Page 22 - Plant design and economics for chemical engineers

INTRODUCTION 5
on detailed specifications can then be obtained from various manufacturers.
However, as mentioned earlier, no design project should proceed to the final
stages before costs are considered, and cost estimates should be made through-
out all the early stages of the design when complete specifications are not
available. Evaluation of costs in the preliminary design phases is sometimes
called “guesstimation” but the appropriate designation is predesign cost estima-
tion. Such estimates should be capable of providing a basis for company
management to decide if further capital should be invested in the project.
The chemical engineer (or cost engineer) must be certain to consider all
possible factors when making a cost analysis. Fixed costs, direct production costs
for raw materials, labor, maintenance, power, and utilities must all be included
along with costs for plant and administrative overhead, distribution of the final
products, and other miscellaneous items.
Chapter 6 presents many of the special techniques that have been devel-
oped for making predesign cost estimations. Labor and material indexes,
standard cost ratios, and special multiplication factors are examples of informa-
tion used when making design estimates of costs. The final test as to the validity
of any cost estimation can come only when the completed plant has been put
into operation. However, if the design engineer is well acquainted with the
various estimation methods and their accuracy, it is possible to make remark-
ably close cost estimations even before the final process design gives detailed
specifications.

FACTORS AFFECTING PROFITABILITY
OF INVESTMENTS
A major function of the directors of a manufacturing firm is to maximize the
long-term profit to the owners or the stockholders. A decision to invest in fixed
facilities carries with it the burden of continuing interest, insurance, taxes,
depreciation, manufacturing costs, etc., and also reduces the fluidity of the
company’s future actions. Capital-investment decisions, therefore, must be
made with great care. Chapters 7 and 10 present guidelines for making these
capital-investment decisions.
Money, or any other negotiable type of capital, has a time value. When a
manufacturing enterprise invests money, it expects to receive a return during
the time the money is being used. The amount of return demanded usually
depends on the degree of risk that is assumed. Risks differ between projects
which might otherwise seem equal on the basis of the best estimates of an
overall plant design. The risk may depend upon the process used, whether it is
well established or a complete innovation; on the product to be made, whether
it is a stapie item or a completely new product; on the sales forecasts, whether
all sales will be outside the company or whether a significant fraction is internal,
etc. Since means for incorporating different levels of risk into profitability
forecasts are not too well established, the most common methods are to raise
the minimum acceptable rate of return for the riskier projects.