lecture # 6 cost estimation ii

Lecture # 6

Cost estimation

Capital and Total Product Cost-Part 2

1 Dr. A. Alim

2

Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed.

McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes, McMaster

University © 2001-2007.

3




Important: In absence of specific known cost data, the use of the previous tables, 6-3, 6-9 and 6-17 is adequate. However, when the costs of certain items are already known, such known data must be used instead of the percentages given in the tables. The following example illustrates this concept:

Problem 6-8, Peters book, page 276:

Notes: 1) Indoor construction is the most expensive type of building. 2) Contractor’s fee is explicitly specified as 7% of direct plant cost.

4


McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes,

McMaster University © 2001-2007.

5




6 Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th ed.



Solution: Table 6-9 shows the cost components as typical percentages of purchased Equipment cost “Q”. In this problem, however, two of these components were specified differently. These are: 1) Buildings: stated as expensive. Hence we choose the top of the range in table 6-3. We will assume 18% of fixed capital (FC) Replacing the 29% of Q by 18% of FC, we then have: Total direct cost = (3.02) Q - 0.29 (Q) + 0.18 (FC) With Q = $300,000; total direct costs = 8.19 x 105 + 0.18 (FC) 2) Contractor’s fee is stated as 7% of direct costs. Replacing the 19% of Q by 7% of direct costs, we have: Total indirect cost = (1.26) Q – 0.19 (Q) + 0.07{ 8.19 x 105 + 0.18 (FC)} = 3.78 x 105 + 0.013 (FC)

FC = direct costs + Indirect costs = 1.197 x 106 + 0.193 (FC) Solving for FC = $ 1.48 x 106

Total direct costs = 8.19 x 105 + 0.18 (FC) = $1.08 x 106

Total indirect costs = 3.78 x 105 + 0.013 (FC) = $0.4 x 106

7




Solution (contin.) From table 6-9, working capital (WC) = 0.75 Q = 0.75 (300,000) = $ 225,000 Hence, Total capital investment = Fixed capital + Working capital = $ 1.48 x 106 + $ 0.225 x 106

= $ 1.71 x 106

Summary (in millions of dollars): Direct costs = 1.08 Indirect costs = 0.4 Fixed capital = 1.48 = 87% of TCI Working capital = 0.225 = 13% of TCI Total capital (TCI) = 1.71

8




COST ESTIMATION

Analysis of Product costs/Expenses

9




ANALYSIS OF COST ESTIMATION

Capital Costs

• Fixed capital

•Manufacturing (direct)

•Nonmanufacturing (indirect)

• Working capital

Product Costs

• Manufacturing costs

•Variable costs

• Fixed costs

• Overhead costs

• General expenses

• Administrative expenses

• Distribution & Marketing costs

• R&D

Total Product Cost = manufacturing costs + General expenses Red : designates fixed (indirect) costs Green : designates variable (direct) costs Hence, Total Product Cost = Total direct costs + Total indirect costs

10




COST ESTIMATION

MANUFACTURING COSTS - These are incurred with every unit of production and do not include capital items.

• Variable (direct) - materials, labor, utilities, supplies, waste treatment, etc.

• Fixed (indirect) – insurance, depreciation, plant administration, etc.

• Overheads production

production

La

bo

r

production

Ma

teri

al

stre

am

s

11




Total Product Cost (TPC) = Manufacturing Costs + General Expenses




Typical Breakdown of Total Product Cost (TPC)

• Manufacturing Cost: – Variable (direct) manufacturing cost 66%

– Fixed (indirect) manufacturing cost 10% - 20%

– Overheads 5% - 15%

• General expenses 15% - 25%

13




14

Material used in this lecture is sourced from "Plant

Design and Economics for Chem. Engineers", 5th

ed. McGraw Hill, © 2003 , by Peters, et al., and also

from Engineering Economics 4N04 class notes,


Depreciation is not a cash flow,

rather it is a deduction for tax

calculation purposes.

15




Material used in

this lecture is

sourced from

"Plant Design and

Economics for

Chem. Engineers",

5th ed. McGraw

Hill, © 2003 , by

Peters, et al., and

also from

Engineering

Economics 4N04

class notes,

McMaster

University © 2001-

2007.

16

Cash Flow For

Industrial Operations

GI - E: Gross profit, or CFBT

CFAT: Cash flow after taxes = NP + D = CFBT - Taxes

TI: Taxable income = GI – E - D

D: Depreciation

Taxes = TI (te)

NP: Net profit, or Net earnings = TI (1 - te)




Gross Profit, Net Profit, and Cash Flows

For any year: Gross Profit = GI – E Also called CFBT

Taxable income TI = GI – E – D

Taxes = TI (te)

Net Profit = Np = TI (1-te)

Cash Flow = A = Np + D Also called CFAT




ANALYSIS OF COST ESTIMATION

Cumulative Cash Position

19

Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers",

5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class

notes, McMaster University © 2001-2007.

