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ENGINEERING ECONOMICS AND ECONOMIC DESIGN FOR PROCESS ENGINEERS Notes, eBook download
Rajan Sharma

ENGINEERING ECONOMICS AND ECONOMIC DESIGN FOR PROCESS ENGINEERS Notes, eBook download

Rajan Sharma | 15-Feb-2016 |
Economic Side of Engineering , Time Value of Money , Estimating Investments , Estimating Production Cost , Economic Evaluation Methods , Economic Design , Defining Objectives , Creating Options , Flowsheet Development , Option/Alternate Analysis , Economic , Design Case Studies , Economic Side of Engineering , Time Value of Money , Estimating Investments , Estimating Production Cost , Economic Evaluation Methods , Economic Design , Defining Objectives , Creating Options , Flowsheet Development , Option/Alternate Analysis , Economic , Design Case Studies ,

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SECTION I Engineering Economics ....................... 1
Chapter 1 The Economic Side of Engineering ....................................................3
1.1 The Engineer’s Role in Profit Creation ................................................... 3
1.2 Economic Viability ..........................................................................................3
1.3 Project Authorization ............................................................................... 5
1.4 Types of Projects..............................................................................................5
1.5 Funding.............................................................................................................5
1.5.1 Funding Considerations .......................................................................6
1.5.2 Funding Decisions................................................................................6
1.6 Investments, Revenues, Expenses, and Profit .................................................7
1.6.1 Investments...........................................................................................7
1.6.2 Revenues, Expenses, and Profits .........................................................8
1.6.3 Project Risks and Risk Analysis..........................................................9
1.7 Economic Work after Funding ......................................................................10
1.8 Corporate Cash Flow .....................................................................................10
1.8.1 What Is Cash Flow?...........................................................................10
1.8.2 Operating Activities ...........................................................................12
1.8.2.1 After-Tax Profit...................................................................12
1.8.2.2 Depreciation/Amortization .................................................13
1.8.2.3 Working Capital Changes...................................................15
1.8.3 Investing Activities.............................................................................15
1.8.3.1 Asset Sales ..........................................................................16
1.8.3.2 Capital Investments.............................................................16
1.8.3.3 Acquisitions ........................................................................16
1.8.3.4 Investing Gains and Losses ................................................16
1.8.4 Financing Activities ...........................................................................16
1.8.4.1 Dividends to Shareholders..................................................16
1.8.4.2 Treasury Stock Purchase ....................................................16
1.8.4.3 Change in Debt...................................................................17
1.8.5 Year-End Cash Balance .....................................................................17
1.8.5.1 Exchange Rate Changes .....................................................17
1.8.6 An Example Illustrates.......................................................................17
1.8.6.1 Operating Activities Cash Flow .........................................17
1.8.6.2 Investing Activities Cash Flow...........................................18
1.8.6.3 Financing Activities Cash Flow .........................................18
1.8.6.4 Total Cash Flow..................................................................18
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1.8.6.5 Year-End Cash Balance ......................................................19
1.9 Summary ........................................................................................................19
1.10 Problems and Exercises .................................................................................19
References................................................................................................................20
Chapter 2 Time Value of Money ........................................................................21
2.1 Cash Flow Diagrams......................................................................................21
2.2 Interest............................................................................................................22
2.2.1 Simple Interest ...................................................................................22
2.2.2 Compound Interest.............................................................................23
2.2.2.1 Compounding Other Than Annually ..................................23
2.3 Present Worth, Future Worth, and Annuities.................................................23
2.3.1 Present and Future Worth ..................................................................23
2.3.2 Annuities ............................................................................................25
2.3.3 Making Calculations ..........................................................................26
2.3.3.1 Formulas and Cash Flow Diagrams ...................................26
2.3.3.2 Determining n, Counting Periods.......................................26
2.3.3.3 Compound Interest Tables ..................................................30
2.4 Before- and After-Tax Considerations...........................................................32
2.4.1 Depreciation .......................................................................................33
2.4.1.1 Straight-Line .......................................................................33
2.4.1.2 Modified Accelerated Cost Recovery System (MACRS)..33
2.4.2 After-Tax Cash Flows ........................................................................35
2.5 Inflation and Indices.......................................................................................35
2.5.1 Process Plant Equipment and Construction ......................................36
2.5.2 Chemical Product Costs.....................................................................36
2.6 Summary ........................................................................................................37
2.7 Problems and Exercises .................................................................................37
2.8 Additional Topic.............................................................................................38
