CHAPTER 6

COST ESTIMATION

6.1 Cost Estimation of Production of Caustic Soda

Cost estimation is the approximation of the cost of a project or operation.

The cost estimate has a single total value and may have identifiable component
values. A problem with a cost overrun can be avoided with a credible, reliable,
and accurate cost estimate.

6.1.1 Fixed Capital Investment

The capital needed to supply the necessary manufacturing and plant

facilities is called the fixed capital investment. It includes both manufacturing
and nonmanufacturing cost. The estimation fixed capital investment is from
delivered equipment cost.

6.1.2 Purchased Equipment Cost

The cost of the purchased equipment is used as the basis of the factorial
method of cost estimation and must be determined as accurately as possible. It
should preferably be based on recent prices paid for similar equipment.

The purchased equipment cost is found from the following table,

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 Table 6.1 Purchased Equipment Cost

Equipment Quantity Specifications Cost (crores)

Saturator Tank 2 30 m3 7.7
Preciptation Tank 2 50 m3 34
Flocculant Tank 1 100-200 L 2.5
Mixing Tank 1 25 m3 3
Clarifier 1 300 m3 28
Polished Filter 2 150 m3 40
Membrane cell 590 5 KW 90
Triple effect evaporator 1 12 m 20
HCl Tank 5 250 m3 25
Cooling Tower 1 12 m 3.5
Pumps 30 15 KW 35
Storage Tank 5 1000 m3 40
Total 328.7

6.1.3 Direct Cost

The direct cost is a price that can be completely attributed to the

production of specific goods or services. Some costs, such as depreciation or
administrative expenses, are more difficult to assign to a specific product and
therefore are considered to be indirect cost. A direct cost can be considered a
variable cost if it is inconsistent and often fluctuates in amount.

Direct costs typically include,

1. Direct materials used in manufacturing

2. Direct labour
3. Direct Expenses

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 The total direct cost can be calculated from the following table,

Table 6.2 Total Direct Cost

Content % of Purchased Amount (Crores)

Equipment Cost
Installation Cost 50 164.35
Instrumentation and control cost 40 131.48
Piping Cost 70 230.09
Electrical Cost 35 115.045
Building and servicing cost 31 101.897

Yard Improvement 20 65.74

Service Facilities 30 98.61
Total 907.217

6.1.4 Indirect Cost

The total indirect cost can be calculated from the following table,

Table 6.3 Total Indirect Cost

Content % of Purchased Amount (Cost)

Equipment Cost

Engineering Supervision 20 65.74

Construction Expense 22 72.314
Contractor Fee 14 46.018
Contingency 39 128.193
Legal Expenses 8.5 27.939
Total 340.204

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 Fixed Capital Investment = Direct cost + Indirect cost + Purchase

Equipment cost

= 907.217 + 340.204 + 328.7

= 1510.571 crores

6.1.5 Depreciation Cost

The decrease in value of a property due to physical deterioration,

technological advances, economic changes is called depreciation.

Original Value V = Purchased equipment cost + Equipment installation

cost + Piping cost + Building and servicing

= 328.7 + 164.35 + 230.09 + 101.897

= 825.037 crores

Salvage value Vs = 48 crores

Depreciation percentage i = 10%

Service life n = 10 years

The depreciation value is found using sum of sinking fund method

Depreciation value = (V - Vs) x (((1 + i)a - 1)/ ((1 + i)n - 1))

= (825.037 - 48) x (((1 + 0.1)1 - 1)/ ((1 + 0.1)10 - 1))

Depreciation value = 48.78 crores

6.1.6 Total Product Cost

The cost for operating plant and selling the products is called total
product cost.

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 This value is obtained from using the following formula.

Total product cost = Total direct product cost + Plant overhead cost

6.1.7 Total Direct Product Cost

Total direct product cost = Raw material cost + Direct product cost

6.1.8 Raw Material Cost

The raw material used in production of caustic soda is sodium chloride .

This raw material is obtained from DCW Limited.

The raw material cost data are given below,

Table 6.4 Raw Material Cost

Raw Material Cost per Kg (Rs.) Quantity per Amount (crores)

year (ton)
NaCl 5 178290000 8.914
Na2CO3 25 100170 0.25
NaOH 75 18732 0.14
BaCO3 36 185337.6 0.66
Total 9.964

6.1.9 Direct Product Cost

A direct cost is a price that can be completely attributed to the production

of specific goods or services. Some costs, such as depreciation or administrative
expenses, are more difficult to assign to a specific product, and therefore, are
considered to be indirect costs. A direct cost can be considered a variable cost if
it is inconsistent and often fluctuates in amount.

The direct product cost data are given below,

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 Table 6.5 Direct Product Cost

Direct Product Content % Amount (crores)

Labour Cost 15 1.495

% of Raw Utilities 20 1.9928

Material Royalty 6 0.598
% of Labour Cost Laboratory cost 15 0.224
% of Equipment Maintenance 2 0.199
Cost
Total 4.509

Total direct product cost = 9.964 + 4.509

= 14.473 crores

6.1.10 Plant Overhead Cost

Plant overhead cost is the costs incurred during the manufacturing

process, not including the costs of direct labour and direct materials.

