8.

COST ESTIMATION AND ECONOMICS

Cost of cumene plant of capacity 400 TPD in 1990 is Rs.23.4×10 7

Therefore cost of 3030 TPD in 1990 is:
C1 = C2 (Q1/Q2)0.6
= 23.4 x 107(3030/400)0.6
= Rs.7.885 x 108

Chemical Engineering Plant Cost Index:

Cost index in 1990 = 357.6
Cost index in 2002 = 402
Thus, Present cost of Plant = (original cost) × (present cost index)/(past cost index)
= (7.885 x 108) × (402/357.6) = Rs. 8.864×108
i.e., Fixed Capital Cost (FCI) = Rs. 8.86×108

Estimation of Capital Investment Cost:

I. Direct Costs: material and labour involved in actual installation of complete
facility (70-85% of fixed-capital investment)

a) Equipment + installation + instrumentation + piping + electrical + insulation +

painting (50-60% of Fixed-capital investment)
1. Purchased equipment cost (PEC): (15-40% of Fixed-capital
investment)
Consider purchased equipment cost = 25% of Fixed-capital investment
i.e., PEC = 25% of 8.86×108 = 0.25 × 8.86×108 = Rs. 2.216×108
2. Installation, including insulation and painting: (25-55% of
purchased equipment cost.)
Consider the Installation cost = 40% of Purchased equipment cost
= 40% of 2.216×108 = 0.40 ×2.216×108 = Rs.0.8864×108
3. Instrumentation and controls, installed: (6-30% of
Purchased equipment cost.)
Consider the installation cost = 20% of Purchased equipment cost
= 20% of ×2.216x108 = 0.20 ×2.216×108 = Rs. 0.4432×108

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 4. Piping installed: (10-80% of Purchased equipment cost)
Consider the piping cost = 40% Purchased equipment cost
= 40% of Purchased equipment cost = 0.40 ×2.216×108
= Rs. 0.8864×108

5. Electrical, installed: (10-40% of Purchased equipment cost)

Consider Electrical cost = 25% of Purchased equipment cost
= 25% of 2.216 ×108 = 0.25 ×2.216×108 = Rs.0.554×108

B. Buildings, process and Auxiliary: (10-70% of Purchased equipment cost)

Consider Buildings, process and auxiliary cost = 40% of PEC
= 40% of 2.216 ×108 = 0.40 ×2.216×108 = Rs. 0.8864×108
C. Service facilities and yard improvements: (40-100% of Purchased equipment
cost)
Consider the cost of service facilities and yard improvement = 60% of PEC
= 60% of 2.216 ×108 = 0.60 ×2.216×108 = Rs. 1.3296×108
D. Land: (1-2% of fixed capital investment or 4-8% of Purchased equipment cost)
Consider the cost of land = 6% PEC = 6% of 2.216 ×108 = 0.06 ×2.216×108
= Rs. 0.1329×108

Thus, Direct cost = Rs. 7.3349×108 ----- (82.74% of FCI)

II. Indirect costs: expenses which are not directly involved with material and
labour of actual installation of complete facility (15-30% of Fixed-capital
investment)
A. Engineering and Supervision: (5-30% of direct costs)
Consider the cost of engineering and supervision = 10% of Direct costs
i.e., cost of engineering and supervision = 10% of 7.3349 ×108
= 0.1× 7.3349 ×108 = Rs.0.73349×108
B. Construction Expense and Contractor’s fee: (6-30% of direct costs)
Consider the construction expense and contractor’s fee = 10% of Direct costs
i.e., construction expense and contractor’s fee = 10% of 7.3349×108
= 0.1× 7.3349 ×108 = 0.73349×108

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 C. Contingency: (5-15% of Fixed-capital investment)
Consider the contingency cost = 10% of Fixed-capital investment
i.e., Contingency cost = 10% of 8.86×108 = 0.12 × 8.86×108
= Rs. 1.0632×108

Thus, Indirect Costs = Rs. 2.5301×108 --- (28.54% of FCI)

III. Fixed Capital Investment:
Fixed capital investment = Direct costs + Indirect costs
= (7.3349×108) + (2.5301×108)
i.e., Fixed capital investment = Rs. 9.865×108

IV. Working Capital: (10-20% of Fixed-capital investment)

Consider the Working Capital = 15% of Fixed-capital investment
i.e., Working capital = 15% of 9.865×108 = 0.15 × 9.865×108
= Rs. 1.4797×108

V. Total Capital Investment (TCI):

Total capital investment = Fixed capital investment + Working capital
= (9.865×108) + (1.4797×108)
i.e., Total capital investment = Rs. 11.3447×108

Estimation of Total Product cost:

I. Manufacturing Cost = Direct production cost + Fixed charges + Plant
overhead cost.
A. Fixed Charges: (10-20% total product cost)
i. Depreciation: (depends on life period, salvage value and method
of calculation-about 13% of FCI for machinery and equipment and
2-3% for Building Value for Buildings)
Consider depreciation = 13% of FCI for machinery and equipment and 3%
for Building Value for Buildings)
i.e., Depreciation = (0.13×9.865×108) + (0.03×0.8864×108)
= Rs. 1.309×108

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 ii. Local Taxes: (1-4% of fixed capital investment)
Consider the local taxes = 3% of fixed capital investment
i.e. Local Taxes = 0.03×9.865×108 = Rs. 0.2959×108
iii. Insurances: (0.4-1% of fixed capital investment)
Consider the Insurance = 0.7% of fixed capital investment
i.e. Insurance = 0.007×9.865×108 = Rs. 0.069×108
iv. Rent: (8-12% of value of rented land and buildings)
Consider rent = 10% of value of rented land and buildings
= 10% of ((0.1329×108) + (0.8864×108))
Rent = Rs. 0.10193x108
Thus, Fixed Charges = Rs. 1.7758×108

