CHEMICAL ENGINEERING ECONOMICS DONALD E. GARRETT Adjunct Professor, University of California, Santa Barbara and Fonner Executive Vice-President for R&D Occidental Petroleum Corp.

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VAN NOSTRAND REINHOLD New York

Copyright © 1989 by Van Nostrand Reinhold Softcover reprint of the hardcover 1st edition 1989 Library of Congress Catalog Card Number 88-19187 ISBN-13: 978-94-011-6546-4 DOl: 10.1007/978-94-011-6544-0

e-ISBN-13: 978-94-011-6544-0

All rights reserved. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means-graphic, electronic, or mechanical, including photocopying, recording, taping, or information storage and retrieval systems-without written permission of the publisher.

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Library of Congress Cataloging-in-Publication Data Garrett, Donald E. Chemical engineering economics / Donald E. Garrett. p. cm Includes bibliographies and index. ISBN-13: 978-94-011-6546-4 I. Chemical engineering-Costs. 2. Chemical engineering-Estimates. I. Title.

PREFACE AND ACKNOWLEDGMENTS

There are many excellent books about economics for the process industries, each containing unique features. However, none of them emphasize the basic economic information that most working engineers will need. When the author started teaching chemical engineering economics some years ago at the University of California, Santa Barbara (UCSB), there were no texts available to provide specific instruction on cost estimating, project evaluation techniques and industry background on economics that related to, or could be profitably used by the engineer. Because of these circumstances a series of notes were assembled that gradually led to this book. The book is intended primarily for the working engineer who is not a cost estimator, upper level manager, or economics specialist, but who needs economics in his or her daily activities for better job performance and advancement. When practicing engineers are asked in surveys about the subjects they wish they had taken in more detail in school, almost all place economics high on their list. This book is designed to fulfill that wish and to be useful in the chemical engineering curriculum. Because of the importance of economics, and since it is a required course for accreditation, most engineers will have had some economics instruction in college. This book, whether used in conjunction with a design course or not, can provide the fundamental economic background that can be used in day-today engineering problems and assignments. Finally, since most chemical engineering professors are highly skilled technical specialists, this book can offer an easier and more comprehensive basic economic guide for the noneconomics instructor teaching the course. The author wishes to acknowledge the support and assistance given by the UCSB Chemmical Engineering Department, which has made writing this book and the companion teaching assignment highly interesting, enjoyable, and rewarding activities. The friendship and assistance of Professor Jack Meyers, former UCSB Dean of Engineering, have been of great value. And last, but not

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PREFACE

least, the author wishes to thank his constantly helpful wife Maggie and his secretary Pat Weimer; the former for her patience, encouragement, and for acting as a sounding-board, and the latter who toiled endlessly, cheerfully, and most competently on the book's preparation.

CONTENTS

Preface / iii 1.

INTRODUCTION / 1

Frequently Used Economic Studies / 2 Basic Economic Subjects / 3 Priorities / 3 Problems / 6 Appendixes / 6 References / 6 2. EQUIPMENT COST ESTIMATING / 8

Manufacturers' Quotations / 8 Estimating Charts / 10 Size Factoring Exponents / 11 Inflation Cost Indexes / 13 Installation Factor / 16 Module Factor / 18 Estimating Accuracy / 19 Estimating Example / 19 References / 21 3.

PLANT COST ESTIMATES / 22

Accuracy and Costs of Estimates / 22 Cost Overruns / 25 Plant Cost Estimating Factors / 26 Equipment Installation / 28 Instrumentation / 30 v

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CONTENTS

Piping / 30 Insulation / 30 Electrical / 30 Buildings / 32 Environmental Control / 32 Painting, Fire Protection, Safety Miscellaneous / 32 Yard Improvements / 32 Utilities / 32 Land / 33 Construction and Engineering Expense, Contractor's Fee, Contingency / 33 Total Multiplier / 34 Complete Plant Estimating Charts / 34 Cost per Ton of Product / 35 Capital Ratio (Turnover Ratio) / 35 Factoring Exponents / 37 Plant Modifications / 38 Other Components of Total Capital Investment / 38 Off-Site Facilities / 38 Distribution Facilities / 39 Research and Development, Engineering, Licensing / 40 Working Capital / 40 Start-up Expenses / 41 Foreign Locations / 41 References / 42 4.

