Chemical Process Design

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1 Chemical Process Design Subject 8. Economic Evalua3on Javier R. Viguri Fuente CHEMICAL ENGINEERING AND INORGANIC CHEMISTRY DEPARTMENT UNIVERSITY OF CANTABRIA License: Crea3ve Commons BY NC SA 3.0

2 ECONOMIC EVALUATION 1.- Economic aspects of the preliminary design 2.- Cost Estimates 3.- Capital Investment 4.- Manufacturing cost 5.- Simple measures to estimate earnings and return on investment 6.- Profitability Measures 7.- Further Reading and References 2

3 1.- Economic aspects of the preliminary design Maximum Potential Profit (MPP) Profitability criteria Process alternatives analysis Different estimation levels Based on t,, interest rate * Non-Discounted * Discounted (time value of money) Maximum Potential Profit Design using hierarchical levels of decision (Levels of Douglas) Use of hierarchical levels to estimate the potential profit 3

4 1.- Economic aspects of the preliminary design 1 st Estimation (PP1): [Incomes from product sale]-[annual cost of raw materials] Importance of the stoichiometry Levels 1 and 2 of Douglas decision Knowledge of PFD PP1 > 0 2 nd Estimation (PP2): [Incomes from product sale] - [Annual cost of raw materials] [Manufacturing costs] Knowledge of energetic needs Levels 1-5 of Douglas decision PP2 > 0 3 rd Estimation (PP3): [Incomes from product sale] - [Annual cost of raw materials] [Manufacturing costs] [Capital costs] Capital investment and manufacturing cost estimation 4

5 2.- Cost Estimates: Costs related to the process CAPITAL INVESTMENT or CAPITAL COST (Inversion de Capital). [ ] Fixed Capital (Capital Fijo o Inmovilizado) portion of the total fixed capital that is invested in fixed assets to build the physical process itself, that stay in the business almost permanently, or at the very least, for more than one accounting period. land, buildings, machinery, vehicles and equipment, patents, incidental expenses (estimation adjustments) Working Capital (Capital Circulante) represents funds required to operate the plant due to delays in payment and maintenance of inventories the money available to fill the tanks (solvents, catalysts, industrial and configured consumer products) and meet the initial payroll and expenses Startup Cost (Coste de Arranque) MANUFACTURING COSTS (Costes de fabricacion). [ /t] Direct Costs (Costes de Fabricación Directos): Vary with the rate of production Fixed Costs (Costes de Fabricación Fijos): Not affected by the production level General Expenses (Gastos Generales): Associated with management level and administrative activities not directly related with the manufacturing process. 5

6 3.- Capital investment (CAPITAL INVESTMENT or CAPITAL COST C TCI -) (Inversion de capital). [ ] A- Guthrie s modular method, based on individual factors, to preliminary design: * Updated Bare Module Cost = BMC = UF. BC. (MPF + MF -1) + Contingencies and Contractor s fee = 18% BMC * C TBM (Total bare-module cost): Σ(BMC) of the process equipment * C TCI = C TPI + C WC = 1.18 (C TBM + C site + C buildings + C offsite facilities ) + C WC * C TCI = 1.18 (1.35 C TBM ) + C WC C TBM : Total Bare-module Investment; C TCI : Total Capital Investment; C TPI : Total Permanent Investment; C WC : Working Capital; C site : Cost of site preparation = 10%-20% C TBM C buildings : Process and non-process buildings = 10% C TBM and 20% C TBM C offsite facilities : Utility plants and pollution control = 5% C TBM B- Method of Lang, bases on overall factor, to study estimate: C TCI = 1.05 f LTCI Σ (I i /I bi ) C Pi 1.05: to account for delivery of the equipment to the plant site f LTCI : Lang Factors in function of the processing plant (solids, solids-fluids, fluids) Σ (I i /I bi ) C Pi : Total purchase cost as sum of the updated equipment cost data C- Method based in estimation of the capital cost components 6

7 3.- Capital investment C- Method based in estimation of the capital cost components: Base cost for equipment BC On-Site Cost - Installation - Supervision - Taxes BC(MF-1); 4 BC Indirect Costs -Construction overhead -Own Engineering 0.25 x (on-site + offsite) Off-site Cost -Equipment to supply process utilities - Site development, Auxiliary buildings 0.45 (on-site) Σ= Fixed Capital = 1.8x(on-site) = 7.2 BC Manufacturing Capital Non- Manufacturing Capital Fixed Capital 1.8 x (on-site) = 7.2 BC Plant startup costs - Equipment performance and personnel 0.1 x Fixed Capital Working Capital - Early plant operation. Cost of raw materials and value of products 0.15 x Capital Costs Σ= Capital Costs = 1.3 x Fixed Capital = 9.4 x BC Capital Costs TCI = 9.4 x BC Equipment life 10 years Annual Interest 15% Annualized Total Capital Costs CT/10 (1.15) 10 = 4 x BC [ /year] 7

