1

Course Outline
• Unit 1: Methodology of the Design Process
• Unit 2: Codes and Standards, Design Factors, Variable
&Mathematical Representation of
• Design Problems
• Unit 3: Optimization and Batch Production Process
• Unit 4: Process Synthesis
• Unit 5: Process Simulation
• Unit 6: Flow Sheeting, Piping and Instrumentation
• Unit 7: Process Economics: Cost Estimation
• Unit 8: Process Economics: Depreciation and
Profitability Analysis

2
 Required Text & Student
Responsibilities
• Required Text
– Plant Design and Economics for Chemical
Engineers: By Peters and Timmerhaus
– Coulson & Richardson’s Chemical Engineering
Design: By Sinnot, Volume 6

• Student Responsibility:
– Attendance and Participation
– Students miss class at their own risk.

3
 Exams
• There are two exams:
– Mid-semester and
– Final exams.

• Each will consist of multiple choice, true/false, short

answers and /or essay questions. The questions will
be drawn from both lecture and the text.

4
 Grades
• Grades will be assigned according to the
following distribution:
– Midterm 20%
– Final 70%
– Question of the day(attendance) or homework
problems 10%

5
 UNIT ONE
Methodology of the Design Process
1.1 Design: it is the synthesis of ideas to achieve
a desired goal.
• Designer starts with specific objective, develops and
evaluates new designs & arrives at what he considers
the best design.

• It could be a new chair, a new bridge, and for a

chemical engineer, a new chemical product or a stage in
the design of a production process.

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1-1.2 Design Contraints

7
1-1.3 The Design Process

8
 1-1.3.1 Design Objective
• For a Chemical Process Plant or in designing a
manufacturing process, Objective is:
– Satisfy public need for product

9
 1-1.3.2 Data Collection
• Designer must assemble all relevant facts and
data required.
• For process Design;
– Process alternatives
– Equipment performances
– Physical property data

10
 Data Collection (cont.)
• Many design organisations will prepare a basic data
manual, containing all the process "know-how" on which
the design is to be based.

• Most organisations will have design manuals covering

preferred methods and data for the more frequently used,
routine, design procedures.

• The national standards are also sources of design methods

and data; they are also design constraints.

• The constraints, particularly the external constraints,

should be identified early in the design process.

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 1-1.3.3 Generation of Possible
Designs
• Designer must come up with possible solutions
for;
– Analysis
– Evaluation
– Selection
• Chemical Engineering Projects are divided into 3
types
– Modification
– New production capacity to meet growing sales
– New processes, developed from lab research, pilot
plant

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 1-1.3.4 Selection
• The selection process can go through the ff
stages:
– Possible designs (credible) within the external
-

constraints.
– Plausible designs (feasible) within the internal
-

constraints.
– Probable designs - likely candidates.
– Best design (optimum) -judged the best solution
to the problem.

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1-1.4 Chemical Manufacturing
Process

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 1-1.5 Continuous & Batch Processes
• Continuous processes are designed to operate 24 hours a
day, 7 days a week, throughout the year. Some down time
will be allowed for maintenance and, for some processes,
catalyst regeneration.

• Batch processes are designed to operate intermittently.

Some, or all the process units being frequently shut down
and started up.

• Continuous processes will usually be more economical for

large scale production.

• Batch processes are used where some flexibility is wanted

in production rate
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Continuous & Batch Processes(contd)
• Continuous
– Production rate greater than 5 x 106 kg/h
– Single product
– No severe fouling
– Good catalyst life
– Proven processes design
– Established market
• Batch
– Production rate less than 5 x 106 kg/h
– A range of products or product specifications
– Severe fouling
– Short catalyst life
– New product
– Uncertain design

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 1-1.5.2 The Organisation of a
Chemical Engineering Project
• The design work required in the engineering
of a chemical manufacturing process plant
can be divided into two broad phases:
• Phase 1
– Process Design: Covers the steps from the initial
selection of the process to be used, through to
the issuing of the process flow-sheets; and
includes the selection specification and chemical
engineering design of equipment

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 The Organisation of a Chemical
Engineering Project(contd.)
• Phase 2
– The detailed mechanical design of equipment; the
structural, civil and electrical design, and the
specification and design of the ancillary services.

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Project Organisation

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 PROJECT DOCUMENTATION
The Project documentation will include:
1. General correspondence within the design group and with:
– government departments
– equipment vendors
– site personnel
– the client
2. Calculation sheets
– design calculations
– costing
– computer print-out
3. Drawings flow-sheets
– piping and instrumentation diagrams
– layout diagrams 20
 PROJECT DOCUMENTATION(contd.)
– plot/site plans
– equipment details
– piping diagrams
– architectural drawings
– design sketches
4. Specification sheets for equipment, such as:
– heat exchangers
– pumps
5. Purchase orders quotations
– Invoices
– quotations

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 UNIT 2:
2-1.1 Codes and Standards
• Code of practice: recommended design or
operating procedure
• Standard:refers to preferred sizes, eg. pipes,
composition etc.
• Standards and codes cover various functions:
– Materials, properties and composition
– Testing procedures for performance, composition and
quality.
– Preferred sizes, e.g. tubes, plates, sections
– Design methods, inspection, fabrication
– Codes of practice; for plant operation and safety
procedures.
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 Codes and Standards (Contd.)
• Standards
– A prescribed set of rules
– Not optional, must be followed
• Codes
– A rule or set of rules governing applied use of
standards
– May be made into law
• Other
– Guidelines
• For guidance only and therefore optional
• May be company specific
– Recommended Practices
• Generally regarded as a valid approach to an issue
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 Codes and Standards (contd)
• All developed countries have national
organizations responsible for the issue and
maintenance of standards for the
manufacturing industries and for the
protection of consumers:
– U.K; British Standards Institution
– U.S; National Bureau of Standards

24
 Codes and Standards (contd)
• Principal ones of interest to chemical
engineers are:
– American National Standards Institute (ANSI)
– American Petroleum Institute (API)
– American Society for Testing Materials (ASTM)
– American Society of Mechanical Engineers (ASME)
(pressure vessels)

25
 Codes & Standards, Contd.
• ASME Code Case 2211
– Pressure vessels with overpressure protection
system design
• ASME Code Case 2290
– In 1999 new maximum allowable stresses in ASME
VIII are based on safety factor of 3.5 ( safety factor
previously was 4)
• ASME B16.34
– Valves and flanges

26
 Codes and Standards (contd)
• In Ghana,
– No national standard organization to
coordinate local standards for industries.
– However there are national standard
organizations with standards for the
protection of consumers:
• Ghana Standards Authority,
• Food and Drug Administration (FDA),
• Environmental Protection Agency (EPA).
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 2-1.2 Factors of Safety (Design
Factors)
• Design factors:
– give a margin of safety in design to prevent
equipment failure and operate safely.

