Government Engineering College, valsad
Chemical Engineering Department
3rd Year-5th semester
Chemical Process Plant Design & Economics
(3130506)
Chapter: Cost estimation
Topic: Cash flow and cumulative factors affecting
estimation of investment and production cost
Suject Cordinator: Prof.D.D.Dhimmar
Assistant Profesor,Cl-2
CASH FLOW FOR INDUSTRIAL OPERATIONS
CASH FLOW FOR INDUSTRIAL OPERATIONS
• Input to the capital sink can be in the form of loans, stock
issues, bond releases, and other funding sources including the
net cash flow returned to the capital sink from each project.
• Output from the capital source is in the form of total capital
investments for each of the company’s industrial operations,
dividends to stockholders, repayment of debts, and other
investments.
• Total capital investment includes all the funds necessary to
get the project underway.
• The cash flow for the capital investments can usually be
considered as in a lump sum or in-an-instant.
CASH FLOW FOR INDUSTRIAL OPERATIONS
• Fixed capital for equipment ideally can be considered as in-an-instant for
each piece of equipment although the payments.
• Cash flows into the operations box as total dollars of income (si) from all
sales while actual costs for the operations, such as for raw materials and
labor, are shown as outflow costs cc,).
• The difference between the income (Si) and operating costs (c,) represents
gross profits before depreciation or income-tax charges (si - co) and is
represented by the vertical line rising out of the operations box.
• Depreciation must be recognized as a cost before income-tax charges are
made and before net profits are reported to the stockholders.
• The resulting new profit of si - c - d is taxable, and the income-tax
charge is shown as a cash-flow stream deducted at the top of the diagram.
Cumulative Cash Position
Cumulative Cash Position
• It represents the steady-state situation for cash flow with si,
co, and d all based on the same time increment.
• Figure shows type of cash flow for an industrial operation
except that depicts the situation over a given period of time
as the cumulative cash position. The time period chosen is the
estimated life period of the project, and the time value of
money is neglected.
• land value is included as part of the total capital investment.
• The zero point on the abscissa represents that time at which
the plant has been completely constructed and is ready for
operation
Cumulative Cash Position
• The total capital investment at the zero point in time includes
land value, fixed-capital and auxiliaries investment, and
working capital.
• The cash position is negative by an amount equivalent to the
total capital investment at zero time, but profits in the ideal
situation come in from the operation as soon as time is
positive.
• Cash flow to the company, in the form of net profits after
taxes and depreciation charges, starts to accumulate and
gradually pays off the full capital investment.
FACTORS AFFECTING INVESTMENT AND
PRODUCTION COSTS
1) Sources of Equipment
2) Price Fluctuations
3) Company Policies
4) Operating Time and Rate of Production
5) Governmental Policies
Break Even point and its significance
• It is defined as a point at which total cost and total revenue is
equal.
Significance:
• Manages the Size of Units to be Sold
• Budgeting and Setting Targets
• Manage the Margin of Safety
• Monitors and Controls Cost
• Helps Design Pricing Strategy
CAPITAL INVESTMENTS
• The capital needed to supply the necessary manufacturing
and plant facilities is called the fixed-capital investment.
• The capital necessary for the operation of the plant is termed
the working capital.
• The sum of the fixed-capital investment and the working
capital is known as the total capital investment.
• The fixed-capital portion may be further subdivided into
manufacturing fixed-capital investment and
nonmanufacturing fixed- capital investment.
Fixed-Capital Investment
It is divided in two parts:
(1) Manufacturing fixed-capital investment: It represents the
capital necessary for the installed process equipment with all
auxiliaries that are needed for complete process operation.
Example: Expenses for piping, instruments, insulation,
foundations, and site preparation.
(2) Nonmanufacturing fixed- capital investment: It represents
the cost necessary for construction overhead and for all plant
components that are not directly related to the process
operation..
