Specifications and Feasibility studies HS501a

Cost Estimation-Lecture

Dr. Mounir Ahmed Arafa

Recall

Basic relationships in accounting:

Assets = Equity Assets = Liabilities + Equity Total income = Costs + profits
The current average method.

Materials costs
The last-in first- out method. The first-in first out method.

Cost Estimation Cash flow for industrial operations Cumulative cash position

Factors affecting investment and production costs

Source of equipment

Price fluctuation

Company policies

Operating time (rate)

Governmental policies

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Specifications and Feasibility studies HS501a

Cost Estimation-Lecture

Dr. Mounir Ahmed Arafa

Materials cost
1. Current average method 2. The first in first out method 3. The last in first out method Accumulation Account Date May 2,2001 May 15 May 17 Received 5000 lb 10000lb Cost $0.036/lb $0.039/lb Balance in hand 5000lb 15000lb 9000lb Delivered for use in process 6000lb

Solution Average method price = $ 0.038/lb Fifo method price, the price of 6000lb is $0.036/lb for the first 5000lb while $0.039/lb for the remaining 100 lb Lifo method price = $ 0.039/lb (The average method is the best for time interval but misleading if used for predicting future cost)

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Specifications and Feasibility studies HS501a

Cost Estimation-Lecture

Dr. Mounir Ahmed Arafa

Capital Investment Cost

Fixed capital investment

Capital investment
Working capital investment

Capital Investment =

Fixed Capital =

Working capital

Manufacturing Capital

Non- Manufacturing Capital

The total amount of money invested in raw materials,supplies,finished product in stock and semi finished products in the process of being manufactured,cash kept on hand for monthly payments,and account payable.

Laboratory, Machines, equipments, Building, Piping, Instrumentation, Insulation, Foundation., All of which are directly related to process Operation Stores, Sewage, Administration, restaurant, hospital, All not directly related to process operation

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Specifications and Feasibility studies HS501a

Cost Estimation-Lecture

Dr. Mounir Ahmed Arafa

Types of cost estimates:

1. Cost index A cost index is an index value for a given point in time showing the cost at that time relative to a certain base time. Present cost = original cost (index value at present time / index value at time original cost). Cost index is used in fairly accurate for time less than 10 years. There are many cost indexes equipments civil construction labors materials and others
Marshall and Swift equipment cost indexes:

Formerly known as Marshall and Stevens. The all industry equipment index is simply the arithmetic average of individual indexes for 47 different types of industrial, commercial, and housing equipments. The percentages used for the weighting in typical year are as follows: Cement, 2 Chemical, 48 Clay products, 2 Glass, 3 Paint, 5 Paper, 10 Petroleum, 22 Rubber, 8 The Marshall and Swift indexes value are based of 100 for the yeas 1926. These indexes take into consideration the costs of machinery and major equipment plus costs for installation, fixtures, tools, office, furniture and other minor equipments.

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Specifications and Feasibility studies HS501a

Cost Estimation-Lecture

Dr. Mounir Ahmed Arafa

Engineering new-record construction cost index:

show the variation in labor rate and material costs for industrial construction.
Nelson-Farrar Refinery construction cost index:

Construction for chemical plant are the basis. 2. Estimating equipment cost by scaling
Six-tenth-factor rule:

Cost of equipment a = cost of equipment b (cap . a /cap . b)^0.6 Log log of capacity versus equipment cost for type of equipment give straight line relationship with 0.6 slope.

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Specifications and Feasibility studies HS501a

Cost Estimation-Lecture

Dr. Mounir Ahmed Arafa

The actual capacity factor varies from less than 0.2 to greater than 1.0 as showing in the previous table. Because of this, the 0.6 factor should only be used in the absence of other information.

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Specifications and Feasibility studies HS501a

Cost Estimation-Lecture

Dr. Mounir Ahmed Arafa

Example

Estimating cost of equipment using scaling factor and cost index: The purchased cost of a 50-gal glass-lined, jacketed reactor (without drive) was $8350 in 1981. Estimate the purchased cost of a similar 300-gal, glass-lined, jacketed reactor (without drive) in 1986. Use the annual average Marshall and Swift equipment-cost index (all industry) to update the purchase cost of the reactor.
Solution

Marshall and Swift equipment-cost index (all industry). (from table 3) for 1981 721 (from table 3) for 1986 798 from table 5, the equipment Vs. capacity exponent is given as 0.45: In 1986, cost of reactor = ($8350)(798/721)(300/50)^0.45 = $24,300

Methods for estimating capital investment

1. Lang factors for approximation of capital investment: This technique is proposed originally by Lang and used frequently to obtain order of magnitude cost estimates.

Fixed capital investment

Factor*deliveredequipment cost

Total capital investment

Factor*Deliveredequipment cost

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Specifications and Feasibility studies HS501a

Cost Estimation-Lecture Lang multiplication factors

Dr. Mounir Ahmed Arafa

Plant Solid pro. plant Solid-fluid pro. Plant Fluid pro. plant

Fixed cap. 3.9 4.1 4.8

Total cap. 4.6 4.9 5.7

These factors vary depends upon the process plant being considered. Greater accuracy of capital investments estimates can be achieved in this method by using not one but more number of factors. 2. Turn over ratio: A rapid evaluation method suitable for the order of magnitude estimate is known as turn over ratio method. It is defined as the ratio of gross annual sales to the fixed capital investment.

Turn over ratio

gross annual sales/fixed capital investment

Turn over ratios of up 5 are common for some business establishments and some are as low as 0.2.For chemical industry ,as a very rough rule of thumb, the ratio can be approximated as 1.
Example

The total capital investment for a chemical plant is $ 1 million and the working capital is$100000.If the plant can produce an average of 8000kg of final product per day during a 365-day year ,what selling price in dollar per kg would be necessary to give turn over ratio of 1? Solution

Fixed capital investment=$1000000-$100000=$900000 T.O.R=annual sales/fixed capital 1=selling price *8000*365/900000 Selling price=900000/8000*365 =$0.308/kg

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