– In process design, design factors are used to give

tolerances in the design e.g. process stream average
flows calculated from material balances are often
increased by a factor of 10%, to give some flexibility
in process operation. This factor then sets the
maximum flows for equipment, instrumentation and
piping design.

28
 2-1.3 System of Units

• Chemical engineering uses a diversity of units

from American and British engineering
Systems, CGS (gram, centimeter, second)

• MKS( kilogram, meter, seconds)

• English and American – pound mass (lb), foot,

second or hours, pound force.
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2-1.4 The mathematical representation of the design
problem: Degrees of freedom and design variables

• A process unit in a chemical process plant

performs some operation on the inlet material
streams to produce the desired outlet
streams. In the design of such a unit the
design calculations model the operation of
the unit.

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The Design Unit

31
The mathematical representation of the design problem:
Degrees of freedom and design variables (contd)

• The information flows are the values of the

variables which are involved in the design;
– such as, stream compositions, temperatures,
pressure, stream flow-rates, and stream
enthalpies.
– Composition, temperature and pressure are
intensive variables: independent of the quantity of
material (flow-rate).

32
The mathematical representation of the design problem:
Degrees of freedom and design variables (contd)

• Constraints on the design places restrictions

on the possible values that these variables can
take.
• But the values of some of the variables are
fixed directly by process specifications. The
values of other variables are determined by
"design relationships" arising from constraints.

33
The mathematical representation of the design problem:
Degrees of freedom and design variables (contd.)

• Some of the design relationships are in the form

of explicit mathematical equations (design
equations); such as those arising from material
and energy balances, thermodynamic
relationships, and equipment performance
parameters.

• Other relationships will be less precise; such as

those arising from the use of standards and
preferred sizes, and safety considerations.
34
The mathematical representation of the design problem
:Degrees of freedom and design variables(contd )
• Degree of Freedom:
– The difference between the number of variables
involved in a design and the number of design
relationships.

– The number of variables in the system is

analogous to the number of variables in a set of
simultaneous equations, and the number of
relationships analogous to the number of
equations.
35
Degrees of freedom and design
variables(contd)

36
Degrees of freedom and design
variables(contd.)
1. If Nv  Nr , Nd  0 and there is only one unique solution to the problem.
The problem is not a true design problem,
no optimisation is possible.

2. If Nv  Nr , Nd  0 and the problem is over defined; only a trivial

solution is possible.

3. If Nv  Nr , Nd  0 and there is an infinite number

of possible solutions.

However, for a practical problem there will be only a limited

number of feasible solutions.
The value of Nd is the number of variables which the designer must
assign values to solve the problem. 37
Process Stream

38
Process Stream( contd)

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 2-1.5 Selection of Design Variables
• To solve a design problem, the designer has to
decide which variables to choose as design
variables, i.e the ones he can manipulate to
produce the best design.

• Consider a flash distillation process:

40
Selection of Design Variables( contd)

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Selection of Design Variables(contd)

For a flash distillation Nd  C  4

For a binary mixture,C  2
Nd  2  4  6

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 UNIT 3: Optimization and Batch Production Process
3-1 Optimization

• The general procedure for optimizing process units and

equipment design is:

– Step1: clearly define the objective. i.e. the criteria to be used for
measuring the performance of the system. For a chemical
process plant, the overall objective is to maximize profit.
• minimize operating cost, reduce labour requirements, reduce
maintenance, operate safely.

– Step 2: determine the objective function; the system of

equations and other relationships, which relate the objectives
with the variables to be manipulated to optimize the function.

– Step 3: find values of the variables that give the optimum value
of objective function i.e maximum or minimum.

• Best technique to use will depend on the complexity of the system

and the type of mathematical model used to represent it.
43
 3-1.2 Simple Models

• Example: : Determine the optimum

proportions or dimensions for a closed
cylindrical container.

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3-1.2 Simple Models (contd)
  
A  DL  2 D 2   DL  D 2
4  2
D2
the objective function is f D, L   D  L  (1)
2
for a given volume (V) we have,
 D2 4V
V L  L (2)
4  D2

exp res sin g the objective function in terms of one variable D, we have

4V D 2
f(D)  
D 2
 4V
differentiating; f ' (D)  D (3)
D 2

finding the optimum D, we set the above equation to zero

1
 4V 4V  4V  3
 D  0  D3   D 
D  

2 1
4V  4V  3
 4V  3
substituting D in (2) above  L     
  
45
 3-1.2 Simple Models (contd)
• For a cylindrical container, the minimum
surface area to enclose a given volume is
obtained when the length (height) is made
equal to the diameter.

• In practice, when the cost is the objective

function; L=2D; this is because the cost must
include that of forming the vessel, making the
joints in addition to the cost of the material.

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 3-1.3 Multiple Variable Problem
• The general optimization problem can be
represented mathematically as:

47
 3-1.4 Methods of Analysis
• Analytical Method:
– The method of Lagrange's undetermined multipliers is a useful
analytical technique for dealing with problems that have equality
constraints (fixed design values).
– For the general, unconstrained, objective function, the derivatives will
give the critical points; which may be maximum or minimum, or
ridges or valleys

48
 Methods of Analysis (contd.)
• Search Method:
– requires that the objective function be
computed from arbitrary values of the
independent values.

49
Methods of Analysis (contd.):
Search Method

50
3-1.5 Other Optimization Methods
• Linear Programming
– A technique used when the objective function and
constraints can be expressed as a linear function
of the variables

• Dynamic Programming
– Used for optimization of large systems

51
 3-2 Batch Production Process
• Productive period: this is the period when product is
being produced

• Nonproductive period; this is the period when the

product is discharged and equipment prepared for the
next batch.

• Total batch time: productive period + nonproductive

period

• The rate of production is determined by the total

batch time as follows:

52
 Batch Production Process(contd.)
• Batches per year = 8760 x Plant attainment
batch cycle time

• Annual production rate = (quantities produced per

batch)x(batches per year)

• Cost per unit of production= annual cost of production

Annual production rate

53
 Batch Production Process(contd.)
• With many batch processes, the production
rate will decrease during the production
period;
– Eg. For batch reactors , there will be an optimum
batch size, or optimum cycle time, that will give
the minimum cost per unit of production.

54
Batch Production Process (contd.)
• For some processes, the period of continuous
production will be limited by gradual changes in
process conditions;

– Such as, the deactivation of catalysts or the fouling of

heat-exchange surfaces.

– Production will be lost during the periods when the

plant is shut down for catalyst renewal or equipment
clean-up. With batch process, there will be an
optimum cycle time to give the minimum production
cost.

55
 Batch Production Process(contd.)
• With batch processes, the period between shut-
downs will usually be a function of equipment
size. Increasing the size of equipment will extend
the production period, but at the expense of
increased capital cost.

