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Kwame Nkrumah University of

Science & Technology, Kumasi, Ghana

METE 451

Metallurgical Plant Design and

Operations

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Equipment Cost Estimations

1. Use to estimate capital cost

2. The cost of a standard item is being compared with an

item of similar function but of different design

3. An existing circuit is being expanded, so that additional

equipment must be purchased

4. A new plant is being designed and several alternative

circuits, which provide similar grades/recoveries, must

be compared

5. Existing equipment is worn out and must be replaced

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Equipment Costs Estimations

Cost of equipment depends on factors such as

• Basic item and its mass and/or volume

• The complexity of its design

• The materials of construction

• The choice of accessories and

• The nature and complexity of the drive train and motor.

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PRELIMINARY CAPITAL COST

ESTIMATION

Purpose of estimate

• Useful to engineers who are involved in selection and design.

• An immediate assessment of initial cash requirements is provided.

• A preliminary estimate may serve as the basis for a “go or no-go”

decision.

• The preliminary estimate serves as a way to assess processing

alternatives.

• Participation in feasibility studies, plant expansion, and

presentation of bids.

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PRELIMINARY CAPITAL COST

ESTIMATION

Total Capital Investment =

Fixed Capital (direct cost) + Working Capital (indirect cost)

Total production costs =

operating costs + general expenses

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PRELIMINARY CAPITAL COST

ESTIMATION

Direct Costs:

1. Purchased equipment: Columns, Heat Exchangers, pumps, etc.

2. Equipment Installation

3. Piping (includes insulation)

4. Instruments and Control

5. Electrical Equipment.

6. Buildings: Process, Administration, Maintenance shops, etc.

7. Site Preparation

8. Service Facilities: steam, water, air, fuel, etc. Waste treatment, fire control,

offices, etc.

9. Land

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PRELIMINARY CAPITAL COST

ESTIMATIONTypes of fixed capital cost estimates - AACE

1. Order-of-Magnitude estimate: Extrapolate similar plant cost

(Profitability analysis. Confidence limit: over 30%.

2. Study estimate: Knowledge of major pieces of equipment costs

(Preliminary design). Confidence limit: ±30%.

3. Preliminary estimate: Enough data for budget authorization

(Budget approval). Confidence limit: ±20%.

4. Definitive estimate: Based on basic engineering and quotes from

suppliers and contractors (Construction control). Confidence

limit: ±10%.

5. Detailed estimate: Based on complete Engineering drawings

(Turnkey contract). Confidence limit: ±5%.www.knust.edu.gh

PRELIMINARY CAPITAL COST

ESTIMATIONIndirect Costs:

1. Raw materials inventory (1 month supply at cost)

2. Materials-in-process inventory (1 month supply at cost)

3. Product inventory (1 month at manufactured cost)

4. Accounts receivable (1 month at selling price)

5. Available cash (to meet expenses of wages, raw material,

utilities, supplies for 1 month at manufactured cost)

– Working capital = (1)+(2)+(3)+(4)+(5)

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Classification of working capital cost

Direct capital

• Concerned with the cost of materials related to production

• Utilities like electricity

• Incentives for direct workers (plant or factory workers),

• Administration, maintenance

• Operating suppliers (safety equipment, mobile equipment, etc),

• Laboratory and quality control

• Product packaging and shipping

• Royalties and patents (intellectual property), etc.

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Classification of working capital

cost

Indirect capital

• Concerns those that are not related to production

• Medical services

• Market and sales administration

• Recreational facilities

• Provision of technical service,

• Research and development.

• Indirect costs are normally taken as 50% of the direct cost.

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Equipment Costs Estimations

Cost Indices

• Cost indices are ratios of costs used to estimate current prices of

equipment from obsolete prices.

• Cost indices are based on mean costs over a period of time.

• Their accuracy varies widely for individual items of equipment but

in some cases can be as high as ±10 percent.

• Indices can be very inaccurate after about 5 or 6 years.

(𝐶𝑜𝑠𝑡)𝑛𝑜𝑤(𝐶𝑜𝑠𝑡)𝑡ℎ𝑒𝑛

=(𝐼𝑛𝑑𝑒𝑥)𝑛𝑜𝑤(𝐼𝑛𝑑𝑒𝑥)𝑡ℎ𝑒𝑛

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Equipment Costs Estimations

Cost Indices

• Cost indices used in process cost estimation include

– Engineering News-Record cost index (ENR)

– The Marshal and Swift cost index (M&S)

– Chemical plant construction cost index (CE)

– Nelson Refinery cost index (NR)

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Equipment Costs Estimations

Cost Indices (as inflation indicators)

Turton et al., 1998

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Equipment Costs Estimations

Cost Indexes (as inflation indicators)

Turton et al., 2009

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Example of Use of Cost Index

• A grinding mill was purchased for $5,000,000 in May

of 1997 when the M&S Index was 1087. What is the

approximate cost of this unit today? Letting “today”

be September, 2001, the M&S Index is 1132.

