local taxes and insurance
Costs associated with property taxes and liability
insurance. Based on plant location and severity of the
process.
C. Plant overhead cost (sometimes referred to as factory expenses)
Catch-all costs associated with operations of auxiliary
facilities supporting the manufacturing process. Costs
involve payroll and accounting services, fire protection
and safety services, medical services, cafeteria and
any recreation facilities, payroll overhead and
employee benefits, general engineering, etc.
3. General expenses Costs associated with management level and
administrative activities not directly related to the
manufacturing process
A. Administration costs
Costs of administration. Includes salaries, other
administration, buildings, and other related activities.
B. Distribution and selling costs
Costs of sales and marketing required to sell chemical
products. Includes salaries and other miscellaneous
costs.
C. Research and development
Costs of research activities related to the process and
product. Includes salaries and funds to research-
related equipment and supplies, etc.
(Source : Turton)
I) Direct manufacturing cost
These costs represent operating expenses that vary with production rate. When product
demand drops, production rate is reduced below the design capacity. At this lower rate,
we would expect a reduction in the factors making up the direct manufacturing costs.
These reductions may be directly proportional to the production rate, for example, raw
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material, or might be reduced slightly, for example, maintenance costs or operating
labor.
II) Fixed manufacturing cost
These are independent of changes in production rate. They include property taxes,
insurance, and depreciation, which are changed at constant rates even when the plant
is not in operation.
III) General expenses
These costs represent an overhead burden that is necessary to carry out business
functions. They include management, sales, financing, and research functions. General
expenses seldom vary with production level. However, items such as research and
development and distribution and selling cost may decrease if extended periods of low
production levels occur.
The cost of manufacturing, COM can be estimated when the following costs are known.
I) Fixed capital investment, (FCI):(CGR)
II) Cost of operating labor (COL)
III) Cost of raw material (CRM)
IV) Cost of utilities (CUT)
V) Cost of waste treatment (CWT)
8.2.1 Estimation of Operating Labour Cost
The technique used to estimate operating labor requirements is based on data obtained
from five chemical companies and correlated by Alkayat and Gerrard. According to this
method, the operating labor requirement for chemical processing plants is given by
푁 = 6.29 + 31.7푃 + 0.23푁.
(8.11)
8.22
where 푁 is the number of operators per shift, 푃 is the number of processing steps
involving the handling of particulate solids, for example, transportation and distribution,
particulate size control, and particulate removal. 푁 is the number of nonparticulate
processing steps handling and includes compression, heating and cooling, mixing and
reaction. In general, value of 푃 is zero and the value of 푁 is given by
푁 = ∑퐸푞푢푖푝푚푒푛푡 (8.12)
Where the equipment is refers to compressors, towers, reactors, heaters/furnace and
exchangers. The value of 푁 is the number of operators required to run the process
unit per shift. A single operator works on the average 49 weeks (3 weeks off for
vacation and sick leave) a year, five 8-hour shifts a week. This amounts leads to
49푤푒푒푘푠푦푒푎푟 푥
5푠ℎ푖푓푡푤푒푒푘. 표푝푒푟푎푡표푟 =
245푠ℎ푖푓푡푠푦푒푎푟.표푝푒푟푎푡표푟
A chemical plant normally operates 24 hours/day and this requires
365푑푎푦푠푦푒푎푟
푥3푠ℎ푖푓푡푠푑푎푦
=1095푠ℎ푖푓푡푠
푦푒푎푟
The number of operators needed to provide this number of shifts is
1095푠ℎ푖푓푡푠
푦푒푎푟푥푦푒푎푟.표푝푒푟푎푡표푟
245푠ℎ푖푓푡푠= 4.5표푝푒푟푎푡표푟푠
Using Equation 8.11 and information in Table 8.12;
푁 = 6.29 + 31.7푃 + 0.23푁.
= [6.29 + 0 + 0.23푥7] .
= 2.81
8.23
Table 8.12: Results for the estimation of operating labor
Equipment type Number of Equipment 푁
1) Compressors 1 1
2) Exchangers 1 1
3) Heaters 3 3
4) Reactors 2 2
5) Vessels 3 -
TOTAL 7
Note : Pumps and Vessels are not counted in evaluating 푁 .
From calculation above, the number of operators required per shift is 2.81. So,
Operating labor = 4.5푥2.81 = 12.65 (rounding up to the nearest integer yields 13
operators)
To estimate the cost of operating labor, the hourly wage of an operator is required.
