Equipment cost inflation

Cost Indices In some cases, the cost of a piece of equipment is available from a previous study, and it is desirable to evaluate its present cost. Because of inflation and other economic changes, it is necessary to correlate equipment cost as a function of time. In this regard, cost indices are useful tools. A cost index is an indicator of how equipment cost varies over time. The ratio of cost indices at two different times provides an estimate for the extent of equipment-cost inflation between these two times. Hence,... 

The asterisk on the receivers and accumulators indicates that if these vessels are pressure vessels, a factor of 4.0 should be used instead of 2.5. The total purchased equipment installed is 9,538,000 for non-pressure vessels and the delivered cost is 10,015,000. Therefore, the fixed capital investment installed would be 10,015,000 x 1.035 x 1.040 = 10,780,000. Using pressure vessels increases the total purchased equipment cost 667,000 therefore, the fixed capital investment for this case including inflation would be 10,780,000 x 1.05 x 1.035 X 1.04 = 11,534,000. 

The total delivered installed equipment cost is the fixed capital investment and, corrected for 2 years of inflation, will be 12,290,000 x 1.035 x 1.040 = 13,229,000. 

Escalation A provision in actual or estimated cost for an increase in equipment cost, material, labor, expenses, etc., over those specified in an original estimate or contract due to inflation. 

Academic institutions are facing difficult fiscal times as are many other areas of our society. The research universities are often being asked to do more with less. Even in these days of reduced inflation, research support is a precious commodity. Equipment costs rise, personnel costs rise, and the general cost of doing business increases with the net result that less research is accomplished. Unreasonable increases in paperwork reduce actual productivity. 

Because the cost literature reports equipment costs for some time in the past, we must correct the costs for inflation. We can calculate the present value of cost of equipment, Cj, using an inflation index, I, as given by Equation 2.9. 

After writing mass balances, energy balances, and equilibrium relations, we need system property data to complete the formulation of the problem. Here, we divide the system property data into thermodynamic, transport, transfer, reaction properties, and economic data. Examples of thermodynamic properties are heat capacity, vapor pressure, and latent heat of vaporization. Transport properties include viscosity, thermal conductivity, and difiusivity. Corresponding to transport properties are the transfer coefficients, which are friction factor and heat and mass transfer coefficients. Chemical reaction properties are the reaction rate constant and activation energy. Finally, economic data are equipment costs, utility costs, inflation index, and other data, which were discussed in Chapter 2. 

In order to account for inflation in the monetary supply and fluctuations in equipment costs due to technology and commodity prices, an equipment index, such as... 

ILLUSTRATIVE EXAMPLE 21,21 A simple procedure is available to estimate equipment cost from past cost data. The method consists of adjusting the earlier cost data to present values using factors that correct for inflation. A number of such indices are available one of the most conunonly used is the Chemical Engineering Fabricated Equipment Cost Index (FECI), outdated past values of which are listed in Table 21.5. 

The common types of estimates are presented along with the basic relationships for scaling costs with equipment size. The concept of cost inflation is presented, and some common cost indexes are presented. The concept of total fixed capital investment to construct a new process is discussed, and the cost module approach to estimating is given. Finally, the software program (CAPCOST) to evaluate fixed capital costs (and other financial calculations) is described. 

CEPCI (Chemical Engineering Plant Cost Index), 186. 188 corrosive environments, 202-204 cost data, sources of, 182 equipment cost attribute, 182 equipment summary, PFD, 19-20 inflation adjustment, 186-187 manufacturing vessels, 207-208 Marshall and Swift Equipment Cost Index, 186. 188 MOCs (materials of construction), 202-208 module costing technique, 192-193 pressure factors, 197-202 relative costs of metals, 206 weld efficiency, 198 Capitalized cost, 314 Capitalized cost method, 314-316 Carbon steels, equipment cost, 205 Carnot efficiency, 235 Cascade diagrams... 

