LECTURE 5

PROCESS ECONOMICS

1
• Economics is ever present in our lives
because we earn money from our job
and we spend money allocated by our
personal budget e.g entertainment,
food, house etc.

• In engineering we learn many subjects

of science so as to utilize the
phenomena in our design and operation
of chemical plant
 Economics

Basic Economic
course

Process design
course
Business course

Basic chemical
Engg course

Technical
Sociopolitical scientific
Social science Environmental Physical
course impact course chemistry
 FINANCING THE VENTURE
Most important responsibilities of
Management
• Capital budgeting
• Planning
 Business Plan
Strategic planning: setting of goals, objectives
and broad business plans for next 5-10 years

Tactical planning: detailing of strategic plan for

next 2 years

Capital budgeting: request, analysis and approval

of expenditure for the coming year
 •Projected share of market
Business plans •Market price
•Market growth
•Markets the company serves
Perceived goals and •Competition
•Project/product life
objective of company
•Fixed capital investment
• Market data •Working capital
•Manufacture expenses
• Capital requirement •Sales expenses
•General overhead expenses
• Operating expenses •Profit after taxes
•Cash flow
• Profitability •Payout period
•Rate of return
• Projected risk •Return on equity/ assets
•Effect of change in revenue
• Project life •Effect of change in direct/indirect taxes
•Effect of cost of capital
•Effect of potential changes in market
competetion
 Sources of FUND
Internal Sources: External Sources:
• Retained earnings • Debt
• Reserves •Current debt
•Commercial loan
•Intermediate debt
•Commercial paper •Long term debt
•Bankers acceptance • Stockholder’s equity
•Deferred payment contract
•Revolving credit Preferred stock
•Term loans
•Mortgage
Common stock
•Debenture
•Income
•Convertible bonds
 Engineering Economics Analysis
of Chemical Process

Estimation of capital cost

Estimation of Manufacturing costs
Engineering Economic analysis
Profitability analysis
 Process Economics
Role of process economics:
• Evaluation of design options

• Process optimization

• Overall project profitability

A plant-design project moves to completion through a
series of stages such as is shown in the following:
1. Inception
2. Preliminary evaluation of economics and market
3. Development of data necessary for final design
4. Final economic evaluation
5. Detailed engineering design
6. Procurement
7. Erection
8. Startup and trial runs
9. Production
 Capital cost for new design
Total investment cost can be divided in following
parts
• Battery limit investment
• Utility investment
• Offsite investment
• Engineering fees
• Working capital
 Estimating purchased Equipment cost
• Effect of capacity on purchased equipment cost
Ca/Cb = (Aa/Ab)n
OR Ca = K (Aa)n

The value of n is mostly around 0.6 and thus the relationship referred to as six-tenths rule

Equipment Type Range of capacity Units of capacity Cost Exponent

correlation

Compressor 220-3000 kW 0.70

Shell and tube heat 5-50 m2 0.44
exchanger
Vertical tank CS 1-40 m3 0.52
• Graphical Presentation. Equipment cost data are presented in
the literature by Guthrie , Hall et al., Hall et al., Peters and
Timmerhaus, Garrett, and Page as logarithmic plots of cost as
a function of equipment capacity.
Problem Statement: Recently a cast iron leaf pressure filter with
100 ft2 was purchased for clarifying an inorganic liquid stream
for $15,000. In a similar application, the company will need a
450 ft2 cast iron leaf pressure filter. The size exponent for this
type filter is 0.6. Estimate the purchased price of the 450 ft2
unit.
 Cost Indexes
• Cost data are presented as of a specific date. They are adjusted through the use of cost indexes that
are based upon constant dollars in a base year and actual dollars in a specified year.

• The base year selected for each index was a period in which inflation was flat and the economy
stable.

• Many cost indexes are published on a regular basis. Some indexes can be used for estimating
equipment costs while other indexes apply only to labor and materials in specialized fields.
• Effect of time purchased capacity
C2 = C1 (I2/I1)
I = cost index
 Marshall and Swift Equipment Cost Index
 The Chemical Engineering Plant Cost Index
 Nelson–Farrar Index
 M and S index
• Based on two major components, namely, a process-industry
equipment average and all industry equipment average. The
process-industry equipment average is based upon selected
process industries.
• The percentages used for this average are cement, 2;
chemicals, 48; clay products, 2; glass, 3; paint, 5; paper, 10;
petroleum products, 22; and rubber, 8.
• Related industries such as electric power, mining and milling,
refrigeration, and steam power are also included.
• The M&S Index tracks equipment costs and installation labor,
thereby reflecting changes in installed equipment costs.
 The basis for CEPCI
This index is intended for use in escalating process plant
construction costs and is designed to reflect trends in chemical
process equipment costs.

Four major components of this index are

• The dominant components, equipment, machinery, and
supports consist of the following subcomponents:
 Nelson–Farrar Indexes
• The original indexes were established in 1946 with a value of
100 and are heavily weighted towards the petroleum and
petrochemical industries. The NF Indexes are based upon the
following components:
• Problem Statement: A stainless steel centrifuge cost
$85,000 in 1990. What is the cost of that same
centrifuge in 2001? Use the CE Index.
Solution:
CE Index in 1990 = 357.6
CE Index in 2001 = 396.8