Economic evaluation capital cost estimation

Prepare rough cost economics, including preliminary sizing and important details of equipment, factor to an order of magnitude capital cost estimate [34] (see also [19]), prepare a production cost estimate, and work with economic evaluation representatives to establish a payout and the financial economics of the proposed process. 

The scope of the economic evaluation includes estimation of capital cost figures for a nitric add plant producing 280 tonnes/day of a 60% product. Following this capital cost estimation the total annual operating costs are estimated, both variable and fixed components being considered. Also considered is the cost of providing finance for the initial capital outlay at 25% interest per annum. 

The economic evaluation is an important and integral part of the overall feasibility study of the project. First, a capital cost estimate is obtained using two estimation techniques. The ratio method and factorial cost estimation techniques are used to determine separate capital cost estimates for the proposed 280 tonne/day plant. Finally an investigation into the expected return on investment from this project is performed. 

The capital cost estimate will be used for an economic evaluation of the CASST process for fuel gas production as well as for synthesis gas production. Further development of the process depends on the results of the economic evaluation. 

Hanvelt et al. (1994) estimated the nationwide indirect costs of mortality due to HIV/AIDS in Canada. A descriptive, population-based economic evaluation study was conducted. Data from Statistics Canada were used, which contained information about aU men aged 25-64 years for whom HIV/AIDS or another selected disease was listed as the underlying cause of death from 1987 to 1991. Based on the human capital approach, the present value of future earnings lost for men was calculated. The estimated total loss from 1987 to 1991 was US 2.11 billion, with an average cost of US 558,000 per death associated with HIV/AIDS. Future production loss due to HIV/AIDS was more than double during the period 1987 to 1991, from US 0.27 to US 0.60 billion. A more comprehensive update of this smdy was presented by Hanvelt et al. (1996). The same database and the same data section but for the calendar years 1987-1993 was used. The indirect cost of future production due to HIV/AIDS in Canada based on the human capital approach for that period was estimated to be US 3.28 billion. The authors also calculated the willingness-to-pay to prevent premature death due to HIV/AIDS, which was estimated based on... 

Overall, there are always considerable uncertainties associated with an economic evaluation. In addition to the errors associated with the estimation of capital and operating costs, the project life or interest rates are not known with any certainty. The important thing is that different projects, and options within projects, are compared on the basis of consistent assumptions. Thus, even though the evaluation will be uncertain in an absolute sense, it will still be meaningful in a relative sense for choosing between options. 

The initial evaluation showed that utilizing fiber-reinforced polymer (FRP) for pipelines is a feasible alternative to steel pipelines with regard to performance and cost [35]. From the cost analysis, an FRP pipe is quite attractive, especially in the regional or distributed service. Currently, spoolable piping manufacturers could install a composite pipeline for serving a 100,000 population for a cost of 250,000-500,000/mi. (does not include the cost for right-of-way), which is well below the DOE s capital cost target in 2017 of 800,000/mi. [35]. From this estimate and cost analyses, it is seen that FRP pipe economics is very attractive, especially for the distribution service. 

So far we have explained how to estimate capital and operating costs. In Example 3.3, we formulated an objective function for economic evaluation and discovered that although the revenues and operating costs occur in the future, most capital costs are incurred at the beginning of a project. How can these two classes of costs be evaluated fairly The economic analysis of projects that incur income and expense over time should include the concept of the time value of money. This concept means that a unit of money (dollar, yen, euro, etc.) on hand now is worth more than the same unit of money in the future. Why Because 1000 invested today can earn additional dollars in other words, the value of 1000 received in the future will be less than the present value of 1000. 

In Chapter 3 we discussed the formulation of objective functions without going into much detail about how the terms in an objective function are obtained in practice. The purpose of this appendix is to provide some brief information that can be used to obtain the coefficients in objective functions in economic optimization problems. Various methods and sources of information are outlined that help establish values for the revenues and costs involved in practical problems in design and operations. After we describe ways of estimating capital costs, operating costs, and revenues, we look at the matter of project evaluation and discuss the many contributions that make up the net income from a project, including interest, depreciation, and taxes. Cash flow is distinguished from income. Finally, some examples illustrate the application of the basic principles. 

In carrying out an economic evaluation of a proposed process or a modification of an existing one, estimation of future operating costs is just as important as estimating the capital costs involved in the analysis. 

Most economic evaluations of the saccharification process (21,22,23) conclude that at the present time the cost of production of the most favoured products (glucose, single cell protein, ethanol) is higher than production from non-cellulosic sources. Nyiri (24) made an economic evaluation of cellulose-based single cell protein and ethanol production. He suggested that an economical plant output is between 7 and 20 m /year, and, depending on the size and complexity of the plant, estimated capital costs between 6 and 12 million. 

The final measure of merit of a given process is the profitability of the business venture required for its implementation. The purpose of the ASPEN Cost Estimation and Economic Evaluation System is to calculate the profitability of the simulated process. This requires calculation of the total required capital investment and the annual operating expenses. 

Next, the technical, economic, and financial feasibility of proposed processes must be demonstrated. Unless the project shows considerable promise when matched against other potential projects, it may be abandoned. Any particular coiT5)any will have several projects to invest in but limited financial resources so that only the most promising projects will be continued. The research engineer should estimate the capital investment required and the production cost of the product. No matter how crade or incon jlete the process data may be, the research engineer must estimate the profitability of the process to determine if further process development is economically worth the effort. This analysis will also uncover those areas requiring further research to obtain more information for a more accurate economic evaluation. 

A thorough engineering and economic evaluation of the molten carbonate process was completed by Singmaster and Breyer in 1970, under contract to EPA (8). For the same plant situation, their cost estimates (based on 1970 dollars) were 16.81/kW for the capital investment (not including the Claus plant) and 0.95 mills/kW hr for operating costs without by-product credit. 

Estimate capital and operating costs. Execute the economic evaluation focused on profitability. 

The economic evaluation of the project should be oriented to profitability analysis, as explained in Chapter 14. The estimation of capital investment and operation costs is necessary, but the figures are only intermediate steps to profitability measures. These should be compared with similar processes, or other industrial projects, on a longer-term vision based on a lifecycle analysis. The economic analysis can be done at best with a spreadsheet. 

A thorough presentation of fundamentals of an economic analysis for process design can be found in the classical book of Peters and Timmerhaus (1991). In addition this book contains detailed information about the cost of chemical equipment. A concise but useful treatment can be found in Coulson Richardson volume 6 (1993). The part on economics in Douglas (1987) is particularly well written from the viewpoint of a designer. The chapter written by Holland Wilkinson for Perry s Handbook 7 edition (1997) contains an extended description of the modem concepts of profitability, a comprehensive estimation of manufacturing and fixed-capital costs, as well as an introduction in the accounting and cost control concepts. The economic evaluation of projects from the perspective of the Institution of Chemical Engineers-UK may be found in Allen (1991). 

The first step in the economic evaluation of equipment alternatives is to identify and estimate the relevant costs of each alternative over its useful life. Relevant costs are usually divided into two categories investment costs and annual operating costs. Investment costs are incurred to obtain the equipment they occur on a one-time or periodic basis. The most common investment cost is the purchase price of the equipment. Typically, investment costs are depreciable, and they are often subject to capital investment tax credits. 

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