Industrial Economics

Course No. 508

Lecture 4

Dr. SYED IMRAN ALI

Department of Applied Chemistry & Chemical Technology,

University of Karachi

Estimating Capital Costs… Equipment Cost Data…

Continued form last topic in lecture 3

Sources: Purchased Equipment Cost can be determine from….

IMPORTANT POINTS:

If the cost of similar equipment is available from past data or cost
estimation tables, we can determine the cost of new equipment after
correcting for time & size

Correction for time is done using Cost Index

Correction for size is done by Cost Capacity Correlation

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Estimating Capital Costs… Equipment Cost Data…

COST INDEXES: Correcting Equipment Cost for Inflation

 If we use past cost data for estimation, correction must be needed for inflation using
Cost or Inflation Indexes

 Cost indexes are dimensionless numbers used to update cost from a past date to a
later time, following changes in the value of money due to inflation and deflation

 If the cost at some time in past is known, equivalent cost at present time can be
determined using cost index:

𝑰𝒏𝒅𝒆𝒙 𝑽𝒂𝒍𝒖𝒆 𝒂𝒕 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑻𝒊𝒎𝒆

𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑪𝒐𝒔𝒕 = 𝑷𝒂𝒔𝒕 𝑪𝒐𝒔𝒕 ( )
𝑰𝒏𝒅𝒆𝒙 𝑽𝒂𝒍𝒖𝒆 𝒂𝒕 𝒕𝒊𝒎𝒆 𝒘𝒉𝒆𝒏 𝑷𝒂𝒔𝒕 𝑪𝒐𝒔𝒕 𝒘𝒂𝒔 𝑶𝒃𝒕𝒂𝒊𝒏𝒆𝒅

Estimating Capital Costs… Equipment Cost Data… Cost Index….

Common Cost Indexes

Different types of cost indexes published each year and are available for use
For example:
 Engineering News-Record Construction & Building Indexes

 Marshall & Swift Installed Equipment Index (from Chem. Engineering Magazine)

 Nelson Refinery Construction Index (from Oil & Gas Journal)

 Chemical Engineering Index (from Chem. Engineering Magazine)

 Wholesale Price Index of the US Department of Commerce

4Most of the Indexes for each year are available online

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Estimating Capital Costs… Equipment Cost Data… Cost Index….

IMPORTANT POINT ABOUT USE OF INDEX:

 To get best estimate, each job should be broken down into its components, and
separate indices should be used for labor and materials.

 A composite index for US process industry published monthly in journal Chem.

Eng. known as Chemical Engineering Plant Cost Index (CEPCI) or CE index.

 This journal also publish Marshall & Swift Index (M&S Equipment Cost Index).

 For oil refinery & petrochemicals projects, Nelson-Farrer Refinery Construction

Index (NF index) is commonly used.

Estimating Capital Costs… Equipment Cost Data… Cost Index….

 Often, to estimate futurecost, some

prediction has to be made for future
annual rate of inflation by
Index Value

extrapolation of published indices

Year

Variation of Major Cost Indices

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 Estimating Capital Costs… Equipment Cost Data… Cost Index….

Estimating Capital Costs… Equipment Cost Data…

Estimating Equipment Costs by Scaling

Effect of Size (Capacity) on Cost (Cost Capacity Relation)
 O-of-M estimate of an equipment cost can be done by scaling from a known cost of
a similar equipment using a logarithmic relationship of the form:
𝒏
𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 𝒐𝒇 𝑬𝒒𝒖𝒊𝒑. 𝑨
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 𝑨 = 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 𝑩
𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 𝒐𝒇 𝑬𝒒𝒖𝒊𝒑. 𝑩
𝒏
𝑺𝑨
𝑪𝑨 = 𝑪𝑩
or 𝑺𝑩
Where CA & CB are required and base costs, SA & SB are the respective capacities,
n is the cost exponent.
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Estimating Capital Costs… Equipment Cost Data… Cost Capacity Relation…

 Actual values of cost capacity factor (n) vary from < 0.2 to >1

 Averaged value of 0.6 is often used and, hence equation (01) is commonly
referred to as the ‘‘six-teenths rule.’’
 A generalized form of the equation is:
𝒏
𝑺𝟏
𝑪𝟏 = 𝑪𝟐 (1)
𝑺𝟐
Where,

C1 = cost of equipment with capacity S1

C2 = cost of equipment with capacity S2

n = an exponent that varies b/w 0.3 and 1.2 depending on the type of equipment
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Estimating Capital Costs… Equipment Cost Data… Cost Capacity Relation…

 Equation (1) can be rearranged as:

𝑪𝟐 𝒏
𝑪𝟏 = 𝒏 𝑺𝟏
𝑺𝟐
𝑪𝟐
𝑪𝟏 = K 𝑺𝟏𝒏 (2) The Power Law Where 𝑲 =
𝑺𝟐 𝒏
Taking Log on both sides:

𝑳𝒐𝒈 𝑪𝟏 = 𝒏 𝑳𝒐𝒈 𝑺𝟏 + 𝑳𝒐𝒈 𝑲 Please recall, 𝑦 = 𝑚𝑥 + 𝑏)

Linear relation with slop = Log K and y-intercept = n

Thus a log-log plot of capacity versus equipment cost for a given type of equipment
should be a straight line with a slope equal to n
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Estimating Capital Costs… Equipment Cost Data… Cost Capacity Relation…

‘‘The Six-Teenths Rule.’’ Important Points!

