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```									Production Cost estimation
This spreadsheet shows the rough breakdown of the manufacturing (or
production) cost and a simplified cost estimation model

The follow table uses mostly the approximation in Douglas Ch. 2
which comes from the tables in P&T Ch. 6
Notes:
• Overhead in indirect cost includes engineering, supervision, construction, and maintenance
• SARE is sales, administration, research and engineering. It is counted
as general expenses. The sales includes distribution and selling costs.
• How do things like sales price, raw materials cost, capital investment
affect the return on investment?

Annual capacity                                          kg/yr          392,000,000
Sales price                                              \$/kg           0.55
Revenue                                                  M\$             215.99

Onsite capital investment as                             M\$             0.84
estimated from process flowsheet

Order-of-magnitude
Cost Item                                              Approximation
1. Get the total capital investment cost:
Onsite cost (inside battery limits)                              1.00 Onsite
Offsite cost (outside battery limits)                            0.45 Onsite
DC              Direct cost (DC)
= Onsite + Offsite =                                             1.45 Onsite

Contingencies and fees (Contig)                                  0.20 DC
=           0.36 Onsite

FC              Fixed capital investment (FC)                                         DC + IDC
= DC + IDC =                                                     1.81 Onsite

WC              Working capital (WC)                                             0.15 (TC)
Start-up cost (ST)                                               0.10 FC

TC              Total capital investment (TC)                                          FC + WC + ST
==to derive that >> TC                                          1.30 FC
=            2.36 Onsite

2. Get the total production cost(or total expenses):
Raw materials (calculated from somewhere)

Maintenance                                                      0.04   FC
Operating supply                                                 0.15   Maintenance
=           0.01   FC
Labor @\$12/hr around the clock                                   1.00   Labor "unit"
Supervision                              0.20 Labor
Laboratory                               0.15 Labor
Labor+Supervis+Lab                       1.35 Labor

Royalty                                  0.03 (Tot. Prod Cost)

DPC      Direct production cost
=Raw Matl.+Util.+Maint.+Supply
+Labor+Supervis.+Lab.+Royalty

Tax and Insurance                        0.03 FC
Rent                                     0.00
Interest                                 0.00
Fix Ch   Fixed Charges
=Tax+Insurance+Rent+Interest             0.03 FC

=0.6(Labor + Supervis. + Maintenance)    0.60

MC       Manufacture Cost (MC)
=Direct Prod. Cost+Fixed Charges

SARE     SARE                                     0.03 (Revenue)

TPC      Total Production Cost (Total expenses)          MC + SARE
==can derive the final result>>                 =1.03 (Raw Matl. + Util.)
+ 2.13 Labor + 0.103 FC
+ 0.026 (Revenue)

Profit before tax (gross profit)
=Revenue-Total Production Cost

Depreciation                             0.10 FC

Tax rate                                 48% of (Profit-Deprec)
Profit after tax

Cash Flow
Rate of Return
Names used:
fixed_cap   =\$E\$36
labor       =\$E\$52
Onsite      =\$E\$24

Example (M\$)

0.84 < Onsite
0.38

1.22

0.30

1.52 < fixed_cap

0.30 --back calc.
0.15

1.98 TC

199.50
3.70 --can be
0.06

0.01
0.11 < labor
0.02
0.02
0.14

=--back calc.

=--back calc.

0.05

0.11

=--back calc.

5.40

215.29 TPC
+ 0.103 FC

0.70

0.15

0.26
0.44

0.59
30%
Calculating the installation cost                                                          Names used:
Why is the install cost so high?                                                           CM
This example is taken from Ulrich, pp. 272-275,                                            CP
which shows how the Guthrie module factor is derived.                                      price

Example: Typical costs associated with purchase and installation of a
carbon steel heat exchanger
Cost
Cost Item                                             Approximation        Factor
A     Direct Project Expenses
Purchase price (f.o.b.), CP                                                   1.00 CP
Materials used for installation, CM                   71% of CP               0.71 CP
Labor                                                 37% of (CP + CM)
= 63% of CP             0.63 CP
Total direct materials and labor                                              2.34 CP

B     Indirect Project Expenses
Freight, insurance, taxes                             8% of (CP + CM)         0.14 CP
Construction overhead                                 70% of Labor            0.44 CP
Contractor engineering expenses                       15% of (CP + CM)        0.26 CP

Total indirect project costs                                                  0.84 CP

> Bare module capital cost, CBM                                                                      3.18

C     Contingency and Fee
Contingency                                           15% of CBM              0.48 CP
Fee                                                   3% of CBM               0.10 CP
Total contingency and fee                                                     0.57 CP

> Total module capital cost, CTM                                                                     3.75

D     Auxiliary Facilities
Site development (range 4 to 6% of CTM)               5% of CTM               0.19   CP
Auxiliary buildings (2 to 6%)                         4% of CTM               0.15   CP
Offsite facilities (17 to 25%)                        21% of CTM              0.79   CP
1.13   CP
> Total grass-root capital, CGR                                                                       4.88
This is the
installation factor