Problem 6-15, Peters book, page 277

A company has direct production costs equal to 50% of total annual sales (GI), and indirect production costs (fixed charges, overhead, and general expenses) equal to $200,000. Annual sales amount to $800,000. If management proposes to increase annual sales to compensate for a 20% increase in indirect costs, and maintain same gross profit. What is the new sales level?




Problem 6-15, Peters book, page 277

A company has direct production costs equal to 50% of total annual sales (GI), and indirect production costs (fixed charges, overhead, and general expenses) equal to $200,000. Annual sales amount to $800,000. If management proposes to increase annual sales to compensate for a 20% increase in indirect costs, and maintain same gross profit. What is the new sales level?

Gross profit = GI – E = GI – (direct costs + indirect costs) = 800,000 – (0.5) 800,000 – 200,000 = $200,000 Then 200,000 = new GI – (direct costs + 1.2 indirect costs) = new GI – (0.5)(new GI) – 1.2(200,000) solve for new GI = $880,000




Problem 6-15, Peters book, page 277 (contin.)

If the annual depreciation is $70,000, and tax rate is 35%, what is the net profit after tax and the annual cash flow?




Problem 6-15, Peters book, page 277 (contin.)

If the annual depreciation is $70,000, and tax rate is 35%, what is the net profit after tax and the annual cash flow?

NP = TI (1-te) = (GI – E – D) (1-te) = (200,000 – 70,000) (1 – 0.35) = 130,000 (1 – 0.35) = $ 84,500 Net cash flow (also known as CFAT) = NP + D = 84,500 + 70,000 = $154,500 Also equal to (CFBT – taxes) = 200,000 – 130,000(0.35) = $154,500




Homework # 2

January 30, 2014

24




25




The following solved examples from Blank and Tarquin, 7th edition (2012) Example 15.2 Page 392 Example 15.4 Page 394 The following solved examples from Peters, et al. 5th edition (2003) Example 6-1 Page 240 Example 6-3 1 Example 6-6 Page 264 Problems 6-1 and 6-2 Page 275 Problem 6-13 Page 277

(problems 6-1 and 6-2, page 275, Peters, et al.):

The purchased cost of a shell-and-tube heat exchanger (floating-head and

carbon-steel tubes) With 10 m2 of heating surface was $4200 in 1990. What

was the 1990 purchased cost of a similar heat exchanger with 20 m2 of

heating surface if the purchased cost capacity exponent is 0.60 for surface

areas ranging from 10 to 40 m2? If the purchased cost capacity exponent for

this type of exchanger is 0.81 for surface areas ranging from 40 to 200 m2,

what will be the purchased cost of a heat exchanger with 100 m2 of heating

surface in 2010?

Plot the 2010 purchased cost of the shell-and-tube heat exchanger outlined

above as a function of the surface area from 10 to 200 m2. Use the Marshall

and Swift process industry installed equipment index and assume the value of

this index in 2010 is 1565.

26

Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th

ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes,


27

Material used in this lecture is sourced from "Plant Design and Economics for Chem. Engineers", 5th

ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering Economics 4N04 class notes,


28

Material used in this lecture is sourced from "Plant Design and Economics for Chem.

Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering

Economics 4N04 class notes, McMaster University © 2001-2007.

29

Material used in this lecture is sourced from "Plant Design and Economics for Chem.

Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al., and also from Engineering

Economics 4N04 class notes, McMaster University © 2001-2007.

30




Spreadsheet calculation of TPC

Problem 6-13, page 277

"Plant Design and Economics for Chem. Engineers", 5th ed. McGraw Hill, © 2003 , by Peters, et al.

The total capital investment for a conventional chemical plant is $1,500,000, and the

plant produces 3 million kg of product annually. The selling price of the product is

$0.82/kg. Working capital amounts to 15 percent of the total capital investment. The

investment is from company funds, and no interest is charged. Delivered raw materials

costs for the product are $0.09/kg; labor, $0.08/kg; utilities, $0.05/kg; and packaging,

$0.008/kg. Distribution costs and R&D costs are 5% and 4% of TPC, respectively.

Estimate the following:

a) Manufacturing cost per kilogram of product

b) Total product cost per year

c) Taxable income (TI) per kilogram of product.

d) Net Profit after tax per kilogram of product if income tax rate is 35%




Product Costs

• Manufacturing costs

•Variable costs

• Fixed costs

• Overhead costs

• General expenses

• Administrative expenses

• Distribution & Marketing costs

• R&D

TPC = [Σ (all terms not depending on TPC)]/ [l – Σ (Factorj)] = (1.244 + 0.055) x 106 / (1 - 0.09) = $ 1.427 x 106 per year The following calculations are made from the spreadsheet results:

a) Manufacturing =($1.244*106/y)/(3*106 kg/y) = $0.417/kg cost per kg product

b) Total product = $ 1.427 x 106 per year cost per year

c) TI per kg = [GI – (E + D)] / production rate $/kg = selling price, $/kg - TPC/kg

= $0.82 - ($1.427*106)/(3*106) = $0.344/kg

d) Net profit after tax = NP = {GI – (E + D)}(1 – te) = ($0.344/kg)(1 - 0.35) = $0.224/kg

TPC including

depreciation

33




lecture # 6 cost estimation ii

Business