Chemical plant operators are relatively highly paid. The hourly rate for miscellaneous
plant and operators is RM20 (Department of Human Resource). Therefore
8ℎ표푢푟푠푑푎푦
푥푅푀20퐻표푢푟푠
푥344푑푎푦푦푒푎푟
= 푅푀55,040
퐿푎푏표푢푟푐표푠푡푖푠 = 13푥푅푀55,040
=푅푀715,520
푦푒푎푟(푓표푟2001)
∴ 퐶표푠푡푓표푟2010 = 715,520푥525397
= 푅푀946,216.62
8.2.2 Cost of Raw Material The production of 1-Propanol is to reach 100,000 metric tonne per year. The costs of
raw material needed for this production rate are shown in Table 8.13 below. From Table
8.13, the total raw material cost is RM 19,596,816.43.
8.24
Table 8.13: Raw Material Cost
Raw Materials Amount (kg/hr) Cost (RM/kg) RM/hr(x1000)
Ethylene 6805 1.50 10,207.50
Hydrogen 3338 1.00 3338
Carbon monoxide 30565 1.50 10,188.33
Catalyst 48157.2 455 21,911,526
Total 19,596,816.43
(Source : www.titangroup.com,www.mox.cokayom.my)
8.2.3 Cost of Utilities This term includes steam (high pressure, medium pressure, low pressure), cooling and
process water, electricity, boiler feed water and effluent treatment.
Table 8.14: Cost of utilities
Utilities Price (RM/unit) Amount RM/year
Steam 1.00/kg 26.32 kg/h 217,197.92
Cooling water 0.05/kg 341.85kg/hr 141,115.68
Electricity 0.087/kWh 53kWh 38,068.42
Total 394,382.02
(Source: Encyclopedia of Chemical Processing and Design)
8.2.4 Cost of Waste Treatment
The cost of waste treatment is calculated and concluded in Table 8.15 below.
Table 8.15: Waste treatment Cost
Item Price (RM/unit) Amount RM/year
Waste 2.42/m3 0.14 m3/h 2,742.02
Total 2,742.02
(Source: Fogler)
8.25
8.2.5 Calculation of Manufacturing Cost
The cost of manufacturing with and without depreciation can be obtained using the
formulae given by Turton, (2003)
퐶푂푀 = 0.280퐹퐶퐼 + 2.73퐶 + 1.23(퐶 + 퐶 + 퐶 ) (8.13)
and
퐶푂푀 = 0.180퐹퐶퐼 + 2.73퐶 + 1.23(퐶 + 퐶 + 퐶 ) (8.14)
where COM and COMd are cost of manufacturing with and without depreciation
respectively. Other symbols are the same as encountered before. Using the value of
fixed capital investment (FCI which is equivalent to CGR) estimated in section 8.2.2, the
production cost for 1-propanol can be calculated as follows
The price for 1 kg n-propanol is RM4.40 (Matrade). So, the total revenue for production
of 95,836,944kg of n-propanol and carbon monoxide and propanal are RM
567,405,823.50 as shown in Table 8.16.
Table 8.16: Total revenue
Selling Item Selling Price (RM/Kg) Production Rate (kg/ hr) Income (RM/year) n-Propanol 4.40 11642.00 422,911,948.80 CO 1.30 39.36 410,162.69 Propanal 2.50 6980.80 144,083,712 Total (RM/yr) 18662.16 567,405,823.50
(Source:Matrade)
8.4 PROFITABILITY ANALYSIS According to Turton (2003), in the economic analysis of a project, it is assumed that any
new land purchases required are done at the start of the project, that is, at time zero.
After the decision has been made to build a new chemical plant, the construction phase
of the projects starts. Depending on the size and scope of the project, this construction
may take anywhere from six months to three years to complete.
8.27
In this plant, it is assumed that it takes a typical value of two years for time from project
initiation to the start-up of the plant. Over the two-year construction phase, there is a
major capital outlay. This represents the fixed capital investment for purchasing and
installing the equipment and auxiliary facilities required to run the plant. The distribution
of this fixed capital investment is usually larger towards the beginning of construction.
At the end of second year, construction has finished and the plant is started up. At this
point, the additional expenditure for working capital is required to float the first few
months of operations. This is a one-time expense at the start-up of the plant and will be
recovered at the end of the project.
After start-up, the process begins to generate finished products for sale, and yearly
cash flows become positive. The cash flows for early years of operation are larger than
those for later years due to the effect of depreciation. The time for depreciation used in
this plant is six years. The method of depreciation used is based on Modified
Accelerated Cost Recovery System (MACRS). Under this method, all equipment is
assigned a class life, which is the period over which the depreciable portion of the
investment may be discounted. Most equipment in a chemical plant has a class life of
9.5 years. The MACRS method uses a double declining balance method and switches
to a straight line method when straight line method yields a greater depreciation
allowance for the year. The Table 8.17 is the depreciation allowance using MACRS
method.
In order to evaluate the profitability of a project, a life of a project must be assumed.
This is not the working life of the equipment nor is it the time over which depreciation is
allowed. It is a specific length over which the profitability of different projects is to be
compared. Lives of 10, 12 and 15 years are commonly used for this purpose. In this
plant, a project life of 10 years is assumed.
