Capital Cost Estimating for Chemical Engineers David Mody

Capital Cost Estimating for Chemical Engineers

David Mody

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Purpose Context of the Capital Cost Different Methods of Capital Cost

Estimating

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Economics Question: Why build a chemical

process?

Investment Decision: Chemical plant investment or Gov’t bond?

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Project Evaluation Does the revenue we generate warrant

the initial outlay of money?

Cash Flow Diagram

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Project Balance Sheet Summary Of The Economics

Capital Cost (fixed and working) Variable Costs

Raw Material Costs / lb of product By-Product Credits Utility Costs Labour Maintenance Depreciation

Fixed Costs

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Capital Cost Estimating Also Known as the “Initial

Cost” Can be a strong or weak

factor to the overall economics

Requires 2 parts engineering, 1 part hand waving

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The Total Estimate

•Equipment CostEquipment Cost

•bulk materials & labour to installbulk materials & labour to install

•off-sites (pipe racks, rail spurs …)off-sites (pipe racks, rail spurs …)

•engineering, freight, insurance, engineering, freight, insurance, overheadoverhead

•first fill of plant, taxes, dutiesfirst fill of plant, taxes, duties

•escalationescalation

TOTAL TOTAL PROJECTPROJECT

COSTCOST

•DIRECT FIELD COSTSDIRECT FIELD COSTS

•INDIRECT FIELD COSTSINDIRECT FIELD COSTS

•CONTINGENCY AND FEESCONTINGENCY AND FEES

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Types Of Estimates Educated Guess

Capacity Factor

Equipment Factored

Semi Detailed

Detailed

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£¢The Time Accuracy of Estimates

% Time vs Estimate Accuracy & % Completion

0102030405060708090100

0 20 40 60 80 100

Time (% of total schedule)

Est

imat

e A

ccu

racy

0102030405060708090

100

% W

ork

Co

mp

lete

d

Construction Begins

Project Completion

Equ

ipm

ent

Fac

tore

d

Cap

acity

Fac

tore

d

Sem

i Det

aile

d

Det

aile

d

Work Completed

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£¢Capacity Factored Estimates The Capacity factor estimate has two reqt’s:

1) The Plant you intend to build has a sister plant, at a different capacity, and

2) The sister plant was built at another time and thus inflation must be dealt with.

Part 1) The 6/10th’s rule - corrects capacity

Cost of New Plant =Capacity of New Plant

Capacity of Similar Plant

0.6 Cost of Similar Plant

X

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Capacity Factor The exponent (0.6)

Product Process Route ExponentEthylene Refinery Gases 0.85Acetaldehyde Ethylene 0.70Ammonia Steam Reforming 0.70Phosphoric Acid Calcium Phosphate/H2SO4 0.60Methanol CO2, nat gas and steam 0.60Formaldehyde Methanol 0.55

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£¢Capacity Factor - Cost Indices Part 2) Correct for Inflation

Use compound interest laws (1 + 4%)years

Chemical Engineering Plant Cost Index Located in the back of the McGraw Hill magazine

“chemical Engineering” Ratio cost index values

Marshall and Swift Index Indices are dangerous to use beyond a 5 year

window changes in technology, enviro req.'s etc.

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£¢Capacity Factor - Cost Indices Chemical Engineering Magazine

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Capacity Factor A plant was built in 1995 with a capacity of 10

million lb/hr at a cost of $20 million. We would like to build a similar process in 2002, but with a capacity of 17.5 million lb/hr. What would the cost be?

Cost in 1995 dollars = (17.5/10)0.6 * $20 million = $28.0 million

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Capacity Factor Correct for Inflation

The CECPCI for 1995 was 381.1, The CECPCI for July of 2001 is 395.3 and for the year 2000 394.1. We judge the CECPCI for 2002 to be 398.

Therefore the cost to build the plant in 2002 is: Cost in 2002 dollars = $28.0 million *

(398/381.1) = $29.2 million

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Capacity Factor Other Factors can be brought into the

equation such as: location factors weather

Where Technology, Environmental Regulations or Safety Aspects have changed the process this estimate may not be very accurate.