• Answer ~ $5,207,000

(𝐶𝑜𝑠𝑡)𝑛𝑜𝑤(𝐶𝑜𝑠𝑡)𝑡ℎ𝑒𝑛

=(𝐼𝑛𝑑𝑒𝑥)𝑛𝑜𝑤(𝐼𝑛𝑑𝑒𝑥)𝑡ℎ𝑒𝑛

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Fixed Capital Cost Estimation For Processing Plants Via Cost Ratio Methods

• Four methods to estimate fixed capital costs:

1. Six-Tenths Rule

2. Plant Cost Ratio Method

3. Equipment Cost Ratio Method

4. Plant Component Cost Ratio Method.

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Fixed Capital Cost Estimation For Processing Plants Via Cost Ratio Methods

• Six-Tenths Rule. To use the six-tenths rule, the fixed capital cost

of a plant of known capacity must be available.

𝐶𝑜𝑠𝑡 2

(𝐶𝑜𝑠𝑡)1=

(𝑃𝑎𝑟𝑎𝑚𝑒𝑡𝑒𝑟)2(𝑃𝑎𝑟𝑎𝑚𝑒𝑡𝑒𝑟)1

𝑥

• Gives very satisfactory results when only an approximate cost

within ±20% is required

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Fixed Capital Cost Estimation For Processing Plants Via Cost Ratio Methods

• Plant Cost Ratio Method. This method requires an estimate of the

cost of major items of delivered major process equipment.

• The method is based on the premise that fairly reliable total plant

costs can be obtained by multiplying the cost of the major

equipment by certain factors.

𝐶𝑇 = ℎ𝐶𝐸where CT = total plant cost

h = overall cost factor or sum of individual cost factors

CE = total cost of major equipment

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Fixed Capital Cost Estimation For Processing Plants Via Cost Ratio Methods

• If the total cost of major equipment is equal to CE then:

– Cost of solid process plant = 3.10 (CE)

– Cost of solid-fluid process plant = 3.63 (CE)

– Cost of fluid process plant = 4.74 (CE)

– The multipliers 3.10, 3.63 and 4.74 are known as Lang factors

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Depreciation

• Initial installation cost of metallurgical plant is high

• The fixed cost cannot be considered as an expense to be

fully charged against the revenue obtained in the year in

which the plant was built or purchased

• A portion of the cost charged against revenues for each

year throughout the estimated useful life is termed

depreciation

– The choice of depreciation method depends on the company

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Depreciation

• The cost of the asset purchased should be spread over the periods

in which the asset will benefit a company.

• Thus depreciation is a periodic charge against revenue that

distributes the first cost of a fixed asset over the expected service

life.

• This cost is a capital recovery or a partial regeneration of the first

cost of the fixed asset.

• It is available and can be used as any other accumulated cash.

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Depreciation Methods

1. Straight Line Method

2. Reducing Balance Method

3. Sum of The Years’ Digits Method

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Straight Line Method

• This distributes the cost of the asset uniformly over its

depreciable or useful life.

𝐷 =𝐶 − 𝐿

𝑛

• C = the initial cost of the fixed asset

• L = the estimated residual value

• n = the useful economic life of asset (years)

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Example

Cost of asset = $1200

Residual/scrap/salvage value = $200

Estimated useful life = 4 years

A𝑛𝑛𝑢𝑎𝑙 𝑐ℎ𝑎𝑟𝑔𝑒 𝑓𝑜𝑟 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =𝑆1200−$200

4= $250

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Reducing Balance Method

• Reason

– Greater benefit is to be obtained from the early years of using

an asset

– Appropriate to use the reducing balance method which charges

more in the earlier years.

• Annual Depreciation = Net Book Value x Depreciation Rate

= (Cost –Accumulated Depreciation) x Depreciation Rate

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Example

Depreciation Rate

4 256

100,000x 100%= (1 - )

= (1 – 0.4) x 100%

= 60%

Cost of assets $10,000

Residual value $256

Useful life 4 years

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Annual Depreciation

Year 1 10,000 x 60% = $6,000

Year 2 (10,000 – 6,000) x 60% = $2,400

Year 3 (10,000 – 8,400) x 60% = $ 960

Year 4 (10,000 – 9,360) x 60% =$ 384

Annual Depreciation

= Net Book Value x Depreciation Rate

= (Cost –Accumulated Depreciation) x Depreciation Rate

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Sum of the Year Digit Method

• It provides higher depreciation to be charged in the early years, and

lower depreciation in the later periods.

• Sum of digits = n(n+1) / 2

• Where n = Useful economic life (number of years)