X Economic Feasibility Analysis

  

X

Economic Feasibility Analysis Dr. Eng. Yulius Deddy Hermawan Department of Chemical Engineering UPN “Veteran” Yogyakarta

  

Outline

  1. Fixed Capital

  2. Working Capital

  3. Manufacturing Cost

  4. General Expenses

  

5. Profitability (ROI, POT, SDP, BEP, DCF)

Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

X.1. FIXED CAPITAL

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Fixed Capital

  1. Purchased equipment

  2. Installation

  3. Piping

  4. Instrumentation

  5. Insulation

  6. Electrical

  7. Building

  8. Land and yard improvements

  9. Utilities…………+

Physical plant cost (PPC)

  10. Engineering and construction+ Direct plant cost (DPC)

  11. Contractor’s fee

  12. Contingency+ _{Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY} Fixed capital Elements of Direct Fixed Capital (DFC) Cost Estimate

  Method of Purchase Cost Factor A Total plant direct cost (TPDC) (physical cost)

  1. Equipment purchased cost (PC) (bare cost) 1.00 X PC

  

2. Installation 43% PC; all fluid processing 47% PC

  3. Process piping Solid: 10-20% PC Solid-fluid: 14-43% PC Fluid: 43-86% PC

  4. Instrumentation No auto control: 15% PC Auto control: 30% PC Computer control: 40% PC

  5. Insulation Low-temp. plants: 8% PC

  6. Electrical Facilities 11% PC

  7. Buildings 6-45% PC, fluid processing 15-70% PC, solid processing

  8. Yard Improvement 16% PC

  9. Auxiliary Facilities Existing: 0%: minor new: 15% Major additions: 15-40% PC _{Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY Σ = TPDC} Completely new (grass roots) 40-140%

  Method of Purchase Cost Factor B Total Plant Indirect Cost (TPIC)

  10. Engineering 25% TPDC (normal)

  11. Construction 30-35% TPDC: small jobs 40% TPDC: high labor jobs

  Σ = TPIC C Total Plant Cost (TPC) TPC = TPDC + TPIC D Direct Fixed Capital

  12. Contractor’s fee 5-8% TPC

  

13. Contingency 5% TPC: established commercial project

10% TPC: process subject to change 20% TPC: speculative process

  14. Size Factor contingency should be adjusted as follows X0.80: huge commercial plant X1.00: standard plant X1.3: experimental units, pilot plants, small additions

  Σ = (12 + 13) _{Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY} DFC = TPC + Σ (12 + 13) Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Purchased Equipment Cost

  

Cost data are often presented as cost versus capacity charts, or

expressed as a power law of capacity M B B E Q Q C C

     

    

  Where C E

  = equipment cost with capacity Q C B

  = known base cost for equipment with capacity Q B M

  =

constant depending on equipment type

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Typical equipment capacity delivered capital cost correlations (Smith, R., 2005)

• Marshall & Stevens (MS)
• Nelson refinery
• Engineering News Record • Chem. Eng. Plant (CEP) PEC + Delivery Cost = Delivered Equipment Cost

  37

  43 Piping Cost (%PEC)

  Material Labor Total

  Solid

  8

  6

  14 Solid – fluid

  21

  15

  36 Fluid

  49

  86 Instrumentation Cost (%PEC)

  11

  Material Labor Total

  Few or no controls

  4

  1

  5 Some specific controls

  12

  3

  15 Extensive controls

  24

  6

  32

  25

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Purchased Equipment Cost

  1 = Cost index in year 1

  Such data can be brought up-to-date and put on a common basis using cost indexes

  2

  1

  2

  1 INDEX

  INDEX C C 

  Where C

  1 = Equipment cost in year 1 C

  2 = Equipment cost in year 2

  INDEX

  INDEX

  25

  2 = Cost index in year 2

  Delivery cost: up to 15% PEC Cost Index references:

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY Installation Cost (%PEC)

  Material Labor Total

  Foundations

  4

  3

  7 Platforms & support

  7

  4

  11 Erection of equipment --

  30 Insulation Cost (%PEC) Material Labor Total

  Insulation cost

  3

  5

  8 Electrical Auxiliaries Cost (%PEC) Installed cost of substations, feeder, wiring: 10 – 15 % PEC

  Building ( depend on the location )

2 Cost in Indonesia (Rp………./m )

  Land & Yard Improvement

  Cost in Indonesia

  Utilitie _{Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY} Estimated agree with designed utility unit (up to installed cost ) Engineering & Construction (%PEC)

  Physical Plant Cost ($) E & C (%) < 1.000.000

  30 1.000.000 – 5.000.000

  25 >5.000.000

  20 Contractor’s fee 4 – 10% Direct Plant Cost (DPC)

  Contingency

  % DPC Low

  12 Average

  15 High _{Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY}

  25

X.2. WORKING CAPITAL

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Working Capital

  1. Raw material inventory

  estimate : 1 month supply at purchased value

  2. In process inventory

  estimate : 0.5 total manufacturing cost X total hold-up time

  3. Product inventory :1 month production, value at manufacturing cost

  estimate

  4. Extended credit

  estimate : 1 month production at sales value, or 2x manufacturing cost

  5. Available cash

  estimate : 1 month manufacturing cost Note: monthly manufacturing cost

  Estimate: I = r (m+4M+0.5MQ)

  w m _{Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY} where Q : production cycle (month)