• The designer must strike a balance between the

savings gained by reducing the non-productive
period and the increased investment required.
56
 UN IT 4: Process Synthesis:
introduction
• Aims at the optimization of the logical
structure of a chemical process; specifically the
sequence of steps; reaction, separation
(distillation, extraction etc).
– logical structure of a chemical process: Given the
following;
• Raw materials, required products, allowed
byproducts, a set of unit operations for
consideration, cost factors for materials and unit
operations required to generate and rank in
order of preference the feasible chemical plant
flow sheets.
57
 Process Synthesis: introduction
(contd.)
• Approach 1.
– Combinatorial algorithms are used to find all
feasible flow sheets contained in a toolkit of raw
materials and operating steps.
– The flow sheets are then reviewed and optimized
based on performance, economic and safety
criteria.

58
 Process Synthesis: introduction
(contd)
• Approach 2. Heuristic rules based on
experiences that are used for the selection
and positioning of processing operations as
flow sheets are assembled.

59
 4-1.2 Raw Materials and Chemical
Reactions
• Heuristic 1: Select raw materials and chemical
reactions to avoid or reduce the handling and
storage of hazardous and toxic chemicals.
E.g. Manufacture of ethylene glycol

60
61
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 2: Distribution of Chemicals
– Use an excess of one chemical reactant in a reaction to
completely consume a second valuable, toxic or hazardous
reactant.
– E.g. use an excess of ethylene in the production of
Dichloroethane.

62
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 3: when nearly pure products are
required, eliminate the inert species before the
reaction operations, when the separations are easily
accomplished, or when the catalyst is adversely
affected by the inert.

63
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 4: Introduce liquid or vapor purge
streams to provide exit for species that;
– Enter the process as impurities in the feed.
– Produced by irreversible side reactions
• E.g. Ammonia, NH3 synthesis loop

64
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 5: Do not purge valuable species or
species that are toxic and hazardous, even in small
concentrations
– Add separators to recover valuable species
– Add reactors to eliminate toxic and hazardous species
e.g. catalytic converter in car exhaust

65
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 6: For competing series or parallel reactions, adjust
temperature, pressure, and catalyst to obtain high yields of desired
products. In the initial distribution of chemicals, assume that these
conditions can be satisfied; obtain kinetic data, and check this assumption
before developing a base-case design.
– E.g. Manufacture of alkyl-chloride

66
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 7: For reversible reactions, consider conducting
them in a separation device capable of removing products,
and hence driving the reaction to the right.
e.g. manufacture of ethyl-acetate using reactive distillation

67
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 8: Separations : separate liquid
mixtures using distillation, stripping towers
and liquid-liquid extractors.

68
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 9: attempt to condense vapour mixtures with
cooling water, then use heuristic 8.

69
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 10: Heat Transfer in reactors: to
remove highly exothermic heat of reaction, consider
the use of excess reactant, an inert diluents.

70
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 11: For less exothermic heat of reaction,
circulate reactor fluid to an external cooler, or use a jacketed
vessel or cooling coils

71
 Raw Materials and Chemical
Reactions(contd.)
• Heuristic 12: Pumping and Compression: To increase the
pressure of a stream, pump a liquid rather than compress a gas: i.e
condense a vapor as long as refrigeration ( and compression) is not
needed before pumping.

72
 UNIT 5: Process Simulation:
5-1.1 Introduction
• Process simulation is the act of representing some aspects of the real
world by numbers or symbols that may be easily manipulated to facilitate
their study.

• The important step in process simulation is the representation of that

aspect of the real world to be studied in terms of a mathematical model.

• With respect to chemical engineering, the real world is a chemical

process described by a process flow sheet. Therefore process simulation is
used to solve problems related to the process flow sheet, i.e process
design, process analysis, process control etc.

• A process simulation is a computer program developed to solve the

model and study its behavior by manipulating the model parameters.

73
 5-1.2 Process Simulator
• Computational package that enables predictions
of the process behavior

• Inputs for the package are:

– Basic engineering relationships such as:
• Mass and energy balances
• Phase and chemical equilibrium
• Flowsheet topography
– Uses are:
• For design of new plants
• Increase profitability in existing plants
• Run many possible cases
• Sensitivity studies, and optimization
74
 5-1.3 Types of Process Simulation
• There are several commercial packages. E.g Aspen Plus,
Chemcad, Hysis Pro/II.

• Common features of all these are:

– Database of hundreds – thousands( a large number) of
compounds
– A parameter library to compute /estimate properties of these
compounds
– Flowsheet builder- graphical interface that enables units to be
defined and connected.
– Thermo Solver; computes phase equilibrium and
thermodynamic properties given the database
– Unit operations Solver: short cut and rigorous solvers for
equipment
– Overall flowsheet solver; mathematical convergence of the
flowsheet
75
 5-1.4 Unit Operations Solvers; e.g
Reactors
• specifies the reaction stoichiometry, temperature, pressure and
conversion
• when the reaction is equilibrium limited, specifies the
stoichiometry , the approach to equilibrium and equilibrium
constants
• for the reaction involved, specifies the kinetic expression, reactor
type and enables the reactor size calculation.
• distillation columns
• Uses the Feuske, Underwood methods to provide a good initial
guess for subsequent calculations
• for rigorous plate-by-plate approach, it solves simultaneously,
material and energy balance equations, and VLE relations for each
plate.

76
 5-1.5. Uncertainty and Sensitivity
Issues
• It is important to be able to quantify the uncertainty of results:
• Determine the probability of accuracy of results
• Determine what part of results obtained is most likely to be incorrect, and
estimate error range

• Sensitivity issues; in cost estimation and profitability studies, estimate the

sensitivity of the results to variations in capital cost, operating cost etc.

• Other causes of uncertainty of results using a simulator.

• Thermo model used
• Physical properties data
• Convergence tolerance
• Simulation method ( simulator)
• Because there are disturbing variations between different process
simulators using the same models.

77
 UNIT 6: Flow Sheeting, Piping and
Instrumentation
• The flow sheet is the key document in process design.
It shows the arrangement of the equipment selected
to carry out the process.

78
 6-1.2 Piping and Instrumentation
• The Piping and Instrument diagram (P and I diagram) shows the
arrangement of the process equipment, piping, pumps,
instruments, valves and other fittings.

79
 6-1.3 Valve Selection
• The valves used for chemical process plant can
be divided into two broad classes, depending
on their primary function:
• Shut-off valves (block valves), whose purpose
is to close off the flow.
• Control valves, both manual and automatic,
used to regulate flow.

80
Valve Selection (Contd.)

81
 Valve Selection (Contd.)
• The main types of valves used are:
– Gate: used when flow is straight, often used –(a)
– Plug: for flow shut off –(b)
– Ball: for flow shut off –(c)
– Globe: used when flow control is rqd. due to
change in flow dxn., are automatic valves-(d)
– Diaphragm: -e
– Butterfly: Figure –f – normally for gas & vapor
control

82
 6-2.1 Introduction of Pumps
• They are mechanical devices used to increase
the energy of a liquid stream flowing in a
closed conduit or pipe.

