Methods for estimating

capital investment
Dr.Asmaa Ali Mohamed Ali
Assistant professor at chem.eng.dept. uofk.
Email: [email protected]
Lec. 9

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• Various methods can be employed for estimating capital investment
• The choice of any one method depends upon the amount of detailed
information available and the accuracy desired

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 1-Detailed-item Estimate
• Requires careful determination of each individual item shown in Table 1.
• Equipment and material needs are determined from completed drawings and
specifications and are priced either from current cost data or preferably from firm
delivered quotations.
• Estimates of installation costs are determined from accurate labor rates, efficiencies,
and employee-hour calculations
• Accurate estimates of engineering, drafting, field supervision employee-hours
• Extensive data necessary and the large amounts of engineering time required to
prepare such a detailed-item estimate, this type of estimate is almost exclusively only
prepared by contractors bidding on lump-sum work from finished drawings and
specifications.
• A maximum accuracy within approximately %5 of the actual capital investment can be
obtained with this method
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Table 1

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2- Unit-cost Estimate
• The method is frequently used for preparing definitive and
preliminary estimates
• requires detailed estimates of purchased price obtained either from
quotations or index-corrected cost records and published data.

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3- Percentage Of Delivered-equipment Cost
• requires determination of the delivered-equipment cost
• other items are then estimated as percentages of the delivered-
equipment cost
• This method is used for preliminary and study estimates, It yields
most accurate results when applied to projects similar in
configuration to recently constructed plants.

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Example
• Prepare a study estimate of the tied-capital investment for a process
plant handling both solids and fluids with a high degree of automatic
controls and essentially outdoor operation. if the delivered
equipment cost is $100,000.

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4- “Lang” Factors For Approximation Of
Capital Investment
• proposed originally by “Lang” and used quite frequently to obtain
order-of-magnitude cost estimates
• the cost of a process plant may be obtained by multiplying the basic
equipment cost by some factor to approximate the capital investment
• These factors vary depending upon the type of process plant being
considered

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• Greater accuracy can be obtained, One approach is to use different
factors for different types of equipment
• Another approach is to use separate factors for erection of equipment,
foundations, utilities, piping, etc., or even to break up each item of cost
into material and labor factors

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5- Power Factor Applied To Plant-capacity
Ratio
• Method is used for study or order-of-magnitude estimates relates the
fixed-capital investment of a new process plant to the fixed-capital
investment of similar previously constructed plants by an exponential
power ratio.
•
• R= the capacity of the new facility divided by the capacity of the old
• C= the fixed-capital investment of the constructed facility
• n= average between 0.4 and 0.8 for many process facilities

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6- Investment Cost Per Unit Of Capacity
• Many data have been published giving the fixed-capital investment
required for various processes per unit of annual production capacity
• The previous table
• An order-of-magnitude estimate of the fixed-capital investment for a
given process can then be obtained by multiplying the appropriate
investment cost per unit of capacity by the annual production
capacity of the proposed plant

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7- Turn Over Ratio
• A rapid evaluation method suitable for order-of-magnitude estimates
• defined as the ratio of gross annual sales to the fixed-capital investment
• Turnover ratio = gross annual sales / fixed-capital investment
• The reciprocal of the turnover ratio is sometimes defined as the capital
ratio or the investment ratio
• Turnover ratios of up to 5 are common for some business
establishments and some are as low as 0.2
• For the chemical industry, as a very rough rule of thumb, the ratio can
be approximated as 1.

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Organization For Presenting Capital Investment Estimates By
Compartmentalization
• the direct application of the above methods can often be accomplished with considerable
improvement by considering the fixed-capital investment requirement by parts
• each identified part is treated as a separate unit to obtain the total investment cost directly
related to it
• forms of compartmentalization:
1. the modular estimate (bare module)
2. the unit-operations estimate
3. the functional-unit estimate
4. average-unit-cost estimate
• For the modular estimate, the basis is to consider individual modules in the total system with
each consisting of a group of similar items ( heat exchangers module, furnces module, vertical
vessels module,…..)
• The total cost estimate is considered under six general groupings including chemical
processing, solids handling, site development, industrial buildings, offsite facilities, and
project indirect
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• For heat exchanger cost module:
• the module would include the basic delivered cost of the piece of equipment with factors
similar to Lang factors being presented for supplemental items needed to get the
equipment ready for use such as piping, insulation, paint, labor, auxiliaries, indirect
costs, and contingencies
• In presenting the basic data for the module factors, the three critical variables
are size or capacity of the equipment, materials of construction, and operating
pressure with temperature often being given as a fourth critical variable
• It is convenient to establish the base cost of all equipment as that constructed of
carbon steel and operated at atmospheric pressure
• Correction factors for different material of construction, pressure and
temperature can be used
• Once the equipment cost for the module is determined, various factors are
applied to obtain the final fixed-capital investment estimate for the item
completely installed and ready for operation
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• unit-operations estimate: involve similar types of operations requiring related
types of auxiliaries. example: distillation operation requiring the distillation
column with the necessary auxiliaries of reboiler, condenser, pumps, holdup
tanks, and structural supports
• the functional-unit estimate: based on the grouping of equipment by function
such as distillation or filtration and including the fundamental pieces of
equipment as the initial basis with factors applied to give the final estimate of
the capital investment.
• The average-unit-cost: puts special emphasis on the three variables of size of
equipment, materials of construction, and operating pressure as well as on the
type of process involved. Defined as: the total cost of the process
equipment divided by the number of equipment items in that
particular process
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Module Factor Approach
o
CBM  C p FBM Bare Module Factor
(sum of all multipliers)