Test the sensitivity of the overall economics to Capital Cost

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£¢Equipment Factored Estimates Types

Lang Factor Equipment Factored, equipment costs

estimated (parametric equations) Equipment Factored, with major

equipment quotes

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Total Capital Cost = Flang * (Sum Of Purchased Cost of Equipment)

Equipment Factored Estimates

Plant Type Lang FactorFluid Processing Plant 4.74, usually rounded to 5.0Solid-Fluid Processing Plant 3.63Solid Processing Plant 3.10

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£¢Equipment Factored Estimates• DIRECT FIELD COSTS (50%)

• INDIRECT FIELD COSTS (32 %)

• CONTINGENCY AND FEES (15% + 3%)

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£¢Equipment Factored Estimates Direct costs - everything associated with

the equipment and it's physical installation. Equipment itself Labour to mount and install the equipment Piping, instrumentation around the

equipment Concrete and steelwork required to hold the

equipment in place Electrical equipment required to run the

equipment.

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£¢Equipment Factored Estimates InDirect costs

Freight, insurance and taxes for the equipment construction period

Construction overhead - vacation, sick leave, workman's compensation etc.for the labour personal an all costs associated with construction supervisory personnel

All engineering costs

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£¢Equipment Factored Estimates Contingency - a factor to cover

unforeseen circumstances. loss of time due to storms strikes small changes in design, and unpredictable price increases.

Fee

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£¢Equipment Factored Estimates• DIRECT FIELD COSTS (50%)

• Equipment (20%)

• Field Labour & Material to install equip. (30%)

• INDIRECT FIELD COSTS (32 %)

• CONTINGENCY AND FEES (15% + 3%)

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£¢Equipment Factored Estimates Further refinement of the direct field

costs has shown that each type of equipment (pump, column, exchanger) has a it’s own factor to obtain direct field cost.

Tanks and Vessels Columns and Trays Pumps and Compressors Exchangers Heaters

Direct Field Cost

x x

FactorsFactors=

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EQUIPMENTFACTOR

INSTALLEDCOST

PURCHASE COST

Equipment Factored Estimates

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Cost $9850Cost $9850 Installed Cost $36,500Installed Cost $36,500

Equipment Factored Estimates

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Equipment Factors

Shop Fab. Vessels Compressors Exchangers Fired Heaters Pumps Material Handling

Equipment

2.0 - 2.51.5 - 2.51.7 - 2.51.7 - 2.52.5 - 3.51.5 - 3.0

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Total Plant CostTotal Plant Cost = (Direct Field Cost + Stuff) x

Factors

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£¢“Off Sites”

Rail Spurs

Office Bldg

Pipe Racks

Cooling Tower

Rail Car Loading

Steam Boilers

Fire Water Sys

Nitrogen Plant

InsideBattery Limits

38

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Direct Field Cost (DFC)Direct Field Labour (DFL)

Allowances

Indirect Field Cost (IFC)

Home Office Engineering

Total Project Cost (ITC)

0.25 x DFC

1.0 to 1.6 x DFL

0.2

5 x

D

FC

Equipment PurchasePrice X

Equipment Factor

“Off Sites” Cost

1.18 x

Equipment Factored Estimates

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Example A project is composed of the following

equipment: 5 pumps priced at $8000 each 2 distillation columns priced at $30,000

each 2 sets of distillation column trays at

$20,000 each 6 heat exchangers at $15,000 each What is the final project cost?

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ExampleQty Cost per Purchase Cost DFC

factorDFC

5 $8000 $ 40,000.00 2.5 $ 100,000.002 $30000 $ 60,000.00 3.2 $ 192,000.002 $20000 $ 40,000.00 1 $ 40,000.006 $15000 $ 90,000.00 2.5 $ 225,000.00

$ 230,000.00 $ 557,000.00

Lang Factor 4.74 DFL $ 139,250.00 Project Cost $1,090,200.00 IFC $ 194,950.00

Eng $ 139,250.00

Subtotal $1,030,450.00Allowance $ 185,481.00

TotalProject

Cost

$1,215,931.00

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£¢Equipment Factored Estimates Understanding What’s NOT included in

the Factors is Critical! Suffers from poor accuracy if equipment

is missing

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Heat & Material Balance (simulation) Preliminary Equipment Sizing Materials Selection Equipment List 1st Draft P&ID’s - recommended Process Hazards Analysis - recommended

Factored EstimateEngineering Deliverables

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Equipment Costing Three Methods

Vendor Quotes Recent purchases Graphs

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Equipment Costing Graphical Methods

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£¢Equipment Costing

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Detailed Estimates Equipment factored estimates are plagued

by missing equipment due to inadequate design, industry averages, and historical numbers.