• This energy may be used to increase the

velocity (move the fluid), the pressure or the
elevation of the fluid.

83
 6-2.2 Classification of Pumps
• Pumps are generally classified into two main
categories namely:
– Centrifugal pumps( dynamic pumps)
– Positive displacement pumps
Category Types Structure

Centrifugal Single-stage Volute

Multi-stage Diffuser
Regenerative
Vertical
Hellico-centrifugal
Axial flow

Positive displacement Rotary Gear

Screw
Vane

Reciprocating Piston
Diaphragm
Plunger
84
 6-2.3 Factors to Consider in Pump
Selection
• Capacity (flow rate in m3/h)
• The pressure head that is generated by the pump
• The type of liquid pumped (its viscosity and
vapour pressure under inlet conditions)

– initial selection is generally made based on the

capacity and the pressure generated
– The centrifugal pump is often the only possible choice
for high capacities whereas positive displacement
pumps are better suited to generating high pressure
heads.
– Other criteria such as the viscosity of the liquid can
modify this initial choice.
• A positive displacement pump is generally recommended to
pump liquids with a viscosity higher than 2000 cP. 85
Approximate Range of Operation for
the Three Main Types of Pump

86
 6-2.4 Centrifugal Pumps
• Basically consists of an impeller equipped
with radial vanes rotating inside a shell called
the pump casing.
• It works by the transfer of centrifugal force of
the rotating impeller into kinetic energy of
the liquid.
• This energy is then converted into pressure
when the fluid velocity decreases.

87
6-2.4.1 Effective characteristic curves
• A centrifugal pump is characterized by 4 basic
curves, all of which are expressed versus the
flow rate:
– The head generated
– The mechanical/hydraulic conversion efficiency
– The mechanical power input consumed at the
shaft
– The pump suction capacity or NPSH.

88
Basic Curves Characterizing a
Centrifugal Pump

89
 6-2.4.2 Design parameters of
centrifugal pumps
• The rotation speed
• The number of impellers
• The impeller diameter
• The impeller design

90
 6-2.4.3 Operating point
• The pressure head HA required by the installation is
represented by the system curve versus flow rate, Q.

• It is the sum of the static and dynamic heads of the

installation as shown in Figure 6-2.3.

• The static heads are independent of the flow rate and

include differences in height and pressure between the
unit inlet and outlet.

• The dynamic heads correspond to pressure drops and

are proportional to the square of the flow rate.
91
Figure 6-2.3: Curve Characteristic of
the System.

92
• A centrifugal pump adjusts itself on an
operating point B, corresponding to the
intersection between the Q/H curve of the
pump and the HA curve of the system (Figure
6-2.4).

• A variation in the operating point (and

therefore in the flow rate and the head) can
be obtained by a physical modification in the
pump, but also by modifying its speed or the
system curve, usually by means of a valve.

93
Effect of impeller diameter on pump
characteristic curve

94
Figure 6-2.4: Variation of Operating
Point by means of a Valve.

95
96
 6-2.4.4 Q/H Curve versus Technical
Choices
• Basic choices; concept of specific speed
• The number Nq, called the “specific speed”, allows all
centrifugal pumps to be compared with one another.
• It is calculated from the following expression:
N Q
Nq  3
4
60H
Where
• N = rotational speed in rpm
• Q= flow rate for the best efficiency in m3/h (through one eye
if double-suction impeller)
• H= head in m generated at the best efficiency (for one stage)
97
 Pressure Drop in Pipelines
• The pressure drop in a pipe, due to friction, is a
function of:
– the fluid flow-rate,
– fluid density and viscosity,
– pipe diameter,
– pipe surface roughness and
– the length of the pipe.

98
 Pressure Drop in Pipelines
• It is represented by:

99
 Pressure Drop in Pipelines
• The friction factor is dependent on the
Reynolds number and pipe roughness.

100
 EXAMPLE 6-1.1
• A pipeline connecting two tanks contains four
standard radius elbows, a globe valve that is
fully open and a gate valve that is half open.
The line is commercial steel pipe, 25 mm
internal diameter, length 120 m. The
properties of the fluid are: viscosity 0.99
mNM-2 s, density 998 kg/m3. Calculate the
total pressure drop due to friction when the
flow rate is 3500 kg/h.
101
102
103
104
 6-2.4.6 Suction Conditions:
Net positive suction Head (NPSH)
• The pressure at the inlet to a pump must be
high enough to prevent cavitation occurring in
the pump.

• Cavitation: occurs when bubbles of vapor, or

gas, form in the pump casing. Vapor bubbles
will form if the pressure falls below the vapor
pressure of the liquid.

105
 Net positive suction Head (NPSH)
• The net positive suction head available
(NPSHavail.) is the pressure at the pump suction,
above the vapor pressure of the liquid, expressed
as head of liquid.

• The net positive head required (NPSHreqd.) is a

function of the design parameters of the pump,
and will be specified by the pump manufacturer.

• As a general guide, the NPSH should be above 3 m

for pump capacities up to 100 m3/h, and 6 m above
this capacity. 106
 Net positive suction Head (NPSH)
The Net Positive Suction Head Available is given by;
NPSH avail  P / g  H  Pf / g  Pv / g

• The inlet piping arrangement must be designed to ensure that

NPSHavail exceeds NPSHreqd under all operating conditions.
107
Power Requirements for Pumping Liquids
• To transport a liquid from one vessel to another
through a pipeline, energy has to be supplied to:
– overcome the friction losses in the pipes
– overcome the miscellaneous losses in the pipe fittings
(e.g. bends), valves, instruments etc.
– overcome the losses in process equipment (e.g. heat
exchangers)
– overcome any difference in elevation from end to end
of the pipe
– overcome any difference in pressure between the
vessels at each end of the pipeline.
108
109
 Power Requirements for Pumping
Liquids (Contd.)
• The total energy required can be calculated from the
equation:
P Pf
gz   W 0
 
where W = work done, J/kg,
∆z = difference in elevations (z1 — z2), m,
∆P = difference in system pressures (P1 — P2), N/m2,
∆Pf = pressure drop due to friction, including
miscellaneous losses, and equipment losses, N/m2,
ρ = liquid density, kg/m3,
g = acceleration due to gravity, m/s2.
110
Power Requirements for Pumping Liquids (Contd.)
• A pump is required if W is negative and a
turbine is required if W is positive.
• The power required is given by:
Power  W  m  /  , for a pump
and
Power  W  m  , for a turbine
where m  mass flowrate, kg/s
Power output
  efficiency 
Power input
The head required by the pump  ΔPf / g  P / g  z 111
Example Problem

