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    LECTURE 5

    1

    PROCESS ECONOMICS

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    Economics is ever present inour lives because we earnmoney from our job and wespend money allocated byour personal budget e.g

    entertainment, food, houseetc.

    In engineering we learn manysubjects of science so as toutilize the phenomena in our

    design and operation of

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    Economics

    Processdesigncourse

    Technicalscientific

    Physical

    chemistry

    Environment

    al impactcourse

    Social

    sciencecourse

    Sociopolitical

    BasicEconomic

    course

    Business

    courseBasicchemicalEnggcourse

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    FINANCING THEVENTURE

    Most important responsibilitiesof Management

    Capital budgeting Planning

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    Business Plan

    Strategic planning: setting of goals,objectives and broad business plansfor next 5-10 years

    Tactical planning: detailing ofstrategic plan for next 2 years

    Capital budgeting: request, analysis

    and approval of expenditure for thecomin ear

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    Business plans

    Perceived goals and objective ofcompany

    Market data

    Capital requirement

    Operating expenses

    Profitability Projected risk

    Project life

    Projected share ofmarket

    Market priceMarket growthMarkets the companyservesCompetitionProject/product life

    Fixed capital

    investmentWorking capitalManufacture expenses

    Sales expensesGeneral overhead

    expenses

    Profit after taxesCash flowPayout periodRate of returnReturn on equity/assets

    Effect of change inrevenueEffect of change indirect/indirect taxesEffect of cost of capitalEffect of potential

    changes in market

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    Sources of FUND

    Internal Sources:

    Retained

    earnings Reserves

    External Sources:

    Debt

    Stockholders

    equity

    Current debtIntermediatedebtLong term

    debtPreferred stockCommon stock

    Commercial loanCommercial paperBankersacceptanceDeferred paymentcontractRevolving creditTerm loansMortgageDebentureIncomeConvertible bonds

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    Engineering EconomicsAnalysis of Chemical

    Process

    Estimation of capital cost

    Estimation of Manufacturingcosts

    Engineering Economicanalysis

    Profitability analysis

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    Process Economics

    Role of process economics:

    Evaluation of design options

    Process optimization

    Overall project profitability

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    A plant-design project moves to completionthrough a series of stages such as isshown in the following:

    1. Inception

    2. Preliminary evaluation of economics andmarket

    3. Development of data necessary for finaldesign

    4. Final economic evaluation

    5. Detailed engineering design

    6. Procurement

    7. Erection

    8. Startup and trial runs

    9. Production

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    Capital cost for new design

    Total investment cost can be divided infollowing parts

    Battery limit investment

    Utility investment

    Offsite investment

    Engineering fees Working capital

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    Estimating purchasedEquipment cost

    Effect of capacity on purchased equipment cost

    Ca/C

    b= (A

    a/A

    b)n

    OR Ca= K (A

    a)n

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

    TypeRange ofcapacitycorrelation

    Units ofcapacity

    CostExponent

    Compressor 220-3000 kW 0.70

    Shell and tubeheat exchanger

    5-50 m2 0.44

    Vertical tank CS 1-40 m3 0.52

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    Graphical Presentation. Equipment cost data arepresented 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 ofequipment capacity.

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    Problem Statement: Recently a cast iron leafpressure filter with 100 ft2 was purchased forclarifying an inorganic liquid stream for $15,000.

    In a similar application, the company will need a450 ft2 cast iron leaf pressure filter. The sizeexponent for this type filter is 0.6. Estimate thepurchased price of the 450 ft2 unit.

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    Cost Indexes

    Cost data are presented as of a specific date. They are adjusted through theuse of cost indexes that are based upon constant dollars in a base year andactual dollars in a specified year.

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

    Many cost indexes are published on a regular basis. Some indexes can be usedfor estimating equipment costs while other indexes apply only to labor andmaterials in specialized fields.

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    Effect of time purchased capacity

    C2= C

    1(I

    2/I

    1)

    I = cost index Marshall and Swift Equipment Cost Index

    The Chemical Engineering Plant Cost Index

    NelsonFarrar Index

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    M and S index

    Based on two major components, namely, aprocess-industry equipment average and allindustry 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; petroleumproducts, 22; and rubber, 8.

    Related industries such as electric power, miningand milling, refrigeration, and steam power arealso included.

    The M&S Index tracks equipment costs andinstallation labor, thereby reflecting changes in

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    The basis for CEPCI

    This index is intended for use in escalating processplant construction costs and is designed to reflecttrends in chemical process equipment costs.

    Four major components of this index are

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    The dominant components, equipment,machinery, and supports consist of the followingsubcomponents:

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    NelsonFarrar Indexes

    The original indexes were established in 1946with a value of 100 and are heavily weightedtowards the petroleum and petrochemicalindustries. The NF Indexes are based upon the

    following components:

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    Problem Statement: A stainless steelcentrifuge 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