2.8.1 Compounding Other Than Annually ....................................................38
2.9 Problems and Exercises .................................................................................41
Chapter 3 Estimating Investments ......................................................................43
3.1 Capital Costs Defined ....................................................................................43
3.2 Estimating Capital..........................................................................................45
3.2.1 Inflation Adjustments .........................................................................45
3.2.2 Order-of-Magnitude Estimates (OOM) .............................................45
3.2.2.1 Ratioing by Capacity ..........................................................46
3.2.2.2 Scaling by Capital/Unit of Capacity or by Capital/Unit
of Sales................................................................................47
3.2.2.3 Other ...................................................................................48
3.2.3 Study Estimates..................................................................................48
3.2.3.1 The Lang Method ...............................................................49
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3.2.3.2 The Hand Method...............................................................50
3.2.3.3 Adjusting Lang and Hand Factors for Materials Other
Than Carbon Steel ..............................................................50
3.2.3.4 Other Factors ......................................................................51
3.2.3.5 The Methods in Final Form ...............................................52
3.2.3.6 Creating One’s Own Factors ..............................................53
3.2.3.7 Other Factor Methods.........................................................55
3.2.4 Equipment Purchase Cost Estimating ...............................................55
3.2.4.1 Budget Quotes ....................................................................56
3.2.4.2 Company or Personal Data.................................................56
3.2.4.3 Purchased Data and Software.............................................56
3.2.4.4 Published Data ....................................................................56
3.2.5 An Example Illustrates the Methods .................................................58
3.2.5.1 The Lang Method ...............................................................58
3.2.5.2 The Hand Method...............................................................59
3.2.5.3 Observations/Conclusions...................................................59
3.2.6 How to Use the Factors with Spare and Used Equipment ...............60
3.3 Estimating the Other Investments..................................................................61
3.3.1 Working Capital .................................................................................61
3.3.2 Startup Expenses ................................................................................61
3.3.3 Supplier Advances and Royalties ......................................................62
3.4 Summary ........................................................................................................62
3.5 Problems/Exercises ........................................................................................62
3.6 Additional Topic.............................................................................................63
3.6.1 Types of Estimates................................................................................63
References................................................................................................................67
Chapter 4 Estimating Production Cost ...............................................................69
4.1 Production Costs Defined ..............................................................................69
4.1.1 Cost Categories ..................................................................................69
4.2 Fixed and Variable Costs ...............................................................................71
4.3 Estimating Methods .......................................................................................71
4.3.1 General ...............................................................................................71
4.3.1.1 Inflation Adjustments..........................................................71
4.3.1.2 Plant Production vs. Design Rate.......................................71
4.3.2 Flexing Existing Costs for Production Volume Changes..................72
4.3.3 Study Estimates..................................................................................73
4.3.3.1 Detailed Estimate Subcategories. .......................................73
4.3.3.2 Factored Subcategories .......................................................81
4.4 Summary ........................................................................................................81
4.4.1 An Example Illustrates .....................................................................81
4.5 Problems and Exercises .................................................................................87
4.6 Additional Topic.............................................................................................90
4.6.1 Product Cost and General Expense ...................................................90
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References................................................................................................................92
Chapter 5 Economic Evaluation Methods ..........................................................93
5.1 Evaluation Methods .......................................................................................93
5.1.1 Net Present Value (NPV) ...................................................................93
5.1.2 Annual Cost (AC) ..............................................................................95
5.1.3 When Is Year 1 for a Typical Project? ..............................................96
5.1.4 NPV or AC? .......................................................................................98
5.1.5 Return on Investment (ROI) ..............................................................99
5.1.6 Breakeven Volume..............................................................................99
5.2 Other Methods..............................................................................................103
5.2.1 Benefit–Cost Ratio ...........................................................................103
5.2.2 Years-to-Payout ................................................................................103
5.2.3 Capitalized Cost ...............................................................................103
5.3 Analysis of Risk...........................................................................................104
5.3.1 Senstivity Analysis ...........................................................................104
5.3.2 Decision Trees..................................................................................106