Crude dichlorobenzene is pumped from a storage tank to a

distillation column. The tank is blanketed with nitrogen and the
pressure above the liquid surface is held constant at 0.1 bar
gauge pressure. The minimum depth of liquid in the tank is 1 m.
The distillation column operates at a pressure of 500 mmHg (500
mm of mercury, absolute). The feed point to the column is 12m
above the base of the tank. The tank and column are connected
by a 50 mm internal diameter commercial steel pipe, 200 m
long. The pipe run from the tank to the column contains the
following valves and fittings: 20 standard radius 90o elbows; two
gate valves to isolate the pump (operated fully open); an orifice
plate and a flow-control valve. If the maximum flow-rate
required is 20,000 kg/h, calculate the pump motor rating
(power) needed. Take the pump efficiency as 70 per cent and
allow for a pressure drop of 0.5 bar across the control valve and
a loss of 10 velocity heads across the orifice. Density of the
dichlorobenzene 1300 kg/m3 , viscosity 1.4 cp.
112
 Example Problem
• A tanker carrying toluene is unloaded, using the ship's pumps,
to an on-shore storage tank. The pipeline is 225 mm internal
diameter, commercial steel and 900 m long. Miscellaneous
losses due to fittings, valves, etc., amount to 600 equivalent
pipe diameters. The maximum liquid level in the storage tank is
30 m above the lowest level in the ship's tanks. The ship's tanks
are nitrogen blanketed and maintained at a pressure of 1.05
bar. The storage tank has a floating roof, which exerts a pressure
of 1.1 bar on the liquid. The ship must unload 1000 tonne
within 5 hours to avoid demurrage charges. Take the pump
efficiency as 70 percent. Physical properties of toluene: density
874 kg/m3, viscosity 0.62 mNm-2 s. Estimate;
– The area of the pipe
– Mass flow rate
– The fluid velocity
– The friction factor
– Difference in elevation (Z1-Z2)
– Difference in pressure (P1-P2)
– Work done, W
– the power required by the pump. 113
 Example Problem 3
• A process liquid is pumped from a storage tank to a distillation
column, using a centrifugal pump. The pipeline is 80 mm
internal diameter commercial steel pipe, 100 m long.
Miscellaneous losses are equivalent to 600 pipe diameters.
The storage tank operates at atmospheric pressure and the
column at 1.7 bara. The lowest liquid level in the tank will be
1.5 m above the pump inlet, and the feed point to the column
is 3 m above the pump inlet. Using the table below, plot the
system curve on the pump characteristic given in FIGURE A
and determine the operating point and pump efficiency.
Properties of the fluid: density 900 kg/m3, viscosity 1.36 mN
m-2s.
FIGURE A

115
 UNIT 7: PROCESS ECONOMICS:
7.1 Cost Estimation
• Capital must be allocated for direct plant
expenses, such as those for equipment,
materials, labor.

• Besides direct expenses, many other indirect

expenses are incurred and these must be
included if a complete analysis of the total cost is
to be obtained.
– Examples of these indirect expenses are
administrative salaries, product-distribution cost, and
cost for interplant communications.
116
7-1.2 Cash Flow for Industrial
Operation.

117
7-1.3 Factors affecting Investment and
Production Costs
• Sources of equipment
• Price fluctuations
• Company policies
• Operating time and rate of
production
• Governmental policies
118
 7-1.4 Capital Investment
• Capital Investment :
– Money to purchase and install the necessary
machinery and equipment.
– Land and service facilities must be obtained, and
the plant must be erected complete with all
piping, controls, and services.
– In addition it is necessary to have money available
for the payment of expenses involved in the plant
operation.

119
 Capital Investment(contd.)

• Total Capital Investment

– Fixed capital Investment +
working capital

120
 Fixed Capital Investment
• Fixed Capital Investment:
– The capital needed to supply the needed
manufacturing and plant facilities.
– Or the total cost of the plant ready for
start-up.
–Manufacturing fixed capital
investment + Non-manufacturing
fixed investment
121
 Fixed Capital Investment(cntd.)
• It includes the cost of:
– Design, and other engineering and construction
supervision.
– All items of equipment and their installation.
– All piping, instrumentation and control systems.
– Buildings and structures.
– Auxiliary facilities, such as utilities, land and civil
engineering work.
• It is a once-only cost that is not recovered at the
end of the project life, other than the scrap value.

122
 Working Capital
• Working Capital:
– the additional investment needed, over and above
the fixed capital, to start the plant up and operate
it to the point when income is earned.

123
 Working capital
• The working capital for an industrial plant consist
of the total amount of money invested in:
– Start-up
– Raw materials and supplies carried in stock
– Initial catalyst charges
– Finished products in stock and semi-finished products
in process of being manufactured
– Accounts receivable
– Cash kept on hand for monthly payment of operating
expenses , such as salaries, wages, and raw materials
purchases
– Accounts payables
– Taxes payables
124
 Working Capital
• Most of the working capital is recovered at the end of
the project.

• Working capital can vary from as low as 5% - as high as

30%

• Most chemical plants use an initial working capital of

10-20% of the total capital investment. It is 50% or
more for companies producing products of seasonal
demand.

• A typical figure for petrochemical plants is 15% of the

fixed capital.
125
 Manufacturing fixed capital
Investment
• It is the fixed capital necessary for the
installed process equipment with all auxiliaries
that are needed for complete process
operation.

• These include: expenses for piping,

instruments, insulations, foundations, and site
preparation.

126
 Non- manufacturing fixed capital
investment
• The fixed capital required for construction
overhead and for all plant components that
are not directly related to the process
operation.
– Plant Comp. not directly rel. to process operation
the land, processing buildings, administrative and
other offices, warehouses, laboratories,
transportation, shipping and receiving facilities,
utilities and waste disposal facilities, shops and
other permanent parts of the plant.

127
Non-manufacturing Fixed capital Investment

– Construction overhead cost

• consists of field-office and supervision expenses, home-
office expenses, engineering expenses, miscellaneous
construction costs, contactor’s fees and contingencies.

• In most cases, construction overhead is proportioned

between manufacturing and non-manufacturing fixed-
capital investment.

128
 7-1.5 Estimation of Capital
Investment
• A check list of items covering a new facility is
an invaluable aid in making a complete
estimation of the fixed capital investment. A
typical list of items is:

129
Estimation of Capital Investment(contd.)
• Direct cost
– Purchased equipment; all equipments listed on a flow
sheet
– Purchased-equipment installation
– Instrumentation and controls
– Piping
– Electrical equipment and materials
– Buildings(including services)
– Yard improvements
– Service facilities
– land
130
Estimation of Capital Investment(contd)

• Indirect cost
– Engineering and supervision
– Construction expenses
– Contractor’s fees
– Contingencies

131
7-1.5.2 Types of capital cost estimates
• The following five categories represent the
accuracy range and designation normally used for
design purposes:
– Order-of-magnitude estimate based on similar
previous cost data
– Study estimate based on knowledge of major items of
equipment
– Preliminary estimate based on sufficient data to
permit the estimate to be budgeted
– Definitive estimate based on almost complete data
but before completion of drawings and specifications
– Detailed estimate based on complete engineering
drawings, specifications and site surveys

132
 7-1.5.3 Cost Indexes(contd.)
• Cost index: is an index value for a given point
in time showing the cost at that time relative
to a certain base time.

 index value at present time 

Pr esent cost  Original cost  
 index value at time original cost was obtained 

133
 Cost Indexes(contd.)
• The common indexes permit fairly accurate estimates if
the time period involved is less than 10 years.

