Fixed capital estimation factors

The accuracy of a fixed capital estimate tends to be a function of the design effort involved. As the project definition is refined, the estimates evolve from the various preliminary phases, ie, order of magnitude, predesign, factor estimates, etc, into the more detailed estimates used for budget authorization, project control, and contracts. At the same time, the uncertainty in the estimate decreases from 50% to as Htfle as 5%. 

The most common approach to fixed cost estimation iavolves the use of a capital recovery factor to give the annual depreciation and return on capital. This factor typically is between 15 and 20% of the total capital investment. Property taxes are taken as 1—5% of the fixed capital and iasurance is assumed to be 1—2% of the fixed capital. If annual depreciation is estimated separately, it is assumed to be about 10% of the fixed capital investment. The annual iaterest expense is sometimes neglected as an expense ia preliminary studies. Some economists even beHeve that iaterest should be treated as a return on capital and not as part of the manufactufing expense. 

Multiple-factor methods include the cost contributions for each given activity, which can be added together to give an overall factor. This factor can be used to multiply the total cost of dehvered equipment X (Ce(j)del lo produce an estimate of the total fixed-capital investment either for grass-roots or for battery-hmit plants. The costs may be divided into four groups ... 

The estimated values for the various contributions are given in Table 9-53, resulting in an estimate of 4,280,000 for the total fixed-capital investment, including a contingency factor. 

Table 9-63 uses the data of Fig. 9-44 to compare the relative fixed-capital costs for plant constnic tion in other countries with those for the United States. The relative cost ratios were developed from data similar to those in Table 9-62. Labor ratios were corrected for the different local rates and hours per working week, job duration, and degree of mechanization available in other countries. Some of these factors are difficult to estimate, and the final total ratios give a reasonable order-of-magnitiide value for relative construction costs for equivalent plants in the countries indicated.

Table 6.1. Typical factors for estimation of project fixed capital cost...

Hant Indirect Expenses These expenses cover a wide range of items such as property taxes, personal and property liability insurance premiums, fire protection, plant safety and security, maintenance of plant roads, yards and docks, plant personnel staff, and cafeteria expenses (if one is available). A quick estimate of these ejq)enses based upon company records is on the order of 2 to 4 percent of the fixed capitm investment. Hackney presented a method for estimating these ej nses based upon a capital investment factor, and a labor factor, but the result is high. 

For economic evaluation purposes, another definition of working capital is used. It is the funds, in addition to the fixed capital, that a company must contribute to a project. It must be adequate to get the plant in operation and to meet subsequent obligations when they come due. Working capital is not a one-time investment that is known at the project inception, but varies with the sales level and other factors. The relationship of working capital to other project elements may be viewed in the cash flow model (see Fig. 9-9). Estimation of an adequate amount of working capital is found in the section Capital Investment. ... 

Assuming a 480-ton/day treatment rate, the estimated life-cycle cost for a full-scale treatment is approximately 160 per ton of dry soil processed (D13753L, p. 2). This estimate includes fixed capital investment and operating costs based on a 70% utilization factor for plant operations over a period of 17 years. Operating cost estimates (included iu the life-cycle cost estimate) include an inflation rate of 5% per year (D13753L, pp. 32-34). 

Of the many factors which contribute to poor estimates of capital investments, the most significant one is usually traceable to sizable omissions of equipment, services, or auxiliary facilities rather than to gross errors in costing. A check list of items covering a new facility is an invaluable aid in making a complete estimation of the fixed-capital investment. Table 1 gives a typical list of these items. 

The cost for land and the accompanying surveys and fees depends on the location of the property and may vary by a cost factor per acre as high as thirty to fifty between a rural district and a highly industrialized area. As a rough average, land costs for industrial plants amount to 4 to 8 percent of the purchased-equipment cost or 1 to 2 percent of the total capital investment. Because the value of land usually does not decrease with time, this cost should not be included in the fixed-capital investment when estimating certain annual operating costs, such as depreciation. 

Lang multiplication factors for estimation of fixed-capital investment or total capital investment... 

METHOD E POWER FACTOR APPLIED TO PLANT-CAPACITY RATIO. This method for study or order-of-magnitude estimates relates the fixed-capital investment of a new process plant to the fixed-capital investment of similar previously constructed plants by an exponential power ratio. That is, for certain similar process plant configurations, the fixed-capital investment of the new facility is equal to the fixed-capital investment of the constructed facility C multiplied by the ratio R, defined as the capacity of the new facility divided by the capacity of the old, raised to a power x. This power has been found to average between 0.6 and 0.7 for many process facilities. Table 19 gives the capacity power factor (x) for various kinds of processing plants. 

Example S Estimation of fixed-capital investment with power factor applied to plant-capadty ratio. If the process plant, described in Example 1, was erected in the Dallas area for a fixed-capital investment of 436,000 in 1975, determine what the estimated fixed-capital investment would have been in 1980 for a similar process plant located near Los Angeles with twice the process capacity but with an equal number of process units Use the power-factor method to evaluate the new fixed-capital investment and assume the factors given in Table 20 apply. 

Results obtained using this procedure have shown high correlation with fixed-capital investment estimates that have been obtained with more detailed techniques. Properly used, these factoring methods can yield quick fixed-capital investment requirements with accuracies sufficient for most economic-evaluation purposes. 

Table 6.4. Typical Factors for Estimation of Project Fixed Capital Cost...

The purchased cost of an item of equipment, free on board (FOB) is quoted by a supplier, and may be multiplied by a factor of 1.1 to give the approximate delivered cost. The factorial methods for estimating the total installed cost of a process plant are based on a combination of materials, labor, and overhead cost components. The fixed capital cost, C(-p, of a plant based on design can be estimated using the Lang Factor method [14] given by the equation... 

The fixed capital investment is the cost to build the manufacturing facility. Corresponding to the different levels in the gating process given in Table 16.1 are methods of cost estimation that have different levels of accuracy. Here we describe estimation methods for the conceptual design stages that use process cost correlations (which are usually accurate to 40 to 50%) and the bare module factor method ( 30%). Some estimation methods provide improved accuracy but require vendor quotations detailed estimates of material costs of piping, valves, and insulation and estimates of installation labor hours and the mix of labor rates. Such methods are beyond the scope of this chapter. 

Table 15.6 Ratio factors for estimating fixed-capital Investment based on purchasing...

Step 2 Using the data in Step 1 with f.o.b. equipment cost data, add to the equipment list the cost and the corresponding cost index of the cost data. Update the cost data to the current cost index, sum the updated purchase costs to obtain the total f.o.b. purchase cost, Cp, and multiply by 1.05 to account for delivery of the equipment to the plant site. Then, multiply the result by an appropriate Lang factor,/l, to obtain the total permanent investment (fixed capital investment), C-ppi (i.e., without the working capital), or the total capital investment, Ctci (i.e., including an estimate of the working capital at 15% of the total capital investment or 17.6% of the total permanent investment). 

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