Working Capital
The working capital for an industrial plant consists of the total
amount of money invested in
• Raw materials and supplies carried in stock,
• Finished products in stock and semi finished products in the
process of being manufactured,
• Accounts receivable,
• Cash kept on hand for monthly payment of operating
expenses, such as salaries, wages, and raw-material
purchases,
• Accounts payable, and
• Taxes payable
ESTIMATION OF CAPITAL INVESTMENT
Direct Costs
1. Purchased equipment
• All equipment listed on a complete flow sheet
• Spare parts and noninstalled equipment spares
• Surplus equipment, supplies, and equipment allowance
• Inflation cost allowance
• Freight charges
• Taxes, insurance, duties
• Allowance for modifications during startup
2. Purchased-equipment installation
• Installation of all equipment listed on complete flow sheet
• Structural supports, insulation, paint
3. Instrumentation and controls
• Purchase, installation, calibration, computer tie-in
ESTIMATION OF CAPITAL INVESTMENT
4. Piping
• Process piping-carbon steel, alloy, cast iron, lead, lined,
aluminum, copper, ceramic, plastic,
• rubber, reinforced concrete
• Pipe hangers, fittings, valves
• Insulation-piping, equipment
5. Electrical equipment and materials
• Electrical equipment -switches, motors, conduit, wire, fittings,
feeders, grounding, instrument
• and control wiring lighting, panels
• Electrical materials and labor
ESTIMATION OF CAPITAL INVESTMENT
6. Buildings (including services)
• Process buildings-substructures, superstructures, platforms,
supports, stairways, ladders, access ways, cranes, monorails, hoists,
elevators
• Auxiliary buildings-administration and office, medical or dispensary,
cafeteria, garage, product warehouse, parts warehouse, guard and
safety, fire station, change house, personnel building, shipping
office and platform, research laboratory, control laboratory
• Maintenance shops-electric, piping, sheet metal, machine, welding,
carpentry, instrument
• Building services-plumbing, heating, ventilation, dust collection, air
conditioning, building lighting, elevators, escalators, telephones,
intercommunication systems, painting, sprinkler systems, file alarm
ESTIMATION OF CAPITAL INVESTMENT
7. Yard improvements
• Site development-site clearing, grading, roads, walkways, railroads, fences,
parking areas,
• wharves and piers, recreational facilities, landscaping
8. Service facilities
• Utilities-steam, water, power, refrigeration, compressed air, fuel, waste
disposal
• Facilities-boiler plant incinerator, wells, river intake, water treatment, cooling
towers, water storage, electric substation, refrigeration plant, air plant, fuel
storage, waste disposal plant, environmental controls, fire protection
• Nonprocess equipment-office furniture and equipment, cafeteria equipment,
safety and medical equipment, shop equipment, automotive equipment, yard
material-handling equipment, laboratory equipment, locker-room equipment,
garage equipment, shelves, bins, pallets, hand trucks, housekeeping
equipment, fuel extinguishers, hoses, fire engines, loading stations
• Distribution and packaging-raw-material and product storage and handling
equipment, product packaging equipment, blending facilities, loading stations
ESTIMATION OF CAPITAL INVESTMENT
9. Land
• Surveys and fees
• Property cost
Indirect costs
1. Engineering and supervision
• Engineering costs-administrative, process, design and general engineering,
drafting, cost engineering, procuring, expediting, reproduction,
communications, scale models, consultant fees, travel
• Engineering supervision and inspection
2.Contractor’s fee
3. Contingency
ESTIMATION OF CAPITAL INVESTMENT
4.Construction expenses
• Construction, operation and maintenance of temporary
facilities, offices, roads, parking lots, railroads, electrical,
piping, communications, fencing
• Construction tools and equipment
• Construction supervision, accounting, timekeeping,
purchasing, expediting
• Warehouse personnel and expense, guards
• Safety, medical, fringe benefits
• Permits, field tests, special licenses
• Taxes, insurance, interest