• Some indexes are used for estimating equipment cost,

others apply specifically to labor, construction,
materials etc.

• The most common of these cost indexes are:

– the Marshall and Swift all-industry and process-industry
equipment indexes,
– the Engineering New-Record construction index,
– the Nelson refinery construction index and,
– the Chemical Engineering plant cost index. 134
Cost Indexes(contd.)

135
 7-1.5.4 Methods for Estimating Capital
Investment
• Power factor applied to plant capacity ratio
• Percent of delivered equipment cost
• Lang factors for approximation of capital
investment
• Detailed factorial Estimate
• Unit cost estimate

136
 (a) Power factor applied to plant capacity
ratio

Cn  CFE R 
n

Cn , C  Equipment cost
R  capacity of new facility divided by the capacity of old facility
FE  Ratio of M & S equipment cost index of new year to old year
n  power, averaged between 0.6 to 0.7 for many process facilities
(or equipment size or capacity exponent)

137
Table 7-1.2 Typical Exponents for Equipment Cost vs. Capacity

138
 EXAMPLE 7-1.1
• If a process plant was erected in Kumasi at a
fixed capital investment of $436,000 in 1970,
determine what the capital investment will be
in 1975 for a similar process plant located
near Dansoman in Accra with twice the
process capacity but with an equal number of
process equipment. Assume capacity
exponent is 0.7.

139
 (b) Percentage of Delivered Equipment
Cost
• This method for estimation of the fixed or total-
capital investment requires determination of the
delivered equipment cost.

• Other items included in the total direct plant cost

are then estimated as percentages of the
delivered-equipment cost.

• The additional components of the capital

investment are based on average percentages of
the total direct plant cost, total direct and
indirect plant cost or total capital investment.
140
 Example
• Prepare a study estimate of the fixed-capital investment for
a process plant if the delivered equipment cost is $100,000.
– Purchased Equipment (delivered), E
– Purchased equipment installation, 39% E
– Instrumentation (installed), 28% E
– Piping(installed), 31%
– Electrical(installed), 10%
– Buildings (including services), 22%
– Yard improvements, 10%
– Service facilities (installed), 55%
– Land, 6%
• Total direct plant cost, D
– Engineering & supervision, 32% E
– Construction expenses, 34% E
• Total direct and indirect plant cost, D+I
– Contractor’s fees, 5%(D+I)
– Contingencies, 10%(D+I)
• Fixed Capital Investment
141
 C. The factorial methods of capital cost estimation:
Lang factors

For approximation of capital investment: here the fixed

capital cost of the project is given as a function of the total
purchase equipment cost by the eqn.

142
 (d) The factorial methods of capital cost estimation:
Detailed factorial (or item) estimates

• To make a more accurate estimate, the cost factors that are

compounded into the "Lang factor" are considered
individually.

143
 EXAMPLE 7-1.2
• Initial design work was done for a chemical
plant to revamp the process in order to
recover valuable product from an effluent gas
stream. The gas will be scrubbed with a
solvent in a packed column and the recovered
product and solvent separated by distillation.
The solvent will then be cooled and recycled.
The major items of equipment required and
their purchased costs in cedis are:
144
• Absorption column
– Column purchased cost = 19,800
– Cost of column packing = 6,786
• Recovery column
– Column purchased cost = 45,000
– Cost of 30 sieve trays = 8,670
• Reboiler
– Cost of reboiler = 7,600
• Condenser
– Purchased cost = 4,800
• Recycle solvent cooler
– Cost of cooler = 2,550
• Storage tank
– Cost of tank = 7,790

145
• The relevant component factors for this
processing plant are;
– f1: equipment erection = 0.40
– f2: piping = 0.70
– f3: Instrumentation = 0.2
– f4: electrical = 0.10
– f10: design and engineering = 0.30
– f12: contingencies = 0.20
• Estimate the total capital investment for the
project, if the working capital can be taken as
10 % of the fixed capital cost.

146
Quest. 2

147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
 Turnover Ratio
• Turnover ratio: is the ratio of gross annual
sales to the fixed capital investment.
gross annual sales
Turnoverratio 
fixed capital investiment

1
Capital ratio or investment ratio 
Turnover ratio

• Turnover ratio ranges between 0.2 to 5. For

chemical industries, as a very rough rule of
thumb, the ratio can be approximated to 1.
162
7-2.1 Estimation of Total Product Cost
• Manufacturing cost: all expenses directly
connected with the manufacturing operation or
the physical equipment of a process plant itself.

– There are 3 classifications of these expenses:

Direct production cost: expenses directly associated with
the manufacturing operation. E.g. expenses for raw
materials ( including transportation, unloading)
Fixed charges: expenses that remain practically constant
from year to year. Do not vary widely with changes in
production rate. E.g. property taxes, insurance
163
 Estimation of Total Product
Cost(Contd.)
Plant overhead cost: are for medical and hospital
services; general plant maintenance and overhead;
safety services; social security
• General Expenses:
– Administrative expenses
– Distribution and marketing expenses
– Research and development
– Financing expenses: extra costs involved in
procuring the money necessary for the capital
investment.
– Gross earnings expenses 164
165
 Estimation of Total Product
Cost(Contd.)
• Total Product Cost= Manufacturing cost +
General Expenses.

• Gross earnings (Gross Profit)= The total

annual income – the total annual product
cost.

• Net annual earnings = Gross annual earnings –

income taxes.
166
 7-2.2 Break-even Point
• Break-even point occurs when the total
annual product cost equals the total annual
sales

• i.e: Total Annual Product Cost = Total Annual

Sales (total annual income from all products
sold).

167
Break-even Point(Contd.)

168
Break-even Point(Contd.)

169
• A-B The investment required to design the plant.
• B-C The heavy flow of capital to build the plant, and provide funds
for start-up.
• C-D The cash-flow curve turns up at C, as the process comes on
stream and income is generated from sales. The net cash flow is
now positive but the cumulative amount remains negative until the
investment is paid off, at point D.
• Point D is known as the break-even point and the time to reach the
break-even point is called the pay-back time. In a different context,
the term "break-even point" is used for the percentage of plant
capacity at which the income equals the cost for production.
• D-E In this region the cumulative cash flow is positive. The project is
earning a return on the investment.
• E-F Toward the end of project life the rate of cash flow may tend to
fall off, due to increased operating costs and falling sale volume and
price, and the slope of the curve changes.
• The point F gives the final cumulative net cash flow at the end of
the project life. 170
 EXAMPLE 7-2.1
• The annual direct production costs for a plant
operating at 70 % capacity is $ 280,000 while the sum
of the annual fixed charges, overhead costs and
general expenses is $ 200,000. What is the break-even
point in units of production per year if the total annual
sales are $ 560,000 and the product sells at $ 40 per
unit?
• (ii) What are the annual gross earnings and net profits
for this plant at 100 % capacity in the year 1974 when
corporate income taxes required 22 %, normal tax on
the total gross earnings plus 26 % surtax on gross
earnings above $ 25,000?