Life cycle cost analysis is the proper tool for evaluation of alternative systems (11,12). The total cost of a system, including energy cost, maintenance cost, interest, cash flow, equipment replacement and/or salvage value, taxes, inflation, and energy cost escalation, can be estimated over the useflE life of each alternative system. A Hst of life cycle cost items which may be considered for each system is presented in Tables 3 and 4. Reference 14 presents a cash flow analysis which also includes factors such as energy cost escalation. 

Cost Indices The value of money will change because of inflation and deflation. Hence cost data can be accurate only at the time when they are obtained and soon go out of date. Data from cost records of equipment and projects purchased in the past may be converted to present-day values by means of a cost index. The present cost of the item is found by multiplying the historical cost by the ratio of the present cost index divided oy the index applicable at the previous date. Ideally each cost item affected by inflation should be forecast separately. Labor costs, construction costs, raw-materials and energy prices, and product prices all change at different rates. Composite indices are derived by adding weighted fractions of the component indices. Most cost indices represent national averages, and local values may differ considerably. 

The usual estimating technique is to collect equipment pricing information from other projects and correlate this data by size, weight, pressure rating, and/or materials of construction. Each piece must be adjusted for inflation to bring all costs to one base time. Adjusting costs for inflation is discussed later under the heading, " Construction Cost Indexes. ... 

Since the adjustments for inflation are so large, it is important to fix the date for historical data as closely as possible. For instance, a historical cost estimate from a vendor or contractor for equipment to be delivered in two years would have escalation built in, so the index should be for two years later, when the equipment was expected to be manufactured. However, data based on purchased equipment delivered on a certain date should use the index for the date the equipment was manufactured. 

Once the cost of each piece of major equipment is known, it must be adjusted by construction cost indexes. Due to inflation and changing competitive situations, the price of equipment changes from year to year (Reference 26). Fortunately, there are several indexes that help in estimating today s costs based on historical data. Some of these indexes are Nelson Refinery Construction Cost... 

In this method each year s savings need to take account of the fact that, as the equipment gets older, the cost of maintenance and repairs is likely to increase. The effect of inflation can also be allowed for in assuming the annual cash flows through the life of the equipment. 

On the other hand, the Hoar Committee s estimate for the UK did not include some significant factors, and some costs that were considered have increased in real terms since the estimates were made. Larger plants and structures are more common, and even when there is no increase in size more intensive use of equipment is demanded. As a result, the real cost of downtime or unavailability, and of dislocation to users of, for example, motorway viaducts while repairs are made, have increased appreciably. Moreover, maintenance and rectification are labour intensive activities, and hence particularly susceptible to the effects of inflation. The increases probably outweigh the savings mentioned, and the current cost of corrosion in the UK is probably around 4% of GNP. As future savings depend on the improvement being maintained despite pressures to reduce first costs, a sound economic approach to corrosion is no less important than it was in 1970. 

Users seeking tender quotations should demand relative running costs and make their decision on the basis of their anticipated running times and so of the expected fuel costs, taking into account the slow inflation of electricity tariffs. Buyers must be aware of the tendency of a contractor to offer only one make or type of equipment, and where this situation arises, alternative tenders should be sought. 

In calculations it is also important to take into account ar r income that may be expected from development grants etc. tax liabilities and the depreciation that takes place on capital items expenditure. This second sum needs to be set aside so that provision can be made to replace capital items at the end of their lifetime, especially as the effects of inflation may be different for the various items involved in the costing. Once the capital equipment has been depreciated then profitabihty can rise, since only variable costs have to be covered. Thus for instance the selling price of a product can be decreased, even down to the production cost, in order for example, to force a new competitor out of business. 

These correlations are based upon 1982 United States figures and must be adjusted for both inflation and currency differences. The M S equipment index asspecified in Ref. CE8 p.7, is used Final exchanger cost = 13 670 (786.0/745.6) (1/0.61)... 

A perpetuity is an annuity in which the periodic payments continufe indefinitely. This type of annuity is of particular interest to engineers, for in some cases they may desire to determine a total cost for a piece of equipment or other asset under conditions which permit the asset to be replaced perpetually without considering inflation or deflation. 

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