X.3. MANUFACTURING COST

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Manufacturing Cost

  1. Raw materials

  2. Labor

  3. Supervision

  4. Maintenance

  5. Plant supplies

  6. Royalties and patents

• 7. Utilities

  Direct Manufacturing Cost

  8. Payroll overhead

  9. Laboratory

  10. Plant overhead

  11. Packaging

• 12. Shipping

  Indirect Manufacturing Cost

  13. Depreciation

  14. Property fixed

  15. Insurance +

  Fixed Manufacturing Cost _{Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY} Manufacturing cost = Direct + Indirect + Fixed

• Purchased cost + delivery expenses
• Amortized costs of catalyst
• 5 – 10% MC
• 15 – 20% MC for considerable handling
• Simple operations: 10% labor cost
• Complex operations: 25% labor cost

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Direct Manufacturing Cost

  1. Raw Materials:

  2. Labor: Related to the production directly  operator’s total salary average:

  3. Supervision:

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Direct Manufacturing Cost

  5. Plant supplies: Used in normal operation: gaskets, lubricants, charts;

  Around 15% of maintenance cost

  6. Royalties and patents: 1 – 5% sales price :

  7. Utilities:

  water, steam, power (electrical), fuel, etc. calculated based on the process

  4. Maintenance: Cost of materials and labor for routine maintenance and incidental repairs:

  Annual maintenance % Fixed Cap

  Simple 2 – 4% Average 6 – 7% Complicated 8 – 10%

  

Indirect Manufacturing Cost

  8. Payroll overhead: Pension, vacation, insurance, social security, 15 – 20% labor cost

  9. Laboratory: Quality control, 10 – 15% labor cost

  10. Plant overhead: health, trip (holiday), ware house, 50 – 100% labor cost

  11. Packaging:

  Food product 24% sales price Oil product 35% sales price

  12. Shipping: shipping cost

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Fixed Manufacturing Cost

  13. Depreciation: as an economic plant

  14. Property taxes:

  1 – 2% Fixed Capital

  15. Insurance:

  1% Fixed Capital Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

  

Typical labor requirements for process equipment

Type of equipment Workers/Unit/Shift

Dryer, rotary 1/2 Dryer, spray

  1 Dryer, tray 1/2 Centrifugal separator 1/2 – 1/4 Crystallizer, mechanical 1/6

Filter, vacuum 1/8 – 1/4

  Evaporator 1/4 Reactor, batch

  1 Reactor, continuous 1/2 Steam plant (100,000 lb/h)

  3 Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Scale up of labor cost

.

  25   N r

  B B   

  N r A A

   

Here N and r refer to the number of operators per shift and

plant capacity, respectively of two plants, A and B , different in

capacity, but producing the same product. The capacity

exponent is about 0.25

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

X.4. GENERAL EXPENSES

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

General Expenses

  1. Administration 2 – 3% or 4 – 6%

  sales manufacturing cost

  2. Sales: for promotion, 3 – 12% sales

  3. Research: 2 – 4%

  sales

  4. Finance: pay interest (bank) for a loan (part of) Fixed Capital and Working Capital the amount is = i F (FC.K F ) + i w (WC.K w )

  Profit: Sales ……………………… ……………………

  Manufacturing cost

  ……………………

  General expense

  ………………………

  Total cost

• – ………………………

  Profit before taxes

  ………………………

  Taxes (up to 52%)

• – ………………………
_{Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY} Profit after taxes

  

Process Classification

( in calculation of manufacturing cost )

  1. One main product: production cost is loaded to a main product

  2. Two or more of main products: production cost is loaded to all main products based on:

• production quantity,
• product’s price

  3. There is a sold byproduct: production cost is loaded to the main product, subtracted by (byproduct’s price – additional operating cost) Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

X.5.

  18

  10

  44 Fermentation products

  21

  56 Paints

  24

  40 Pharmaceutical

  39 Pulp and paper

  PROFITABILITY Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

  16

  44 Petroleum

  11

  ROI Types Low risk High risk Industrial chemical

  % 100 x Capital Fixed Profit 

  

Return on Investment (ROI)

 Profit before/after tax  For Minimum ROI Standard, use profit before taxes

  49 Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Pay Out Time (POT)

  Depreciati on Profit Capital Fixed  

  3

  2. Variable cost:  Raw Materials  Packaging  Utilities  Royalties

  1. Fixed Cost:  Depreciation  Taxes  Insurances

  2 Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

BEP and SDP Calculation

  3

  2 Fermentation products

  3

  2 Paints

  2 Pharmaceutical

  POT  Unit: year  Aries Newton:  Maximum limit:

  4

  2 Pulp and paper

  5

  2 Petroleum

  5

   POT Types Low risk High risk Industrial chemical

  FC Tax 1 . Before Profit Capital Fixed 

  3. Regulated cost  Labor  Supervision  Overhead  Laboratory  Maintenance  Plant Supplies  General Expenses

  Dr. Eng. Y. D. Hermawan – ChemEng - UPNVY

Break Even Point

  

Production Capacity (%)

100 Fixed Cost Variable Cost Regular cost Sales

  BEP SDP Rp/tahun or

  $/yr SDP: Shut Down Point Interested BEP: 40% - 60%