B. Direct Production Cost: (about 60% of total product cost)

Now we have Fixed charges = 10-20% of total product charges – (given)
Consider the Fixed charges = 15% of total product cost
Ö Total product charge = fixed charges/15%
Ö Total product charge = 1.7758×108/15%
Ö Total product charge = 1.7758×108/0.15
Ö Total product charge(TPC) = Rs. 11.8388×108

i. Raw Materials: (10-50% of total product cost)

Consider the cost of raw materials = 25% of total product cost
Ö Raw material cost = 25% of 11.8388×108 = 0.25×11.8388×108
Ö Raw material cost = Rs. 2.9597×108
ii. Operating Labour (OL): (10-20% of total product cost)
Consider the cost of operating labour = 12% of total product cost
Ö operating labour cost = 12% of 11.8388×108 = 0.12×11.8388×108
Ö Operating labour cost = Rs. 1.4206×108
iii. Direct Supervisory and Clerical Labour (DS & CL): (10-25% of OL)
Consider the cost for Direct supervisory and clerical labour = 12% of OL
Ö Direct supervisory and clerical labour cost = 12% of 1.4206×108
= 0.12×1.4206×108
Ö Direct supervisory and clerical labour cost = Rs. 0.1704×108

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 iv. Utilities: (10-20% of total product cost)
Consider the cost of Utilities = 12% of total product cost
Ö Utilities cost= 12% of 11.8388×108 = 0.12×11.8388×108
Ö Utilities cost = Rs. 1.4206×108
v. Maintenance and repairs (M & R): (2-10% of fixed capital investment)
Consider the maintenance and repair cost = 5% of fixed capital investment
i.e. Maintenance and repair cost = 0.05×9.865×108 = Rs. 0.4932×108
vi. Operating Supplies: (10-20% of M & R or 0.5-1% of FCI)
Consider the cost of Operating supplies = 15% of M & R
Operating supplies cost = 15% of 0.4935×108 = 0.15 ×1.085×108
Operating supplies cost = Rs. 0.07398×108
vii. Laboratory Charges: (10-20% of OL)
Consider the Laboratory charges = 15% of OL
Laboratory charges = 15% of 1.4206×108= 0.15×1.4206×108
Ö Laboratory charges = Rs. 0.2131×108
viii. Patent and Royalties: (0-6% of total product cost)
Consider the cost of Patent and royalties = 4% of total product cost
Ö Patent and Royalties = 4% of 11.8388×108 = 0.04×11.8388×108
Ö Patent and Royalties cost = Rs. 0.4735×108

Thus, Direct Production Cost = Rs. 7.225×108 ----- (61% of TPC)

C. Plant overhead Costs (50-70% of Operating labour, supervision, and
maintenance or 5-15% of total product cost); includes for the following: general plant
upkeep and overhead, payroll overhead, packaging, medical services, safety and
protection, restaurants, recreation, salvage, laboratories, and storage facilities.
Consider the plant overhead cost = 60% of OL, DS & CL, and M & R
Plant overhead cost = 60% of ((1.4206×108) + (0.1704×108) + (0.4932×108))
Plant overhead cost = Rs. 2.084×108
Thus, Manufacture cost = Direct production cost + Fixed charges + Plant overhead
costs.
Manufacture cost = (7.225×108) + (9.865×108) + (2.084×108)
Manufacture cost = Rs. 19.1742×108

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 II. General Expenses = Administrative costs + distribution and selling costs
+ research and development costs
A. Administrative costs:(2-6% of total product cost)
Consider the Administrative costs = 5% of total product cost
Ö Administrative costs = 0.05 × 11.838×108
Ö Administrative costs = Rs. 0.5919×108
B. Distribution and Selling costs: (2-20% of total product cost); includes costs
for sales offices, salesmen, shipping, and advertising.
Consider the Distribution and selling costs = 15% of total product cost
Distribution and selling costs = 15% of 11.838×108
Ö Distribution and selling costs = 0.15 × 11.838×108
Ö Distribution and Selling costs = Rs. 1.7757×108

C. Research and Development costs: (about 5% of total product cost)

Consider the Research and development costs = 5% of total product cost
Research and Development costs = 5% of 11.838×108
Ö Research and development costs = 0.05 × 11.838×108
Ö Research and Development costs = Rs. 0.5919×108

D. Financing (interest): (0-10% of total capital investment)

Consider interest = 5% of total capital investment
i.e. interest = 5% of 11.3447×108 = 0.05×11.3447×108
Interest = Rs. 0.5672×108

Thus, General Expenses = Rs. 3.5267×108

IV. Total Product cost = Manufacture cost + General Expenses

= (19.1742×108) + (3.5267×108)
Total product cost = Rs. 22.7009×108

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V. Gross Earnings/Income:
Wholesale Selling Price of cumene per kg = Rs.49

Total Income = Selling price × Quantity of product manufactured

= 49 x 100000000
Total Income = Rs. 49×107
Gross income = Total Income – Total Product Cost
= (49×107) – (11.8388×107)
Gross Income = Rs. 37.1612×107
Let the Tax rate be 45% (common)
Net Profit = Gross income - Taxes = Gross income× (1- Tax rate)
Net profit = 37.1612 x 107(1-0.45) = Rs. 20.4386×107
Rate of Return:
Rate of return = Net profit×100/Total Capital Investment
Rate of Return = 2.04386×108×100/ (11.3447×108)
Rate of Return = 18.01%

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