CHAPTER

Cost Estimation

Including the pay

back period
 Chapter 9: Cost Estimation including pay back period

9.0 Introduction

Fixed capital required for construction overhead and for all plant components that are not

directly related to the process operation is designated as the nonmanufacturing fixed-capital

investment.

Working capital is the additional investment needed, over and above the fixed capital, to

start the plant up and operate it to the point when income is earned.

The raw materials inventory included in working capital usually amounts to a l-month

supply of the raw materials valued at delivered prices. Finished products in stock and semi

finished products have a value approximately equal to the total manufacturing cost for 1

month’s production. Because credit terms extended to customers are usually based on an

allowable 30-day payment period, the working capital required for accounts receivable

ordinarily amounts to the production cost for 1 month of operation.

Most of the working capital is recovered at the end of the project. The total investment

needed for a project is the sum of the fixed and working capital.Cost estimation is a

specialized subject and a profession in its own right.

Capital costs are fixed, one-time expenses incurred on the purchase

of land, buildings, construction, and equipment used in the production of goods or in the

rendering of services.

Working capital costs (WCC) refer to the costs of maintaining daily operations at an

organization. These costs take into account the following two factors: the company's short-

term debt position and the current portion of long-term debt, which is generally the portion of

debt due within the next 12 months. Working capital is required for day to day business of the
 Chapter 9: Cost Estimation including pay back period

chemical process plant. It is the additional investment needed, over and above the fixed

capital, to start the plant up and operate it to the point when income is earned. Theoretically

speaking, working capital can be fully recovered and no depreciation can be charged on this

amount.

Cost Indices The value of money will change because of inflation and deflation. Hence cost

data can be accurate only at the time when they are obtained and soon go out of date. Data

from cost records of equipment and projects purchased in the past may be converted to

present-day values by means of a cost index. The present cost of the item is found by

multiplying the historical cost by the ratio of the present cost index divided by the index

applicable at the previous date. Ideally each cost item affected by inflation should be forecast

separately. Labor costs, construction costs, raw-materials and energy prices, and product

prices all change at different rates.

9.1 Sum of the cost of the units of plant

One of the major costs involved in a chemical process is for the equipments. The dimensions

of the last (second) distillation column are calculated with material of construction specified.

So the cost of this equipment is calculated in detail. The cost of the other equipments is taken

as some percentage of the second distillation column cost.

The main units involved in the production is as follows

 The hydrolysis reactor – the hydrolyzer

 The washing unit

 The extraction unit

 The Storage tank – degassing unit

 First distillation column

 Chapter 9: Cost Estimation including pay back period

 The second or final distillation column

9.1.1 Cost of the product distillation column

Number of plates in the column : 11 +1

Here, SS 316 is used as material of construction for the second distillation column.

The product purification column is a long vertical cylinder of shell and tube type. The cost is

calculated from the following procedure.

The following equation can be used for cost calculation

Cdistillation column = C × (Scolumn / S) n

Where, Cdistillation column = purchased equipment cost, $,

S = characteristic size parameter in the units given below in the table,

Scolumn = Number of trays in column = 11

C = cost constant given below

n = index for that type of equipment.

Substituting the values given for the particular type of equipment into the equation the cost is

calculated.

For distillation column, the C, S and n values are listed below in table 9.1

Table 9.1 Purchase cost of Second distillation column

(Ref. Perry, 6th edn, p 25.69)

Equipments C, $ S, size unit S value n

Second or final distillation 3310000 Number of trays 4000 1

column
 Chapter 9: Cost Estimation including pay back period

Cdistillation column = C × (Scolumn / S) n = 3310000× (11/ 4000) 1 = $ 9102.5

Using, cost index, the current price is calculated. Most cost data which are available for

immediate use in a preliminary or pre design estimate are based on conditions at some time in

the past. A cost index is merely an index value for a given point in time showing the cost at

that time relative to a certain base time. If the cost at some time in the past is known, the

equivalent cost at the present time can be determined by multiplying the original cost by the

ratio of the present index value to the index value applicable when the original cost was

obtained.

Cost inflation index table is shown below in table 9.2

Table 9.2 Cost Inflation Index

Sr. no. Financial year Cost inflation Sr. no. Financial year Cost inflation

index index

1 1997-98 331 2 1998-99 351

3 1999-2000 389 4 2000-01 406

5. 2001-02 426 6 2002-03 447

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15 2013-14 939 16 2014-15 1024

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22 2021-22 1342

23 2022-23 1382
 Chapter 9: Cost Estimation including pay back period

24 2023-24 1422

As per the current year, the current cost is calculated as per cost index values by using the

following formula.