8.28
Table 8.17: Depreciation schedule for MACRS method for equipment with a 9.5 year
class life
Year Depreciation allowance (% of capital investment)
1 20.00
2 32.00
3 19.20
4 11.52
5 11.52
6 5.76
(Source: Analysis, Synthesis and Design of Chemical Process, 2003)
8.4.1 Estimation of Land Cost The non-discounted techniques do not take into account the time value of money and
are not recommended for evaluating new large projects. Figure 9.6 below shows the
graph of cumulative cash flow for non-discounted after tax cash flow based on
information in Table 9.19. The taxation rate, t used is 45% since the rate is often in the
range of 40% to 50% according to Turton, (2003).
8.4.2 Nondiscounted After-Tax Cash Flow Cost of land: RM 129.17 – RM 139.93 per meter square Wide of land required: 121,532 m2 according to Dairen Chemical Company in Johor Total cost of land: RM 139.93 x 121532 m2= RM 17,005,972.76.
8.29
8.4.3 Discounted After-Tax Cash Flow
For discounted criteria, we discount each of the yearly cash flows back to time zero.
The following tables show the discounted cash flow from 10% to 16% p.a. All the value
iv) Discounted Cash Flow Rate of Return The discounted cash flow rate of return (DCFROR) is defined to be the interest rate at
which all the cash flows must be discounted in order for net present value or net
present worth of the project to be equal to zero. Therefore, the DCFROR represents the
highest, after-tax interest or discount rate at which the project can just break even. It is
worth noting that for evaluation of the discounted cash flow rate of return, no interest
8.37
rate is required since this is what is calculated. If the value of DCFROR is greater than
internal discount rate, then the project is considered to be profitable.
The net present values for several discount rates which have previously been
calculated (Table 8.18 to Table 8.22) are summarized in the following Table 8.23.
Table 8.23: NPV as a function of discount rates ( values in $million)
Interest or Discount Rate Net present worth
7% 30.32
8% 21.82
9% 14.36
10% 7.84
12% -2.93
The value of DCFROR can be calculated by interpolating from the table above.
(퐷퐶퐹푅푂푅 − 10%)(12%− 10%) =
(0 − 7.84x10 )(−2.93x10 − 7.84x10 )
∴ 퐷퐶퐹푅푂푅 = 11.46%
Clearly, the DCFROR is greater than internal discount rate (11.46% p.a). Therefore, the
project is considered to be profitable.
8.5 CONCLUSION Table 8.26 summarizes the costs and profitability criteria for this plant. The fixed capital
investment for this plant is around RM51 million and the cost of manufacturing with and
without depreciation are RM41million and RM36 million respectively. The breakeven
point is achieved when the plant produces 6000 metric tonnes per year of 1-propanol
8.38
which is well below the planned production of 100000 metric tonnes per year. By
considering a discount rate of 10% per annum, the payback period is 5.5 years after
start-up or 7.5 years after the beginning of the constructions. The net present worth or
net present value is found to be RM50.86 million) and the present value ratio is 1.08.
The discounted cash flow rate of return for the plant is computed to be 11.46% which
gives the net present value of zero. Based on these criteria, it can be concluded that the
proposed 1-propanol plant is profitable.
Table 8.24: Summary of economic analysis
Items Data/Value
Grass root cost, CGR or Fixed capital investment, FCI RM51*
Cost of manufacturing with depreciation, COM RM41*
Cost of manufacturing without depreciation, COMd RM36*
Depreciation method MACRS
Variable cost, VC RM26*
Fixed cost, FC RM9.27*
Project life after start-up 17 years
Payback period 5.5 years after start-up
Net present value at 8% discount rate (NPV) RM6.16*
Present value ratio (PVR) 1.08
Discounted cash flow rate of return (DCFROR) 8.99%
Salvage value RM1*
.Note*: in million
8.39
8.6 REFERENCES 1) Turton et al, 2003, Analysis, Synthesis, and Design of Chemical Processes, Prentice Hall International Series. 2) Peters. Max S. and Timmerhaus, Klaus D. (1991). “Plant Design and Economics for Chemical Engineers.” 4th Edition. Singapore: McGraw-Hill Book Company. 3) Ulrich, G. D. (1984). “A Guide to Chemical Engineering Process Design and Economics.” Toronto : John Wiley & Sons. 4) Perry, R.H. and Green, D.W. (1997). “Perry’s Chemical Engineering Handbook.” 7th ed. USA: McGraw-Hill, Inc 5) Sinnott, R.K. (1983). “Chemical Engineering Volume 6.” 1st ed. Great Britain: Pergamon Press.
6) Mark, H.F., Othmer, D.F., Overberger, C.G. and Searborg, G.T. (1963). “Kirk-Othmer: Encyclopedia of Chemical Technology Volume 1.” 3rd ed. USA: Interscience Publisher. 414-424.