MANUF ACTURING COST / 44

Detailed Estimates / 44 On-Stream Efficiency / 44 Raw Materials / 46 Utilities / 47 Operating Labor / 47 Factoring Method / 51 Payroll Overhead / 53 Supervisory and Other Labor / 53 Maintenance / 53 Operating Supplies, Laboratory Charges, Royalties / 57 Packaging, Storage / 57 Environmental/57

CONTENTS vii

Depreciation / 58 Local Taxes, Fees, Insurance, Interest / 59 Administration, Sales, and Research and Development / 61 Total Manufacturing Cost / 62 Estimating Charts and Tables / 64 References / 65 5. INTEREST CALCULATIONS: PRELIMINARY

PROJECT EVALUATION / 67

Interest: The Cost of Money / 67 Interest Calculations / 69 Simple Interest / 69 Compound Interest / 70 Present Worth (or Present Value) / 72 Annuities / 72 Capitalized Cost / 74 Product Sales Value / 75 Market Research / 75 Income Tax / 76 Return on Investment (ROI) / 79 Payout Period / 80 References / 80 6. PROFITABILITY ANALYSIS; DISCOUNTED CASH

FLOW (DCF) / 81

Cash Flow / 81 Discounted Cash Flow Calculations / 82 Instantaneous Cash Flows / 83 Income Cash Flows / 85 Initial Plant Investment / 87 Example / 90 Present Worth (or Present Value) / 94 Simplified Calculation Methods / 95 Data Presentation; Pro Forma Analysis / 95 Minimum Acceptable DCF / 97 Inflation / 98 Basic Businesses / 99

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Sensitivity Analysis / 99 Effect of Borrowed Capital; Leverage / 102 Production Rate; Break-Even Point / 104 Comparison of Project Evaluation Methods / 105 References / 106

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ECONOMY OF THE CHEMICAL INDUSTRY / 107

Industry Statistics / 107 Chemical Process Industries (CPI) / 107 The Chemical Industry / 108 Industry Data / 108 Profitability / 121 Present and Future Changes / 129 Cutting Costs / 129 Divestitures / 132 Mergers and Acquisitions / 135 Strengthening Existing Production / 142 Move into Higher Value-Added Products / 143 Foreign Trade and Production / 147 Diversification / 149 References / 152

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ACCOUNTING AND BUDGETS / 154

Basic Accounting Principles / 154 Journals / 155 Ledgers / 157 Basis / 157 Financial Statements / 158 Assets / 158 Liabilities / 158 Equities / 159 Cost Accounting / 159 Plant Operating Statements / 160 Standard Costs / 163 Plant Management / 164

CONTENTS

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Budgets / 165 Operating Budgets / 166 Inventory Budgeting / 166 Budget Preparation / 167 Budget Control / 168 Personal Budgets / 170 References / 172 9.

CORPORATE ANNUAL REPORTS / 173

Balance Sheets / 174 Income Statements / 180 Flow of Funds, Footnotes / 180 Ratio Analysis / 182 Current Ratio / 182 Acid Test Ratio / 183 Debt-to-Equity Ratio / 184 Return on Investment or Sales / 185 Pseudo-DCF / 186 Cash Flow/Capital Spending; Book Value / 187 General / 187 References / 188 10.

PROJECT MANAGEMENT / 189

Management Principles / 189 Planning / 190 Organizing / 192 Staffing / 192 Controlling / 193 Cost Control / 194 Code of Accounts / 194 Spending Curve / 194 Subprojects, Tasks / 196 Time Control Methods / 197 Bar Charts / 197 Network Diagrams; Critical Path Method (CPM) / 199 PERT (Program Evaluation and Review Technique) / 206 References / 208

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CONTENTS

11. PERSONAL INVESTING / 209

Why Invest / 209 How to Initiate an Investment Plan / 210 Budgeting / 210 Initial Investment Program / 210 Investment Strategy / 212 Diversification (Balanced Portfolio) / 212 Economic Cycles / 213 Inflation / 217 Investment Types / 218 Mutual Funds / 218 Direct Stock and Bond Purchases / 227 Bonds / 230 Precious Metal, Collectibles / 231 Real Estate / 233 High-Risk Investments / 234 Life Insurance / 235 Methods of Investment / 235 Company Stock Purchase Plans / 235 Investment Clubs / 238 Investment Counselors / 238 References / 239 12. EMPLOYMENT CONSIDERATIONS / 240

Seeking Employment / 240 Resumes / 241 Job Interviews / 241 Chemical Engineering Jobs / 243 Economic Presentations / 251 Informal Reports / 251 Informal Presentations / 252 References / 252 APPENDIX 1. EQUIPMENT COST ESTIMATES / 255 APPENDIX 2. COMPLETE PLANT COST ESTIMATING

CHARTS / 309

CONTENTS

APPENDIX 3. MANUFACTURING COST / 354 APPENDIX 4. SAMPLE QUESTIONS AND ANSWERS FOR

EACH CHAPTER / 379

APPENDIX 5. CONVERSION FACTORS / 399 INDEX / 403

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