Cost in year A = [Cost index in year A / Cost index in year B] × (cost in year B).

Cost index for the year 2023 - 2024 = 1422

Cost index for the year 1998 - 99 = 351

The ratio of cost indices with base year mid 1998 = 1422 / 351 = 4.0513

Purchase cost of the distillation column as per present cost index = 4.0513 × $ 9102.5 = $

36876.8

1 $ = Rs 84.13

So, the cost the second distillation column in rupees = Rs. 84.13 × 36876.8 = Rs. 3.102×106.

Material of construction : SS 316

Incorporating material factor, (for stainless steel, it is 2), the cost of the column = 2× 3.106×

106 = Rs. 6.205 × 106

Other equipment costs are calculated based on the cost of the distillation column by using a

suitable multiplication factor.

 The hydrolysis reactor – the hydrolyzer (150 %)

 The washing unit (50%)

 The extraction unit (75%)

 The Storage tank – degassing unit (50%)

 First distillation column (100 %)

 The second distillation column (100 %)

 Chapter 9: Cost Estimation including pay back period

 Another 425 % is considered for reactant storage tank (5 units),product storage tank

(2 units), heat Exchanger, condenser, reboiler, cooler the boiler, the compressor,

unaccounted units like, pumps, the cooling tower, etc.

 So , total contribution in percentage including the contribution of the last distillation

column = 525% +425%= 950%

The present cost of all the equipments in rupees = Rs. (950/100)× Rs. 6.205 × 106 =

Rs.5.9×107

Total cost of equipment, E = Rs. 5.9×107

9.2 Depreciable capital cost and total capital cost calculation

Total Capital Cost The installed cost of the fixed-capital investment FCI is obviously an

essential item which must be forecast before an investment decision can be made. It forms

part of the total capital investment TCI. The fixed-capital investment is usually regarded as

the capital needed to provide all the depreciable facilities. It is sometimes divided into two

classes by defining battery limits and auxiliary facilities for the project. The boundary for

battery limits includes all manufacturing equipment but excludes administrative offices,

storage areas, utilities, and other essential and nonessential auxiliary facilities.

In the factor methods for cost estimating,

first calculate the purchased or delivered cost of all major equipment.

Then multiply the total equipment cost by factors to estimate the various other

components of the depreciable capital cost given in above equation, such as piping

and electrical wiring.

 Chapter 9: Cost Estimation including pay back period

Thus, one can arrive at the cost of installing all the equipment and supplying all the

services needed to produce an operational process.

Capital cost means the investment required to install and operate a process plant to

manufacture a desired specific product. Total capital cost of a project consists of

Fixed capital cost

Working capital cost

Cost of land and other non depreciable facilities installed for the project.

These costs have to be considered for new process plant, expansion of the present process

plant, modification or diversification of the process plant.

The costs are calculated on the basis of list in (Peter & Timmerhaus, fourth edition, p182).

Ratio factors for estimating capital-investment items based on delivered equipment cost. The

factors are taken for fluid processing plant.

Direct and indirect costs :

Direct cost includes items such as software, equipment, labor and raw materials. If your

company develops software and needs specific pregenerated assets such as purchased

frameworks or development applications, those are direct costs.

Labor and direct materials, which are used in creating a specific product, constitute the

majority of direct costs. For example, to create its product, an appliance maker requires steel,

electronic components and other raw materials.

While salaries tend to be a fixed cost, direct costs are frequently variable. Variable expenses

increase as additional units of a product or service are created, whereas an employee's salary
 Chapter 9: Cost Estimation including pay back period

remains constant throughout the year. For example, smartphone hardware is a direct, variable

cost because its production depends on the number of units ordered.

Indirect costs go beyond the costs associated with creating a particular product to include the

price of maintaining the entire company. These overhead costs are the ones left over after

direct costs have been computed, and are sometimes referred to as the "real" costs of doing

business.

The materials and supplies needed for the company's day-to-day operations are examples of

indirect costs. These include items such as cleaning supplies, utilities, office equipment rental,

desktop computers and cell phones. While these items contribute to the company as a whole,

they are not assigned to the creation of any one service.

Indirect labor costs make the production of cost objects possible, but aren't assigned to a

specific product. For example, clerical assistants who help maintain the office support

the company as a whole instead of just one product line. Thus, their labor can be counted as

an indirect cost.