171
 UNIT 8:PROCESS ECONOMICS:
Depreciation and Profitability Analysis
• 8-1.1 Depreciation: Two types exist:
– Physical depreciation: is the measure of the decrease
in value due to changes in the physical aspect of the
property. Wear and tear, corrosion, accidents and
deterioration due to age.

– Functional depreciation: depreciation due to all other

causes. One common type of functional depreciation
is obsolescence. This is caused by technological
advances or developments that make an existing
property obsolete.

172
 Depreciation(Contd.)
• Service life: The period during which the use
of a property is economically feasible.
– Synonymous with economic or useful life

• Salvage value: the net amount of money

obtainable from the sale of used property
over and above any charges involved in
removal and sales.

173
 Depreciation(Contd.)
• Scrap or junk value: If the property cannot be
disposed of as a useful unit, it can often be
dismantled and sold as junk to be used again
as a manufacturing raw material. The profit
obtainable from this type of disposal is scrap
or junk value

174
• Present Value: It is the value of an asset in its
condition at the time of valuation.

• Types of present values are:

– Book value or unamortized cost (asset value): the
difference between the original cost of a property, and
all the depreciation charges made to date.

– Market value: the price which could be obtained for an

asset if it were placed on sale in the open market.

– Replacement value: the cost necessary to replace an

existing property at any given time with one at least
equally capable of rendering the same service.
175
 8-1.5 Methods for Determining
Depreciation
8-1.5.1 Straight Line method: here it is assumed
that the value of the property decreases
linearly with time
V  Vs
d
n

where d  annual depreciation, $/year

V  original value of the property at start of the service  life period,completely
installed and ready for use, dollars.
Vs  salvage value of property at end of service life,dollars
n  service life, years
176
• Book value ( or asset value)of the equipment
at any time during the service life may be
determined from:

Va  V  ad

where Va  book value,dollars

a  number of years in actual use

177
8-1.5.2 Textbook Declining – Balance ( or Fixed
Percentage) Method: here, the annual depreciation
cost is a fixed percentage of the property value at the
beginning of the particular year.

• The fixed percentage factor remains constant

throughout the entire service life of the property, while
the annual cost for depreciation is different each year.

• Under these conditions, the depreciation cost for the

first year of the property’s life is Vf. where f represents
the fixed-percentage factor.
178
 Declining – balance method (contd.)
• At the end of the first year,
Asset value  Va  V (1  f )

• At the end of the second year,

Asset value  Va  V (1  f ) 2

• At the end of the a year,

Asset value  Va  V (1  f ) a

At the end of the n year ( i.e. at the end of service

life). 1
n
 Vs 
Asset value  Va  V (1  f )  Vn
n
f 1  
V  179
 EXAMPLE 8-1.1
• The original cost of a piece of equipment is $ 30,000
completely installed and ready to use. The salvage
value of the equipment is estimated to be $ 5000 at
the end of a service life estimated to be 20 years.
• (i) Determine the book value of the equipment at the
end of 10 years using (a) straight line method (b)
textbook declining balance method.
• (ii) Using the textbook declining balance method:
• (a) What will be the first year depreciation?
• (b) What will be the depreciation at the end of the 6th
year?
180
3. Double Declining-Balance Method: Often
applied to cases where the salvage value is
considered to be zero.
– Using the straight-line method ,the minimum
depreciation rate occurs in the first year when
V=22000 and d=2000. Therefore, 2000/22,000.

– Hence, double declining balance factor is

2(2000/22000)=0.1818.

– Therefore, Asset value is:

Va = V(1-f)a= 22,000(1-0.1818)5
181
4. Sum-of-the-Years-Digits Method: it is an arbitrary
process for determining depreciation which gives
results similar to those obtained by the declining-
balance methods.

– Larger costs for depreciation are allotted during the

early-life years than during the latter years.

– Has the advantage of permitting the asset value to

decrease to zero or a given salvage value at the end of
the service year.

– Here, the annual depreciation cost is based on the

number of service-life years remaining and the sum of
arithmetic series of numbers from 1 to n, where n is the
number of service life.
182
• Yearly depreciation factor = number of useful
service-life years remaining divided by the sum of
the arithmetic series.
number of useful service  life years remaining
Yearly Depreciation Factor 
the sum of the arithmetic series

• Annual Depreciation cost= Yearly depreciation

factor x total depreciable value at the start of the
service life.
Annual Depreciation Cost  Yearly Depreciation Factor  Total depreciable at the start of the servicelife

183
 EXAMPLE 8-1.3
• Consider an equipment costing $20,000 and
with a service life estimated at 5 years. If the
salvage value is $2,000, find the depreciation
cost for the 1st , 2nd and 3rd years using the
sum-of-the-years-digits method.

184
5. Sinking-Fund Method: here the use of compound
interest is involved.

– It is assumed that the basic purpose of depreciation

allowances is to accumulate a sufficient fund to provide
for the recovery of the original capital invested in the
property.

– An ordinary annuity plan is set up wherein a constant

amount of money should theoretically be set aside each
year.

– At the end of each year the sum of all the deposits plus
accrued interest must equal the total amount of
depreciation.

185
da  depreciation for year a 
n  a  1
V  V 
n s

a
1

2n  a  1
da  V  Vs 
nn  a 
but from previous eqn. for an ordinary annuity

R  V  Vs 
i
1  i   1
n

186
• The amount accumulated in the fund
after a years of useful life must be equal
to the total amount of depreciation up
to that time.

• This is the same as the difference

between the original value of the
property, V at the start of the service life
and the asset value Va at the end of a
years.
187
Therefore;
Total amount of depreciation after a years  V  Va

V  Va R
1 i
a
1
i
Combining last 2 equations :

V  Va  V  Vs 
1  i 1
a

1  i   1
n

Asset (or book ) value after a years  Va

Va  V  V  Vs 
1  i 1
a

1  i   1
n
188
 Evaluation of Depreciation Methods
• Declining –balance and Sum-of-the years digits
methods gave similar results.
– Depreciation costs in both cases are greater in
the early-life years of the property than in the
latter years.

• Annual depreciation costs are constant when the

straight-line, sinking-fund methods are used.
– The annual decrease in asset values are lower in
the early-life years of the property than in the
latter years. 189
 Evaluation of Depreciation Methods
• The Straight-line method is widely used for
depreciation cost accounting because it is very
simple to apply.