8 4.- Manufacturing Cost MANUFACTURING COSTS (Costes de fabricacion). [ /t] (COM) Direct Manufacturing Costs (DMC): Vary with production rate Fixed Manufacturing Costs (FMC): Independent of changes in production rate General Manufacturing Expenses (GE): Business functions and seldom vary with production level COM = DMC + FMC + GE COM can be determined when the following costs can be estimated: 1.- Base Module Cost, BMC 2.- Operating Labor, C OL 3.- Utilities, C UT 4.- Waste treatment, C WT 5.- Raw Materials, C RM COM = BMC C OL (C UT +C WT +C RM ) The Service Factor need to be known = Nº days in operation during the year / 365 8

9 4.- Manufacturing Cost Factor Description of Factor Value 1. Direct Costs (DC) Factors that vary with rate of production = C RM + C WT + C UT C OL COM BMC Raw materials Costs of chemical feed stocks. Flow rates from the PDF C RM Waste treatment Costs of waste treatment C WT Utilities Gas, oil, coal, electric power, steam, water, air, inert gas, refrigeration, etc. C UT Operating Labor Cost of personnel for plant operations C OL C RM + C WT + C UT C OL COM BMC Direct supervisory Costs of administrative/engineering and support personnel, clerical labor ( )C OL Maintenance & Repairs Costs of labor & materials associated with maintenance ( )BMC Operating Supplies Costs of miscellaneous supplies that support daily operation not considered raw materials (chart paper, lubricants, protective clothing, etc.) ( )BMC Laboratory charges Costs of laboratory tests of quality control ( )C OL Patents and Royalties Costs of using patented or licensed technology (0-0.06)COM 2. Fixed Costs (FC) Factors not affected by the level of production = 0.708C OL BMC Depreciation Costs associated with the physical plant (buildings, equipments). Legal operating expenses for tax purposes 0.708C OL BMC 0.1BMC Local taxes and Insurance Based on plant location and severity of the process ( )BMC Plant Overhead Costs 3. General Expenses (GE) Catch-all costs associated with operation of auxiliary facilities supporting manufacturing process (fire protection, safety and medical services, etc.) Costs associated with management level + administrative activities = 0.177C OL BMC+0.16COM ( )C OL +BMC 0.177C OL BM C+0.16COM Administration Costs Salaries and other administration 0.325(C OL +( ) BMC Distribution and Selling Sales and marketing required to sell products. ( )COM Research & Development Costs of R&D activities related to the process 0.05COM 9 9

10 4.- Manufacturing Cost Cost of Raw Materials CRM - Price quotations from prospective suppliers of feedstocks - ICIS Chemical Business Americas (Chemical Market Reporter) Cost of waste treatment CWT - Legal framework, minimization, IPPC, BAT Technologies, BREF Documents. Utility Cost - C UT C UT = a x (CE Plant Cost Index) + b x Cs,f a,b: Coefficient cost for different kind of utilities CE Plant Cost Index as the effective date of the estimate (Basis, 1958 = 100) Cs,f.: Price of the fuel use to generate the utility Cost of Operating Labor - C OL - Annual Operator Salary ($) = x (1,03) year Operator Requirements for process equipment per shift * 49 weeks/operator.year x 5 shifts/week = 245 shifts/opeartor.year * 365 days/year x 3 shifts/day = 1095 shifts/year * [1095 shifts/year] / [245 shifts/operator.year] = 4.5 operators C OL = (4.5) operators x (Σnº operators/shift) x /year BMC Updated Bare Module Cost = BMC = UF.BC.(MPF + MF -1) 10

11 5.- Simple Estimate Earnings and Returns Earnings - Pre-tax earnings or Gross earnings or Profit = S - C S: Annual sales revenue; C: COM, Manufacturing Costs - After-tax earnings or Net earnings or Profit = Gross earnings - Income taxes on the gross earnings = (1-t) Gross earnings = 0.6 (S-C) t: Income tax rate = Cte. in function of the local law. Cash Flow (CF) and Depreciation (D) -Cash flow = Net passage of money into (+) or out of (-) a company due to an investment. Investment (-) cash flow After-tax profits+depreciation (+)cash flow -Annual CF for any year of the project CF = 0.6 (S-C) + D fc TDC C WC C land C startup C royal + S equip CF plant operation CF plant construction D: Depreciation, decrease in value of an asset over time (use, obsolescence, old age). f: fraction of the total depreciable capital (C TDC ) C WC : Working capital; C land : Cost of land expended during the year of construction C startup : Startup Costs; C royal : Cost of royalties S equip : Salvage value for used equipment 11