Other common indirect costs include advertising and marketing, communication, "fringe

benefits" such as an employee gym, and accounting and payroll services.

Much like direct costs, indirect costs can be both fixed and variable. Fixed indirect costs

include things like the rent paid for the building in which a company operates. Variable costs

include the ever-changing costs of electricity and gas.

Total purchased cost of equipment, E = Rs. 5.9×107

The plant is considered as fluid processing plant and the fixed capital cost is calculated as per

the book Plant Design and Economics for chemical engineers by Peters , Timmerhaus, table

6.9 p 251
 Chapter 9: Cost Estimation including pay back period

Table 9.3

A: Direct cost calculation for the benzyl alcohol plant

E = Rs. 5.9×107

Components Assumed % of Cost in Rs.

total, E

Purchased equipment delivered 100

Including fabricated equipment

Purchased-equipment installation 46 %

Instrumentation and controls 36 % 360% in total as direct cost.

(installed) D = (360 / 100) × 5.9 × 107 =

Piping (installed) 68 Rs.2.124 × 108

Electrical (installed) 11

Buildings (including services) 17

Yard improvements 12

Service facilities (installed) 70

Total purchased cost of equipment, E = Rs. 5.9×107

 Chapter 9: Cost Estimation including pay back period

Table -9.4

B. Indirect cost calculation of the benzyl alcohol plant

Components Assumed % of Cost

total, E

Engineering and 33 Indirect costs are costs that are not

supervision directly accountable to

Construction expense 41 a cost object. Indirect costs may be

Legal Expenses 4 either fixed or variable.

Contractor’s fee 22 Indirect costs include administration,

Contingency 44% personnel and security costs.

144% in total as indirect cost.

Total indirect cost (I) I = (144 /100) ×5.9×107 = Rs.8.496 ×107

Fixed capital investment (FCI) = Direct cost + Indirect cost = D + I = Rs. 2.124 ×108

+ Rs. 8.496 ×107 = Rs. 2.9736×108

Total purchased cost of equipment, E = Rs. 5.9×107

Working capital investment (WCI) = 15% of the total capital investment or 87% of E

Taking the working capital, WCI = 0.87 ×E = 0.87× 5.9×107 = Rs. 5.133×107

Total capital investment (TCI) = FCI + WCI = 2.9736×108 + 5.133×107 = Rs. 3.4869×108
 Chapter 9: Cost Estimation including pay back period

9.3 Cost of raw material

The main raw materials entering the hydrolyzer are ----

 Sodium carbonate( Na2CO3) aqueous phase component.

 Benzyl chloride(C6H5CH2Cl) organic phase component.

Along with the above, the other components are

 Toluene, C6H5CH3, as inert solvent, organic phase component.

 Water as solvent for hydrolyzing agent, aqueous phase component.

 Water as reactant.

Materials entering to the hydrolyzer as raw material in the form of organic and aqueous phase

are shown in table 4.4 from chapter 4.

Table 4.4 Raw materials inlet to the hydrolyzer

Stream Components Materials inlet, Total amount of

(kg/hr) the stream ,

(kg/hr)

Aqueous phase Sodium carbonate 1658.55 15469.063

inlet Water as solvent 10168.128

Water from washing unit 3389.376

Water as reactant 253.0008

Organic phase Benzyl chloride 3602.3327 7208.268

inlet Toluene 3605.935

Total raw material inlet to the hydrolyzer 22677.33

Effective working days per year = 345 days

 Chapter 9: Cost Estimation including pay back period

Unit price of benzyl chloride = Rs 96 per kg

So, annual cost of benzyl chloride = 96 (Rs / kg) × 3602.3327 (kg / hr) × 24 (hr / day) × 345

(days/year) = Rs. 2.863×109.

The amount of sodium carbonate entering the reactor as fresh feed = 1658.55 kg/hr

Price of sodium carbonate = Rs 32 per kg

So, annual cost of sodium carbonate = 32 (Rs / kg) × 1658.55 (kg / hr) × 24 (hr / day) × 345

(days/year) = Rs. 4.3945×108.

So, cost of the raw materials for benzyl alcohol production = Rs. 2.863×10 9 + 4.3945×108 =

Rs. 3.302×109

It is increased by 2% to consider other small reactants.

Therefore, cost of the raw materials for benzyl alcohol production = 1.02× Rs. 3.302×109 =

Rs.3.368×109.

Check list for fixed capital investment

Land: Surveys, Fees, Property cost, Site development:, Site clearing, Grading, Roads,

access and on-site, Walkways, Railroads, Fence, Parking areas, Other paved areas, Wharves

and piers, Recreational facilities, Landscaping.