 If no sufficient data are available, 0.6 can be used as rough estimate for the

value of n

 If sufficient data are available, the relationship is best represented by a log-log plot

and n can calculated from the slop.

 Cost-capacity concept SHOULD NOT be used beyond tenfold range of capacity

 The method is valid if the two equipment are similar in terms of type of
construction, materials of construction, temperature and pressure operating range
and other
13 variables.

Estimating Capital Costs… Equipment Cost Data… Cost Capacity Relation…

‘‘The Six-Teenths Rule.’’ Important Points…

From:
Max S. Peters &
Klaus D.
Timmerhaus

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Estimating Capital Costs… Equipment Cost Data… Examples…

Example 1: Estimation of fixed-capital investment using ranges of process-

plant component costs. Make a study estimate of the fixed-capital investment for a
process plant if the purchased-equipment cost is $100,000. Use the ranges of
process-plant component cost outlined in Table 4 for a process plant handling both
solids and fluids with a high degree of automatic controls and essentially outdoor
operation.

From Max S. Peters & Klaus D. Timmerhaus , Chapter 6

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Estimating Capital Costs… Equipment Cost Data… Examples…

Example Problem:
Recently a cast iron pressure filter with 100 ft2 was purchased for clarifying an
inorganic liquid stream for $15,000. In a similar application, the company will need a
450 ft2 cast iron leaf pressure filter. The size exponent for this type filter is 0.6.
Estimate the purchased price of the 450 ft2 unit.
SOLUTION:

Note the economy of scale!

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Estimating Capital Costs… Equipment Cost Data… Examples…

Example 2 Estimating cost of equipment using scaling factors 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.
Max S. Peters & Klaus D. Timmerhaus
Solution.
Marshall and Swift equipment-cost index (all industry)
(From Table 3) For 1981 721
(From Table 3) For 1986 798
In Table 5, exponent for equipment cost vs. capacity is 0.54
𝟎.𝟓𝟒
𝟕𝟗𝟖 𝟑𝟎𝟎
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑹𝒆𝒂𝒄𝒕𝒐𝒓 𝒊𝒏 𝟏𝟗𝟖𝟔 = $𝟖𝟑𝟓𝟎
𝟕𝟐𝟏 𝟓𝟎
17 = $ 𝟐𝟒, 𝟑𝟎𝟎

Max S. Peters & Klaus D. Timmerhaus

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 Estimating Capital Costs… Equipment Cost Data… Examples…

For example 2

Max S. Peters & Klaus D. Timmerhaus

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Estimating Capital Costs… Equipment Cost Data… Examples…

Example Problem
Use the six-tenths-rule to estimate the % increase in purchased cost when the
capacity of a piece of equipment is doubled
SOLUTION: 𝟎.𝟔
𝟐
Using equation (1) 𝑪𝟏 = 𝑪 𝟐 𝑪𝟏
𝟏

= 𝟏. 𝟓𝟐𝑪𝟐

𝟏. 𝟓𝟐𝑪𝟐 − 𝑪𝟐 100 % increase in capacity only

% 𝒊𝒏𝒄𝒓𝒆𝒂𝒔𝒆 𝒊𝒏 𝑪𝒐𝒔𝒕 = × 𝟏𝟎𝟎
𝑪𝟐 results in 50 5 increase in cost!
= 𝟓𝟐 %

The larger the equipment, the lower the cost of equipment per unit of capacity
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Estimating Capital Costs… Equipment Cost Data… Examples…

Example Problem

SOLUTION:

Estimating Capital Costs… Equipment Cost Data… Examples…

Example Problem
Cost of a vessel in 1993 was 25,000, what is the estimated cost on Sept 2003?

SOLUTION
First we find out the index values for the two years using table (available in books)
CEPCI in 1993= 359
CEPCI in 2003= 402
Now wecan calculate the required cost as:

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 Estimating Capital Costs… Equipment Cost Data… Examples…

If sufficient data is available, we can calculate the actual value of n rather than using 0.6
Example Problem
Two heat exchangers, one bought in 1990 and the other in 1995 for the same
service. The specifications are:
Heat Exchanger A Heat Exchanger B
Area = 70 m2 Area = 130 m2
Time = 1990 Time = 1995
Cost = 17 K Cost = 24 K
I = 358 I = 381
What is the Cost of a 80 m2 Heat Exchanger Today? (I = 402)

Note: Capacity
23 of Heat Exchanger is measured in terms of its heat transfer area

Estimating Capital Costs… Equipment Cost Data… Examples…

SOLUTION:
First Bring Cost of both HE to a Common Time (i.e 2003):

For Heat Exchanger A, Area = 70 m2 :

For Heat Exchanger B, Area = 130 m2 :

Using these two points, we can calculate value of exponent n (slop of cost-capacity
log-log relationship)

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Estimating Capital Costs… Equipment Cost Data… Examples…

Applying the power law,

𝒏
𝑺𝒂
𝑪𝒂 = 𝑪𝒃
𝑺𝒃

𝟎.𝟒𝟓𝟔𝟓
𝟖𝟎
𝑪𝒂 = 𝟏𝟗. 𝟎𝟖𝟗
𝟕𝟎

𝑪𝒂 = $ 𝟐𝟎. 𝟐𝟖𝟖 𝑲

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