Page 77 - Chemical process engineering design and economics

62 Chapter 2

Correcting Equipment Cost for Inflation

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, C 2, using an inflation index, I, as given by Equation 2.9.

la
= C li —— (2.9)
C a
In
There are several inflation or cost indexes in use. Examples are the
Chemical Engineering Cost Index (CE Index), and the Nelson Refinery Cost
Index. Chemical Engineering magazine publishes the CE Index regularly,
whereas the Oil and Gas Journal reports the Nelson Refinery Index. We will use
the CE Index. Cost indexes are relative to some time in the past. Chemical
Engineering magazine defined the CE Index as equal to 100 during 1957-1959
when plant costs were relatively stable.
Chemical Engineering magazine established their index in 1963, and revised
it in 1982. To revise their index they surveyed the process industry, equipment
manufacturers, contractors, and consultants, as described by Chilton and Arnold
[17]. The magazine determined the fractional contribution to the CE index of the
many components of the average chemical plant. Determining the fractional con-
tribution is necessary because the components inflate at different rates. The types
of plant studied were fluid, fluid-solid, and solids-processing plants, built as a new
plant at a new site, a new plant at an existing site, and an expansion of an existing
plant. Chilton and Arnold [17] discussed other details of the CE index. The major
changes in the revised index were a reduction in the number of components com-
prising the index from 110 to 66, the replacement of many components with more
suitable ones, and the lowering of the construction productivity factor from 2.50 to
1.75. Figure 2.6 shows the fractional contribution of the many components to the
revised index. BLS in the first column in Figure 2.6 is an abbreviation for the Bu-
reau of Labor Statistics.
Table 2.12 gives the CE Indexes since 1969. As shown in Figure 2.6 and
Table 2.12, the CE Index is composed of four major parts - Equipment, Construc-
tion Labor, Buildings, and Engineering and Supervision. The equipment compo-
nent, in turn, is subdivided into several components. Table 2.12 lists cost indexes
for all major components of the CE Index. If we sum up the fractional contribu-
tion, given in Figure 2.6, of each component of the cost index, we obtain the plant
cost index. Example 2.2 illustrates the calculation of the plant cost index from the
component cost indexes. The cost indexes in Table 2.12 for a given year are time
averaged for the year, and thus they are more representative of mid-year values as
illustrated in Example 2.3.

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