Notes:
• The cost factor will be even higher if you use more expensive material like stainless steel
• The purchase price should have accounted for both inflation with a cost index
and material used for construction (e.g. stainless steel) with a material factor
• f.o.b. is free on board
• The total material cost (CP + CM) is only 1.71 CP
• The breakdown of the materials cost for installation (CM):
with the percentages with respect to the f.o.b. price (CP),
piping (45%), Concrete for foundation (5%), steel support (3%),
instruments (10%), electrical materials (2%), insulation (5%) and
paint (1%)....and they add up to 71% of CP
• The construction overhead (under indirect costs) is mainly due to labor
costs like employee benefits and mandatory social security, unemployment
insurance and workmen's compensation (also called burden). But the
overhead can also include temporary buildings, warehousing, security,
jobsite cleanup and equipment (e.g. cranes) rental.
• Engineering indirect cost includes our salaries (project and process
engineering), designers, draftsmen, etc. The cost, however, is dependent
on the complexity of the design and thus relates to materials
• The total module cost include contingency and fee which are required
to procure and install the equipment in the battery limits and to make it
• A grass-root plant requires site development, auxiliary building and
offsite facilities and the contribution of the equipement to the plant
=\$D\$12
=\$D\$11
=\$F\$11

Example

\$10,000 <Change the price
\$7,100

\$6,327
\$23,427

\$1,368
\$4,429
\$2,565

\$8,362

CP                \$31,789

\$4,768
\$954
\$5,722

CP                \$37,511

\$1,876
\$1,500
\$7,877
\$11,253
CP                \$48,764

nstallation factor
Comapre different depreciation methods
You can make your own plots to compare them
Using Excel functions
End of          Stright line                         Decline balance      Double decline
Year Investment use SLN()Book value                  use DB()            use DDB()        Book value
startup   0     100        SL            SL                             Book         DDB              DDB
end of    1                  9.5        91                     26         74         20.0             80
2                  9.5        81                     19         55         16.0             64
3                  9.5        72                     14         41         12.8             51
4                  9.5        62                     11         30         10.2             41
5                  9.5        53                      8         22          8.2             33
6                  9.5        43                      6         17          6.6             26
7                  9.5        34                      4         12          5.2             21
8                  9.5        24                      3          9          4.2             17
9                  9.5        15                      2          7          3.4             13
10     5.00         9.5         5                      2          5          2.7             11
Salvage             Book left                 DB() cannot take    Salvage has no
is salvage                zero salvage        effect unless it is BIG?
versus textbook definitions                       versus textbook definitions
End of          Decline balance                                          Double decline
Year Investment     0.26 **                                                      0.20
startup   0     100                   Book        check                                            Book
end of    1               26           74             74                              20            80
2               19           55             55                              16            64
3               14           41             41                              13            51
4               11           30             30                              10            41
5                8           22             22                               8            33
6                6           17             17                               7            26
7                4           12             12                               5            21
8                3            9              9                               4            17
9                2            7              7                               3            13
10       5        2            5              5 Book at                       3            11
Salvage ** Definition does NOT allow      salvage                 Definition of DB cannot
zero salvage                     OK                      handle salvage
Thus MACRS has to switch
to str line
MACRS details
1st yr is only half-year!!; 2nd year on DDB until str line gives a higher D
Case for N =10
DDB till yr 6                MACRS
End                           ST afterward                  According to P&T, p. 288
of                    Book Depreciation             use                   DDB f
Year Investment Value            DD/ST              DDB?       Book         0.20
startup      0         (100)
1                     80       (20.00)      90       (10)    90.00      (10.00) first half-year
2                     64       (16.00)      72 (18.00)       72.00      (18.00)            72.00
3                     51       (12.80)      58 (14.40)       57.60      (14.40)            57.60
4                     41       (10.24)      46 (11.52)       46.08      (11.52)            46.08
5                     33        (8.19)      37     (9.22)    36.86       (9.22)            36.86
6                     26        (6.55)      29     (7.37)    29.49       (7.37)            29.49
7                     20        (6.55)      23     (6.55)    22.94       (6.55)    4.5-year to go
8                     13        (6.55)      16     (6.55)    16.38       (6.55)
9                   7        (6.55)      10    (6.56)      9.83       (6.55)
10                  0        (6.55)       3    (6.55)      3.28       (6.55)
0    (3.28)      0.00       (3.28)       last half-year

DD till yr 6                  MACRS
End                       ST afterward                   According to P&T, p. 288
of                 Book Depreciation           use                    DDB f
Year   Investment   Value   DD/ST              DDB?         Book        0.29
startup    0        (100)
1                   71      (28.57)      86   (14.29)     85.71       (14.29)
2                   51      (20.41)      61   (24.49)     61.22       (24.49)
3                   36      (14.58)      44   (17.49)     43.73       (17.49)
4                   26      (10.41)      31   (12.49)     31.24       (12.49)
5                   17       (8.68)      22    (8.92)     22.31        (8.92)      3.5 to go
6                    9       (8.68)      13    (8.92)     13.39        (8.92)
7                    0       (8.68)       4    (8.92)      4.46        (8.92)
0.00        (4.46)
MACRS                                               Sum-of-year digit
copied from below        Book                                   Book
fraction     MACRS MACRS                          SYD      SYD
0.10        10.0   90                          17.27      83
0.18        18.0   72                          15.55      67
0.14        14.4   58                          13.82      53
0.12        11.5   46                          12.09      41
0.09         9.2   37                          10.36      31
0.07         7.4   29                           8.64      22
0.07         6.6   23                           6.91      15
0.07         6.6   16                           5.18      10
0.07         6.6   10                           3.45       7
0.07         6.6    3                           1.73       5
0.03         3.3    0

100.0
check

25.0
SL
DDB
20.0
Depreciation charge (\$/yr)

MACRS
SYD

15.0

10.0

5.0

0.0
0     2                 4          6   8           10
Year

100
SL
90                                              DDB
MACRS
80
SYD
70
ook value (\$)
70

Book value (\$)
60

50

40

30

20

10

0
0   2   4          6   8   10
Year

```
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