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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

                Overhead                                                         0.05 DC
                Contingencies and fees (Contig)                                  0.20 DC
IDC             Indirect cost (IDC)                                                   Overhead+Contig
                 =Overhead+Contig                                                0.25 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)
                Utilities (from another spreadsheet)

                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

ovhd     Plant overhead
         =0.6(Labor + Supervis. + Maintenance)    0.60

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

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




< can link from
 another spreadsheet


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
               linked
       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
  ready for operation.
• A grass-root plant requires site development, auxiliary building and
  offsite facilities and the contribution of the equipement to the plant
  has to be added too.
               =$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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