• From financial protection viewpoint, it is

desirable to make a greater charge for property
depreciation during early life than during later
life. This can be accomplished by the use of the
double-declining and Sum of the years digits
methods.
190
 8-2.1 Profitability Analysis
• It is a measure of the amount of profit
that can be made from a given situation.
– Assists in evaluating alternative projects
and identifying where to invest the capital.

– Design engineer deals with investments

expected to yield tangible profit.

191
 8-2.3 Basis for Evaluating Project
Profitability
• Total profit alone cannot be used as the deciding
profitability factor in determining if an investment
should be made.

• The profit goal of a company is to maximize income

above the cost of the capital which must be invested
to generate the income.

• If the goal were merely to maximize profits, any

investment would be accepted which would give a
profit, no matter how low the return or how great
the cost. 192
 EXAMPLE 8-2.1
• Investment A: Capital needed=$100,000; Profit yielded=$10,000/year
• Investment B: Capital needed=$1 million; Profit yielded=$25,000/year

• Investment B gives a greater yearly profit than A but annual rate of return
on the second investment is only
• ($25,000/$1,000, 000) x100=2.5%
• While annual rate of return on $100,000 is 10%.

• Reliable bonds and other conservative investments would yield annual

rates of return in the range of 6 to 9%, the $1 million investment in this
example would not be very attractive; the 10% return on the $100,000
capital would make this investment worthy of careful consideration.

• Therefore, the rate of return rather than the total amount of profit is the
important profitability factor in determining if the investment should be
made.

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 8-2.4Mathematical Methods for
Profitability Evaluation
• The most commonly used methods for profitability
evaluation are:
– Rate of return on investment
– Discounted cash flow based on full-life performance
– Net present worth
– Capitalized cost
– Payout period

• Each method has its own advantages and

disadvantages.
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8-2.4.1 Rate of Return on Investment

Profit
ROR   100%
Total initial investment  Years

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Rate of Return on Investment(Contd.)

• Profit= Income – Expenses

• Total investment determination; consider both

fixed capital and working capital

• To determine profit; estimates must be made of

direct production cost, fixed charges including
depreciation, plant overhead costs, general
expenses

• Profits may be expressed on a before-tax or after-

tax basis but the condition must be indicated.
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 EXAMPLE 8-2.2
• A proposed manufacturing plant requires an initial
fixed capital investment of $900,000 and $100,000 of
working capital. It is estimated that the annual income
will be $800,000 and the annual expenses including
depreciation will be $520,000 before income taxes. A
minimum annual return of 15% before income taxes is
required before the investment will be worthwhile.
Income taxes amount to 48% of all pre-tax profits.
Determine the following:
– The annual percent return on the total initial investment
before income taxes.
– The annual percent return on the total initial investment
after income taxes

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 8-2.4.2 Discounted Cash Flow
• Discounted Cash Flow : takes into account the time value of money
and it is based on the amount of the investment that is unreturned
at the end of each year during the estimated life of the project.

• A trial and error procedure is used to establish a rate of return

which can be applied to a yearly cash flow so that the original
investment is reduced to zero (or to savage and land value plus
working-capital investment) during the project life.

• The rate of return by this method is equivalent to the maximum

interest rate ( normally after taxes) at which money could be
borrowed to finance the project under conditions where the net
cash flow to the project over its life would be just sufficient to pay
all principal and interest accumulated on the outstanding principal.

• This particular rate is called the “discounted cash flow rate of

return” (DCFRR) and it is a measure of the maximum rate that the
project could pay and still breakeven by the end of the project life.198
Discounted Cash Flow(Contd.)
n t
NFW
The Total NPW (orNPV)   0
n 1 (1  r )
n

where
NPW  net present worth
NPV  net present value
NFW  net future worth
r  discounted rate (interest rate)
t  life of project
n  nth year

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 EXAMPLE 8-2.3
• Initial fixed capital investment = $100,000
• Working capital investment = $10,000
• Salvage value at end of service-life = $10,000
• The predicted after-tax cash flow to project based on total income minus
all costs except depreciation in dollars is shown in the table below.
Estimate the discounted cash flow rate of return (DCFRR).
Year Cash flow into the project,$

0 -110,000
1 30,000
2 31,000
3 36,000
4 40,000
5 43,000

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 8-2.4.3 Capitalized cost
• The capitalized cost profitability concept is used for comparing
alternatives which exists as possible investment choices
within a simple overall project.
• Basic equation for capitalized cost:
CR C R (1  i ) n
K  Cv    Vs
(1  i ) n  1 (1  i ) n  1

where
K  Capitalized cost
C R  Re placement cost
C v  Original cost of equipment
Vs  Salvage value at end of estimated useful life
n  Estimated useful life of equipment
i  int erest rate
(1  i ) n
 capitalised cost factor
(1  i )  1
n
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 EXAMPLE 8-2.4
• A reactor, which will contain corrosive liquids, has been
designed. If the reactor is made of mild-steel, the initial
installed cost will be $5000 and the useful life period
will be 3 years. Since stainless- steel is highly resistant
to the corrosive action of the liquids, stainless- steel as
the material of construction has been proposed as an
alternative to mild-steel. The stainless-steel reactor will
have an initial installed cost of $15,000. The scrap value
at the end of the useful life would be zero for either
type of reactor, and both could be replaced at the cost
equal to the original price. On the basis of equal
capitalized cost for both types of reactors, what should
be the useful life period for the stainless-steel reactor if
money is worth 4% compounded annually?

202
 8-2.4.4 Payout period (or Pay-back time)
• Payout period or pay-back time is the minimum
length of time theoretically necessary to recover the
original capital investment in the form of cash flow to
the project based on total income minus all costs
except depreciation.

• In other words, it is the length of time to reach a

cumulative cash flow of zero.

depreciable fixed capital investment

Payout period in years 
avg profit/yr  avg depreciation/yr

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 Payout period (Contd.)
• Pay-back time (or payout period), is a useful
criterion for judging projects that have a short
life, or when the capital is only available for a
short time.

• It is often used to judge small improvement

projects on operating plants.

• Typically, a pay-back time of 2 to 5 years

would be expected from such projects.
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 8-2.5 Sensitivity Analysis
• The economic analysis of a project can only be
based on the best estimates that can be made of
the investment and the cash flows.

• The actual cash flows achieved in any year would

be affected by any changes in raw material costs
and other operating costs and will be very
dependent on the sales volume and price.

• A sensitivity analysis, therefore, is a way of

examining the effects of uncertainties in the
forecasts of the viability of a project
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• In addition to economic performance, many
other factors have to be considered when
evaluating projects. These include;
– Safety
– Environmental problems (waste disposal)
– Political consideration (government policies)
– Location of customers
– Availability of labour
– Availability of supporting services
– Company experience in the particular
technology
206