Bare Module Purchased Equipment Cost for CS

Cost and 1 atm. pressure
o
FBM  B1  B2
FBM = B1 + B2FpFM
Fp = pressure factor (= 1 for 1 bar)
FM = material of construction factor (=1 for CS)

C p  C op Fp FM
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Bare Module Cost Factor
For Heat Exchangers, Process vessels, and pumps
Values of B1 and B2 are given in Table A.4

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Module Factor Approach – Pressure Factors

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Material Factor
Material Factor, FM , for other equipment are given in table
15.5

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Total module cost = bare module
cost + contingency+ fee

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Example 5.9
The purchased cost for a carbon steel heat exchanger operating at
ambient pressure is $10,000. For a heat exchanger module given the
following cost information:
Item % of Purchased Equipment Cost
Equipment 100.0
Materials 71.4
Labor 63.0
Freight 8.0
Overhead 63.4
Engineering 23.3
Using the information given above, determine the equivalent cost
multipliers given in Table 5.8 and the following:
0
a. Bare module cost factor, FBM
b. Bare module cost, CBM 0

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Item % of Purchased Cost Multiplier Value of Multiplier
Equipment Cost
Equipment 100.0 1.0
Materials 71.4 M 0.714
Labor 63.0 L
0.63/(1+0.714)=
0.368
Freight 8.0  FIT 0.08/(1+0.714)=
0.047
Overhead 63.4 0.634/0.368/
O
(1+0.714)= 1.005
Engineering 23.3 E 0.233/(1+0.714) =
0.136

a. Using Equation 5.8:

0
FBM = (1 + 0.368 + 0.047 + (1.005)(0.368) + 0.136)(1 + 0.714) = 3.291
b. From Equation 5.6:
0
CBM = (3.291)($10,000) = $32,910
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Example
 Compare Costs for
 1. Shell-and-tube heat exchanger in 2001 with an area =

100 m2 for
 Carbon Steel at 1 bar

 Carbon Steel at 100 bar

 Stainless Steel at 1 bar

 Stainless Steel at 100 bar

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Effect of Materials of Construction
and Pressure on Bare Module Cost
P MOC C op Cp o
CBM CBM

1 bar CS 25 K 25 K 82.3 K 82.3 K

1 bar SS 25 K 68.3 K 82.3 K 154 K

100 bar CS 25 K 34.6 K 82.3 K 98.1 K

100 bar SS 25 K 94.4 K 82.3 K 197.4

K
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Bare-Module and Total-
Module Costs
 BM – Previously Covered
 TM – Includes Contingency and Fees at 15%
and 3% of BM

CTM  1.18  CBM

all equip

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Grass-Roots Costs
 GR – grass-roots cost includes costs for
auxiliary facilities

CGR  0.50  o
CBM  CTM
all equip

 Use base BM costs in GR cost (1 atm and

CS) since auxiliary facilities should not
depend on pressure or M.O.C.

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Operating costs
• The fees necessary to manufacture and deliver the product give the
second big category of costs, called here operating costs or (total
product costs) or (manufacturing costs).
• Elements of operating cost:
• Manufacturing cost
• General expenses

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• Manufacturing cost:
• Direct production cost
• Fixed charges
• Plant overhead cost
• General expenses:
• Administration
• Distribution and marketing
• Research and development
• Financial charges

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Raw materials

• could represent up to 50-60% of the total operation costs

• is time variable and highly uncertain
• Sources of prices are specialised
journals as Chemical Market Reporter, and more recently on Internet
site
• Freight and transportation fees should be included.

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Utilities
• steam, water, refrigerants, natural gas, liquid fuel, electricity,
etc.
• can be determined accurately from the material and energy
balance
• Electricity consumption must be included in the case of
compressors, blowers, high pressure pumps, vacuum systems,
very viscous liquids, pneumatic transportation, mixing vessels,
and in general for power intensive operations.
• As a rough approximation, the costs of utilities might
represent 10 to 20% of the total
operating costs

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 Operating labour
• designates the cost of human operators involved in plant
operation.
• Estimation from old sources is obsolete because of
automation and supervision by computers.
• Wages are difficult to estimate, situation is very variable
from country to country, particularly regarding the
special allowances for employees, but also the
employer contributions to social security

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Capcost
• A Microsoft excel macro enabled file that allows the calculations of
equipment costs, total plant cost , cost of manufacturing, and cash
flow analysis
• The program is user friendly

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Questions?

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