5.4 Summary ......................................................................................................112
5.5 Problems and Exercises ...............................................................................112
5.6 Additional Topics .........................................................................................115
5.6.1 Creating Guidelines for Rapid ROI Calculation .............................115
5.6.2 What to Use — Constant Dollars or Actual Dollars ......................116
SECTION II Economic Design ........................... 121
Chapter 6 Economic Design: A Model ............................................................123
6.1 Defining Economic Design..........................................................................123
6.2 The Economic Design Model......................................................................126
6.2.1 Defining Objectives..........................................................................126
6.2.2 Creating Options ..............................................................................127
6.2.2.1 Flowsheet Development....................................................127
6.2.2.2 Creating an Option List....................................................129
6.2.3 Analyzing and Selecting Options ....................................................131
6.2.3.1 Technical Feasibility Comes First ....................................131
6.2.3.2 Assess Costs of the Technically Feasible Options...........131
6.2.3.3 Selecting an Option ..........................................................132
6.3 Summary ......................................................................................................132
Reference ...............................................................................................................132
Chapter 7 Defining Objectives..........................................................................133
7.1 Why Define Objectives? ..............................................................................133
7.2 What Do Good Objectives Look Like?.......................................................133
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7.3 An Example..................................................................................................134
7.4 Project Objectives ........................................................................................136
7.4.1 Business Objectives .........................................................................136
7.4.2 Technical Objectives ........................................................................139
7.5 How to Get Input from the Key Stakeholders (and Ensure It Is Correct) .... 143
7.5.1 Getting Manager Input.....................................................................143
7.5.1.1 Business Manager Interview Structure ............................143
7.5.1.2 Technical Manager Interview Structure ...........................144
7.5.1.3 Conducting the Interview .................................................145
7.5.2 Writing Down the Objectives ..........................................................147
7.6 Summary ......................................................................................................148
7.7 Problems and Exercises ...............................................................................149
References..............................................................................................................150
Chapter 8 Creating Options: Flowsheet Development.....................................151
8.1 Design (or Project) Phases...........................................................................151
8.2 Flowsheet Development...............................................................................151
8.2.1 The Generic Block Flow Diagram ..................................................153
8.2.2 Technical Function Flowsheets........................................................154
8.2.3 The Technical Function Definition ..................................................156
8.3 Summary ......................................................................................................158
8.4 Problems and Exercises ...............................................................................162
8.5 Additional Topics .........................................................................................166
8.5.1 Types of Flowsheets.........................................................................166
8.5.1.1 Block Flow Diagrams.......................................................166
8.5.1.2 Process Flowsheets ...........................................................169
8.5.1.3 Process and Instrumentation Diagrams (P&ID) ..............169
References..............................................................................................................172
Chapter 9 Creating Options: Creating the List ................................................173
9.1 General Methods ..........................................................................................173
9.1.1 Brainstorming...................................................................................173
9.1.2 The 6-3-5 Method ............................................................................174
9.2 Process Development Methods....................................................................174
9.2.1 Unit Operation Guides .....................................................................175
9.2.1.1 Use of the Guides .............................................................175
9.2.2 General Process and Process Interaction Questions .......................190
9.2.2.1 The Questions — Further Thoughts.................................190
9.3 Feasibility and Conceptual Engineering......................................................192
9.3.1 The Feasibility/Conceptual Checklist..............................................192
9.3.1.1 The Checklist — Further Thoughts .................................192
9.4 Summary ......................................................................................................196
9.5 Problems and Exercises ...............................................................................197
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References..............................................................................................................199
Chapter 10 Option/Alternate Analysis................................................................201
10.1 Technical Feasibility Comes First ...............................................................201
10.2 Economic Analysis Methodology................................................................201
10.2.1 Variable Selection ............................................................................202
10.2.2 Equipment Sizing — Cost Estimation ............................................202
10.2.3 Compare the Options Economically................................................203
10.2.3.1 Use the Same Economic Life...........................................203
10.2.4 The Economic Design Point............................................................205