12 6.- Profitability Measures Approximate Profitability Measures. Useful in the early stages of project evaluation. New small projects or revamping. Non-Discounted Techniques (Time value of money is ignored and straight-line depreciation is used ) - Return of investment (ROI), Payback period (PBP), venture profit (VP), Annualized cost (AC) Rigorous Profitability Measures: Useful before a final decision is made on whether to proceed with a new venture Discounted Techniques (involve the time value of money in terms of discounted cash flows) - Net Present Value (NPV), Investor s rate of return (IRR) or discounted cash flow rate of return (DCFRR) 12

13 6.- Profitability Measures Non-discounted criteria Based on time Payback, Payout, Payoff period (PBP) / (Periodo de Retorno ) Time required for the annual earnings to equal the original investment PBP (years) = Total Depreciable Capital ( )/ Net earnings + annual depreciation ( /year) = C TDC / (1-t) (S-C) + D PBP < 3-4 y Profitable; 4< PBP < 10 y Additional assess; PBP > 10 y Non profitable useful in early evaluations to compare alternatives Based on interest rate Return of Investment (ROI) / (Retorno de la Inversión ) Annual interest rate made by the profits on the original investment ROI (%) = Net earnings / Total Capital Investment = (1-t) (S-C)/ C TCI ROI > 15% Profitable provides a snapshot view of the profitability of the plant 13

14 6.- Profitability Measures Non-discounted criteria Taking into account the size of the project Venture profit (VP) Annual net earnings in excess of a minimum acceptable return of investment, i min (20%) VP = (1-t) (S-C) i min C TCI = net earnings - i min C TCI preliminary estimates when comparing alternative flowsheets during process synthesis Based on interest rate Annualized Costs (C A ) Sum of the production cost and a reasonable return on the original capital investment where the reasonable return on investment, i min is 0.2. C A = C + i min C TCI useful to comparing alternative items of equipment in a process or alternative replacements for existing equipment 14

15 6.- Profitability Measures Discounted criteria The time value of money recognised that an amount of money at the current time, Present amount, P, that is invested at an interest rate, i, and the interest is added to P, the amount of money at the future date will be a Future amount, F, P F= P (1+i) n The change of the time value of money are due to: - INTEREST, annual rate at which money is returned to investors for use of their capital - RETURNS of competitor investments; thus the actual inversion must compensate the lost investments opportunities in other business - INFLATION or change in the value of a currency over time Net Present Value (NPV) / Valor Actual Neto (VAN) Sum of all the discounted cash flows computed for each year of the projected lifetime (n) of the plant, including construction + startup phases NPV = [Gross earnings x (1-(1+i) -n ) / i ] Capital investment provides a quantitative measure for comparing the capital required for competing processes in current terms is an indicator of the value or magnitude of an investment 15

16 6.- Profitability Measures Discounted criteria Investor s Rate of Return (IRR) or Discounted Cash Flow Rate of Return (DCFRR) Interest rate that gives a net present value of zero. Interest rate that can be compared with a competing investment. NPV {i} = [Gross earnings x (1-(1+i) -n ) / i ] Capital investment = 0 Used to evaluate the desirability of investments or projects. It is an indicator of the efficiency, quality, or yield of an investment. An investment is considered acceptable if its IRR is greater than an established minimum acceptable rate of return or cost of capital. The largest IRR is the most desirable. NPV and IRR are effective measures especially when the alternatives have widely disparate investments. 16

17 6.- Profitability Measures Technical Assessment Technical Assessment Environmental Assessment Environmental Assessment Design of wastes minimization alternatives: Application of criteria (Viguri et al., 2000) Viguri, J., 2000, Environmental situation of the SME in Cantabria: Minimization of the environmental impact Final Inform. Project from the enterprise development initiative. Santander, Spain, Sep Economic Assessment Economic Assessment Diferential Cash Flow Payback Period - Payback Period - PBP <3 years PBP >10 years 3-10 years NPV and IRR NPV and IRR Intangible aspects Intangible aspects Combined Analysis Figure 7. Suitability analysis of the minimization options Memo 3 are to size the equipment of the flowsheet, perform heat integration, and an economic evaluation 17

18 7.- Further Reading and References Biegler, L., Grossmann, I., Westerberg, A., 1997, Systematic Methods of Chemical Process Design, Prentice Hall. Douglas, J.M., 1988, Conceptual Design of Chemical Processes. McGraw-Hill. Peter, M., Timmerhaus, K., West, R., 2005, Plant Design and Economics for Chemical Engineers, 5ª Ed., McGraw-Hill. Seider, W., Seader, J., Lewin, D., Widagdo, S., 2010, Product and Process Design Principles. Synthesis, Analysis and Evaluation. 3 rd Ed. John Wiley & Sons. Turton, R., Bailie, R., Whiting, W., Shaeiwitz, J., 2003, Analysis, Synthesis and Design of Chemical Processes, Prentice Hall 18

Chemical Process Design / Diseño de Procesos Químicos

Chemical Process Design / Diseño de Procesos Químicos Subject 6.3. Economic Indicators Javier R. Viguri Fuente Eva Cifrian Bemposta Department of Chemistry and Process and Resource Engineering GER Green