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Capital Cost Estimating for Chemical Engineers David Mody

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Capital Cost Estimating for Chemical Engineers David Mody Slide 2 $ Purpose Context of the Capital Cost Different Methods of Capital Cost Estimating Slide 3 $ Economics Question: Why build a chemical process? Investment Decision: Chemical plant investment or Govt bond? Slide 4 $ Project Evaluation Does the revenue we generate warrant the initial outlay of money? Slide 5 $ 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 Slide 6 $ 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 Slide 7 $ 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, overheadengineering, freight, insurance, overhead first fill of plant, taxes, dutiesfirst fill of plant, taxes, duties escalationescalation TOTAL PROJECT COST DIRECT FIELD COSTSDIRECT FIELD COSTS INDIRECT FIELD COSTSINDIRECT FIELD COSTS CONTINGENCY AND FEESCONTINGENCY AND FEES Slide 8 $ Types Of Estimates Educated Guess Capacity Factor Equipment Factored Semi Detailed Detailed Slide 9 $ The Time Accuracy of Estimates % Time vs Estimate Accuracy & % Completion 0 10 20 30 40 50 60 70 80 90 100 020406080100 Time (% of total schedule) Estimate Accuracy 0 10 20 30 40 50 60 70 80 90 100 % Work Completed Construction Begins Project Completion Equipment Factored Capacity Factored Semi Detailed Detailed Work Completed Slide 10 $ Capacity Factored Estimates The Capacity factor estimate has two reqts: 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 6/10ths rule - corrects capacity Cost of New Plant = Capacity of New Plant Capacity of Similar Plant 0.6 Cost of Similar Plant X Slide 11 $ Capacity Factor The exponent (0.6) Slide 12 $ 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. Slide 13 $ Capacity Factor - Cost Indices Chemical Engineering Magazine Slide 14 $ 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 Slide 15 $ 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 Slide 16 $ 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 Slide 17 $ Equipment Factored Estimates Types Lang Factor Equipment Factored, equipment costs estimated (parametric equations) Equipment Factored, with major equipment quotes Slide 18 $ Total Capital Cost =F lang * (Sum Of Purchased Cost of Equipment) Equipment Factored Estimates Slide 19 $ Equipment Factored Estimates DIRECT FIELD COSTS (50%) INDIRECT FIELD COSTS (32 %) CONTINGENCY AND FEES (15% + 3%) Slide 20 $ 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. Slide 21 $ 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 Slide 22 $ 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 Slide 23 $ 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%) Slide 24 $ Equipment Factored Estimates Further refinement of the direct field costs has shown that each type of equipment (pump, column, exchanger) has a its own factor to obtain direct field cost. Tanks and Vessels Columns and Trays Pumps and Compressors Exchangers Heaters Direct Field CostxFactors = Slide 25 $ EQUIPMENT FACTOR INSTALLED COST PURCHASE COST Equipment Factored Estimates Slide 26 $ Cost $9850 Installed Cost $36,500 Equipment Factored Estimates Slide 27 $ Equipment Factors Shop Fab. Vessels Compressors Exchangers Fired Heaters Pumps Material Handling Equipment 2.0 - 2.5 1.5 - 2.5 1.7 - 2.5 2.5 - 3.5 1.5 - 3.0 Slide 28 $ Total Plant Cost Total Plant Cost = (Direct Field Cost + Stuff) x Factors Slide 29 $ Off Sites Rail Spurs Office Bldg Pipe Racks Cooling Tower Rail Car Loading Steam Boilers Fire Water Sys Nitrogen Plant Inside Battery Limits 38 Slide 30 $ 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 0.25 x DFC Equipment Purchase Price X Equipment Factor Off Sites Cost 1.18 x Equipment Factored Estimates Slide 31 $ 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? Slide 32 $ Example Slide 33 $ Equipment Factored Estimates Understanding Whats NOT included in the Factors is Critical! Suffers from poor accuracy if equipment is missing Slide 34 $ Heat & Material Balance (simulation) Preliminary Equipment Sizing Materials Selection Equipment List 1st Draft P&IDs - recommended Process Hazards Analysis - recommended Factored Estimate Engineering Deliverables Slide 35 $ Equipment Costing Three Methods Vendor Quotes Recent purchases Graphs Slide 36 $ Equipment Costing Graphical Methods Slide 37 $ Equipment Costing Slide 38 $ 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 Slide 39 $ 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 Slide 40 $ Types Of Estimates Educated Guess Capacity Factor cost=capacity ratio 0.6 Equipment Factored Lang Factor Individual Equipment factors Semi Detailed Detailed Slide 41 $ Kingston Slide 42 $ Evaluation Slide 43 $ Operating Cost Estimates Yearly Cash flow has two components revenue - from sales expenses - from operations Slide 44 $ Slide 45 $ NPV and IRR Analysis Scenarios: Slide 46 $ 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. Slide 47 $ 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 its likely to be +/- 10% but unlikely to be more than +/- 50%. Probability -50%-10%+10%+50% Slide 48 $ 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/ Slide 49 $ Summary Whew its 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.

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