10.3 The Economics of Selecting Equipment .....................................................210
10.3.1 Pumps: Preliminary Selection..........................................................211
10.3.1.1 Technical Considerations..................................................211
10.3.1.2 Economic Considerations .................................................212
10.3.1.3 Selection Guideline...........................................................212
10.3.2 Heat Exchangers: Preliminary Selection .........................................212
10.3.2.1 Technical Feasibility.........................................................213
10.3.2.2 Economic Considerations .................................................213
10.3.3 Examples Illustrate...........................................................................213
10.4 The Economics of Plant Siting....................................................................216
10.4.1 How to Set Up the Economic Study ...............................................217
10.4.2 How to Go about Rough Siting.......................................................217
10.4.2.1 Subdividing the Distribution Area....................................217
10.4.2.2 Locating Plants Based on Customer and
Supplier Locations ............................................................218
10.4.3 Siting Criteria...................................................................................223
10.4.3.1 Proximity to Suppliers and Customers ............................223
10.4.3.2 Labor Considerations........................................................224
10.4.3.4 Utility Availability and Cost.............................................224
10.4.3.5 Health, Safety, and Environmental Considerations..........224
10.4.3.6 Locale................................................................................225
10.4.3.7 Community Considerations ..............................................225
10.5 Summary ......................................................................................................225
10.5.1 Economic Comparisons ...................................................................225
10.5.2 Economic Equipment Selection.......................................................226
10.5.3 Economic Plant Siting .....................................................................226
10.6 Problems and Exercises ...............................................................................227
10.7 Additional Topic...........................................................................................232
10.7.1 How to Decide Whether to Install Capacity for an Assumed
Future Need......................................................................................232
10.7.1.1 The Two Options ..............................................................232
10.7.1.2 The Breakeven Point and Decision Guidelines ...............232
10.7.1.3 Calculation of the Breakeven Point, nb ............................234
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10.7.1.4 Examples Illustrate ...........................................................235
References..............................................................................................................236
Chapter 11 Economic Design Case Studies .......................................................237
11.1 Optimal Cooling Water Temperature in a Cooler .......................................237
11.1.1 Problem Statement ...........................................................................237
11.1.2 Analytical Methodology ..................................................................238
11.1.3 Problem Solution ............................................................................239
11.1.3.1 Size and Price the Exchanger.......................................... 240
11.1.3.2 Estimate the Capital Cost ................................................ 241
11.1.3.3 Estimate the Production Cost/Expense Differences........ 241
11.1.3.4 Calculate the NPV ........................................................... 242
11.1.3.5 Find the Economic Design Point .................................... 242
11.2 Optimal Catalyst Usage in a Reactor/Filter System ...................................248
11.2.1 Problem Statement ...........................................................................248
11.2.2 Analytical Methodology ..................................................................250
11.2.3 Problem Solution..............................................................................251
11.2.3.1 Size and Price the Reactor .............................................. 251
11.2.3.1 Estimate the Production Cost Differences ...................... 252
11.2.3.3 Calculate the NPV ........................................................... 253
11.2.3.4 Find the Economic Design Point .................................... 253
11.3 Optimal Heat Recovery in a Heat Exchanger Loop ...................................253
11.3.1 Problem Statement ...........................................................................255
11.3.2 Analytical Methodology ..................................................................257
11.3.3 Problem Solution..............................................................................257
11.3.3.1 Size the Heat Exchangers................................................ 257
11.3.3.2 Estimate the Capital Cost ................................................ 260
11.3.3.3 Find the Annual Expenses................................................261
11.3.3.4 Calculate the NPV ........................................................... 261
11.3.3.5 Find the Economic Design Point .................................... 262
11.4 What to Choose: A Grass-Roots Plant or the Expansion of an
Existing Plant ...............................................................................................262
11.4.1 Problem Statement ...........................................................................262
11.4.2 Analytical Methodology ..................................................................267
11.4.3 Problem Solution..............................................................................267
11.4.3.1 Estimate the Capital Cost for the Grass-Roots Site ....... 267
11.4.3.2 Estimate the Production Cost for the Grass-Roots Site.... 268
11.4.3.3 The Economic Design Point ............................................... 270
11.5 Optimum Number of Plants.........................................................................270
11.5.1 Problem Statement ...........................................................................270
11.5.2 Analytical Methodology ..................................................................271
11.5.3 Problem Solution..............................................................................272
11.5.3.1 Estimate the Investments for All Four Plants ................. 273
11.5.3.2 Estimate the Items of Production Costs Where
Differences are Found ..................................................... 274
11.5.3.3 Calculate the NPV ........................................................... 276

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