Detailed Estimates Require Cost and Quantity of

Concrete, wire, instruments, structural steel etc. etc.

Require extensive engineering effort

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£¢Capital Costs - Working Capital Usually costs that are not lost forever

(i.e. the first fill of chemicals, solvents) when the plant is shut down

Typically: 1 month of raw materials inventory 2 to 3 months of product inventory

Usually 10 to 20 % of fixed capital

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Types Of Estimates Educated Guess

Capacity Factor cost=capacity ratio0.6

Equipment Factored Lang Factor

Individual Equipment factors

Semi Detailed

Detailed

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Kingston

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Evaluation

Cash Flow Diagram

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Operating Cost Estimates Yearly Cash flow has two components

revenue - from sales expenses - from operations

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Fixed Capital 3,578$ thousands

Production Rate 50,000 ton/yr

$ thousands/yr $/ton

% of Gross Sales

Gross Sales 30,000.00$ 600 100%

Expenses1 Raw Materials 21,222.00$ 424.4 70.7%2 Utilities 588.60$ 11.8 2.0%3 Operating Labour 98.00$ 2.0 0.3%4 Indirect Labour 14.70$ 0.3 0.0%5 Maintenance 214.68$ 4.3 0.7%6 Supplies 32.20$ 0.6 0.1%7 Laboratory 19.60$ 0.4 0.1%8 Patents 836.51$ 16.7 2.8%9 Overhead 196.43$ 3.9 0.7%

10 Admin Cost 49.11$ 1.0 0.2%11 Local Taxes 71.56$ 1.4 0.2%12 Distribution and Selling 2,788.38$ 55.8 9.3%13 R&D 1,394.19$ 27.9 4.6%14 Depreciation 10% 357.80$ 7.2 1.2%

Total Expenses 27,883.75$ 557.7 92.9%Net Annual Profit 2,116.25$

Income Taxes 634.87$ 30%After Tax Profit 1,481.37$

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NPV and IRR AnalysisFixed Capital $3,578.0

Working Capital $7,015.0year Operating Factor Yearly Cash Flow

0 0% -$1,1931 0% -$2,3852 70% -$5,5343 80% $1,6934 90% $1,9055 100% $2,1166 100% $2,1167 100% $2,1168 100% $2,1169 100% $2,116

10 100% $2,11611 90% $8,920

MARR NPV10% $3,690.8515% $1,084.6925% -$1,336.78

IRR : 18.3%

Raw Material CostsVariation from Base Raw Material Costs

-20% $16,977.600% $21,222.00

20% $25,466.40

IRR Payback Period NPV @25%69.3 2 9,066.00$ 18.3 3 1,337.00-$

0 infinite 11,740.54-$

Scenarios:

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Risk Analysis Test a range of values and determine the

range of Outputs (Tornado Plots) Develop 3 scenarios

“dismal decades” “best guess” “midsummer nights dream”

Combine the relevant parameters Determine an IRR and NPV under these

conditions. If they still exceed minimum requirements the project is acceptable.

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Risk Analysis Monte Carlo

A more sophisticated method that attempts to predict statistically the probability of a range of IRRs or NPVs.

requires not only the range of values but also an idea of the probability of these values occurring.

For instance if we think our initial cost will be $10MM and it’s likely to be +/- 10% but unlikely to be more than +/- 50%.

Probability

-50% -10% +10% +50%

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Risk Analysis There are functions built into Excel to

generate a gaussian distributed value based on random value NORMINV(probability,mean,standard_dev)

Commercial Software for Monte Carlo Calculations Refer to programs such as @risk and

Crystal Ball http://www.palisade.com/html/risk.html http://www.decisioneering.com/crystal_ball/

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Summary Whew… it’s been a long one By now we should have

A way of determining a rough capital cost

An analysis of the whole Sheebang

So Long….