Buildings: Include in each as required substructure, superstructures, platforms, supports,

stairways,ladders, access ways, cranes, monorails, hoists, elevators. Administration and

office,Medical or dispensary, Cafeteria, Garage, Product warehouse(s) Parts or stores

warehouse Maintenance shops—electric, piping, sheet metal, machine, welding, carpenters,

instrument Guard and safety, Hose houses, Change houses Smoking stations (in hazardous
 Chapter 9: Cost Estimation including pay back period

plants), Personnel building, Shipping office and platforms, Research laboratory, Control

laboratories.

Building services: Plumbing, Heating, Ventilation, Dust collection, Air conditioning,

Sprinkler systems, Elevators, escalators, Building lighting, Telephones, Fire alarm, Paging

Intercommunication systems, Painting.

Non-process equipment: Office furniture and equipment, Cafeteria equipment, Safety and

medical equipment, Shop equipment Automotive heavy maintenance and yard material

handling equipment, Laboratory equipment, Lockers and locker-room benches, Garage

equipment, Shelves, bins, pallets, hand trucks, Housekeeping equipment, Fire extinguishers,

hoses, fire engines.

Piping—carbon steel, alloy, cast iron, lead-lined, aluminum, copper, asbestos-cement,,

ceramic, plastic, rubber, reinforced concrete, Pipe hangers, fittings, valves

Insulation—piping, equipment, Instruments, Instrument panels

Electrical—panels, switches, motors, conduit, wire, fittings, feeders, grounding, instrument

and control wirings.

Utilities: Boiler plant, Incinerator, Ash disposal, Boiler feed-water treatment, Electric

generation Electrical substations, Refrigeration plant, Air plant, Wells, River intake

Primary water treatment—filtration, coagulation, aeration Secondary water treatment—

deionization, demineralization, pH and hardness control,Cooling towers, Water storage,

Effluent outfall, Process-waste sewers, Process-waste pumping stations, Sanitary-waste

sewers, Sanitary-waste pumping stations, Impounders, collection basins, Waste treatment,

including gases, Storm sewers.

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Yard distribution and facilities (outside battery limits):

Process pipe lines—steam, condensate, water, gas, fuel oil, air, fire, instrument, and electric

lines, Raw-material and finished-product handling equipment—elevators, hoists, conveyors,

airveyors, cranes, Raw-material and finished-product storage—tanks, spheres, drums, bins,

silos, Fuel receiving, blending, and storage, Product loading stations, Track and truck scales

9.4 Calculation of the cost of product – benzyl alcohol

Cost of the product

Actual amount of product of benzyl alcohol to be produced = 25000 TPA of benzyl

alcohol

= 25000 × 1000 / (24 × 345) = 3019.3237 kg/hr

1 yr = 345 days working days and the rest is for shut down or any repairing job.

Unit price of benzyl alcohol = Rs. 242 per kg

Therefore, annual selling price of benzyl alcohol = 242 × 25000×1000 = Rs. 6.05×109

Product cost of the Benzyl Alcohol plant

Product cost refers to the costs used to create a product. These costs include the

following:

 direct materials,

 direct labor,

 consumable production supplies, and

 factory overhead.
 Chapter 9: Cost Estimation including pay back period

Product cost can also be considered the cost of the labor required to deliver a service to

a customer. Product cost appears in the financial statements, since it includes the

manufacturing.

Product cost can also be considered the cost of the labor required to deliver a service to

a customer. In the latter case, product cost should include all costs related to a service,

such as compensation, payroll taxes, and employee benefits.

Therefore, cost of the raw materials for benzyl alcohol production = 1.02× Rs. 3.302×109 =

Rs. 3.368×109

It is assumed to be 59% of the total product cost.

Therefore, product cost of the benzyl alcohol production plant = Rs. 3.368 × 109 / 0.59 =

5.7085 × 109. (Ref. : Table 6.17 p 273, Peters, Timmerhaus, West, 5th Edn).

9.5 Profit analysis

Traditional Measures of Profitability

Assuming 345 working days and 24 hrs per day operation, annual selling price of benzyl

alcohol = 242 × 25000×1000 = Rs. 6.05×109

The cost of the raw materials for benzyl alcohol production = 1.02× Rs. 3.302×10 9 = Rs.

3.368×109

Therefore, product cost of the benzyl alcohol production plant = Rs. 3.368 × 109 / 0.59 =

5.7085 × 109
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Profit

Profit is defined as the difference between income and expense. Therefore, profit is a function

of the quantity of goods or services produced and the selling price. The amount of profit is

also affected by the economic efficiency of the operation, and increased profits can be

obtained by use of effective methods which reduce operating expenses. To determine the

profit, estimates must be made of direct production costs, fixed charges including

depreciation, plant overhead costs, and general expenses. Profits may be expressed on a

before-tax or after-tax basis, but the conditions should be indicated. Both working capital and

fixed capital should be considered in determining the total investment.

Gross Profit = Rs. 6.05×109 – Rs. 5.7085 × 109 = Rs. 3.415×108

The tax paid is assumed as 40% of the gross profit.

So, tax paid = 0.40× Rs. 3.415×108 = Rs. 1.366×108

Net profit (income) of the plant = Rs. 3.415×108 – Rs. 1.366×108 = Rs. 2.049×108

Return on original cost Investment

Return on investment or ROI is a profitability ratio that calculates the profits of

an investment as a percentage of the original cost. In other words, it measures how much

money was made on the investment as a percentage of the purchase price.

Return on investment may be calculated in terms other than financial gain. For example, social

return on investment (SROI) is a principles-based method for measuring extra-financial value

(i.e., environmental and social value not currently reflected in conventional financial accounts)

relative to resources invested. It can be used by any entity to evaluate impact on stakeholders,

identify ways to improve performance, and enhance the performance of investments.

 Chapter 9: Cost Estimation including pay back period

Total capital investment (TCI) = FCI + WCI = 2.9736×108 + 5.133×107 = Rs. 3.487 ×108

Fixed capital investment (FCI) = Direct cost + Indirect cost = D + I = Rs. 2.124 ×10 8

+ Rs. 8.496 ×107 = Rs. 2.9736×108

Net profit (income) of the plant = Rs. 3.415×108 – Rs. 1.366×108 = Rs. 2.049×108

Net Profit 2.049 ×108

Return on investment =  100   100  58.78 %
Total Capital Investment 3.486 ×108

Payback Time

The payback period is the time required for the amount invested in an asset to be repaid by

the net cash outflow generated by the asset. It is a simple way to evaluate the risk associated

with a proposed project. The payback period is expressed in years and fractions of years.

Generally, for this method, original capital investment means only the original, depreciable,

fixed-capital investment, and interest effects are neglected.

Thus,

Payback period(time) in years (no interest charge) = DEPRECIABLE FIXED-

CAPITAL INVESTMENT(FCI) / (AVERAGE ANNUAL PROFIT + AVERAGE

ANNUAL DEPRECIATION )

In accountancy, depreciation refers to two aspects of the same concept:

 The decrease in value of assets (fair value depreciation)

 The allocation of the cost of assets to periods in which the assets are used

(depreciation with the matching principle)

 Chapter 9: Cost Estimation including pay back period

Depreciation (depends on life period, salvage value, and method of calculation-about 10% of

fixed-capital investment for machinery and equipment and 2-3% of building value for

buildings).

Total capital investment (TCI) = FCI + WCI = 2.9736×108 + 5.133×107 = Rs. 3.4869×108

Fixed capital investment (FCI) = Direct cost + Indirect cost = D + I = Rs. 2.124 ×10 8

+ Rs. 8.496 ×107 = Rs. 2.9736×108

The depreciation is taken as 10% of FCI.

So, depreciation = 0.1×2.9736×108 = 2.9736×107

Net profit (income) of the plant = Rs. 3.415×108 – Rs. 1.366×108 = Rs. 2.05×108

So, Pay back period in years (without interest charge) = depreciable fixed- capital investment

/ (average profit/year + average depreciation/year )

= (2.974×108 ) / (2.05×108 + 2.974×107 ) = 1.27 year

Construction expenses : Construction, operation, and maintenance of temporary sheds,

offices, roads, parking lots, railroads, electrical, piping, communication, and fencing ,

Construction tools and equipment, Warehouse personnel and expense, Construction

supervision, Accounting and timekeeping, Purchasing, expediting, and traffic, Safety and

medical, Guards and watchmen, Travel and transportation allowance for craft labor, Fringe,

benefits, Housekeeping, Weather protection, Permits, special licenses, field tests, Rental of

off-site space, Contractor’s home office expense and fees, Taxes and insurance, interest.

There are three main components associated with working capital management: accounts

receivable, accounts payable and inventory. The efficient management of working capital is

essential for the profitability and overall financial health of any company.