The Plant overhead cost data are given below,

Table 6.6 Plant overhead Cost

Content % of Total Direct Amount (crores)

Product Cost
Depreciation 1.7 0.1693
Insurance 4 0.3985
Local Taxes 2.3 0.2292
Medical and Safety 5.2 0.5181
Total 1.3351

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Total product cost = Total direct product cost + Plant overhead cost

= 14.473 + 1.3351

= 15.8081 crores

6.1.11 Annual Income

It is the amount earned from selling all goods and services.

No of working days = 350

Annual income per year = cost of product per Kg x no of working days

x Production rate

Table 6.7 Annual Income

Product Cost per Kg Quantity per Annual Income

year (Kg) (crores)
NaOH 75 99050000 742.88
HCl 25 28000000 70
Total 812.88

6.1.12 Net Profit

This is the amount remaining after paying the income tax from the cost
obtained from the difference between annual income and total product cost.

Net profit NP = (annual income - total product cost) x (1- income tax)

Income tax = 35 % of net profit

NP = (812.88 – 15.8081) x (1 - 0.35)

Np = 518.10 crores

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6.1.13 PayBack Period

This is the length of the time necessary for the total return to equal the
capital investment. It intuitively measures how long something takes to pay for
itself. It is popular due to its ease of use despite the recognized limitations. It as
a tool of analysis often used because it is easy to apply and easy to understand
for most individuals for, regardless of academic training or field of endeavour.
It considered a method of analysis with serious limitations and qualifications for
its use, because it does not account for the time value money, risk, financing, or
other important considerations such as the opportunity cost.

Payback period = (fixed capital investment)/(net profit + depreciation)

= 1510.571 / (518.10 + 48.78)

Payback period = 2.98 years

6.2 Cost Estimation for Sulphate Removal System

Cost estimation for optimizing brine sludge in caustic soda production by

using sulphate removal system. . The cost estimate has a single total value and
may have identifiable component values. A problem with a cost overrun can be
avoided with a credible, reliable, and accurate cost estimate. A cost estimator is
the professional who prepares cost estimates. There are different types of cost
estimators, whose title may be preceded by a modifier, such as building
estimator, or chief estimator. Other professionals such as quantity surveys and
cost engineers may also prepare cost estimates or contribute to cost estimates.
There are three types of cost estimation classified according to their scope and
accuracy. They are,

1. Order of magnitude estimate

2. Budget estimate
3. Definitive estimate

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 Table 6.8 Purchased Equipment Cost of SRS

Equipment Quantity Specifications Cost (crores)

Saturator Tank 2 30 m3 4
SRS Tank 1 15 m3 1.65
Permeate Tank 1 15 m3 1.5
Crystallizer Feed Tank 1 30 m3 3
Filtrate Tank 1 25 m3 2.5
Main feed Tank 1 20 m3 2
Pumps 6 12 KW 30
Dehydrator 2 80 m3 9
Heat exchanger 5 10 m 15
Membrane cell 590 5 KW 90
Triple effect evaporator 1 12 m 20
HCl Tank 5 250 m3 25
Cooling Tower 1 12 m 3.5
Pumps 20 15 KW 16
Storage Tank 5 1000 m3 40
Total 263.15

6.2.1 Direct Cost

The direct cost is a price that can be completely attributed to the

production of specific goods or services. Some costs, such as depreciation or
administrative expenses, are more difficult to assign to a specific product and
therefore are considered to be indirect cost.

The total direct cost can be calculated from the following table,

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 Table 6.9 Total Direct Cost of SRS

Content % of Purchased Amount (Crores)

Equipment Cost
Installation Cost 50 131.575
Instrumentation and control cost 40 105.26
Piping Cost 70 184.205
Electrical Cost 35 92.102
Building and servicing cost 31 81.576
Yard Improvement 20 52.63
Service Facilities 30 78.945
Total 726.293

6.2.2 Indirect Cost

Indirect cost are costs that are not directly accountable to a cost object.
Indirect costs may be either fixed or variable. Indirect costs include
administration, personnel and security costs. The total indirect cost can be
calculated from the following table,

Table 6.10 Total Indirect Cost of SRS

Content % of Purchased Amount (Cost)

Equipment Cost
Engineering Supervision 20 52.63
Construction Expense 22 57.893
Contractor Fee 14 36.841
Contigency 39 102.6285
Legal Expenses 8.5 22.368
Total 272.3605

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 Fixed Capital Investment = Direct cost + Indirect cost + Purchase

Equipment cost

= 726.293 + 272.3605 + 263.15

= 1261.804 crores

6.2.3 Depreciation Cost

The decrease in value of a property due to physical deterioration,

technological advances, economic changes is called depreciation.

Original Value V = Purchased equipment cost + Equipment installation

cost + Piping cost + Building and servicing cost

= 263.15 + 131.575 + 184.205 + 81.576

= 660.506 crores

Salvage value Vs = 45.5 crores

Depreciation percentage i = 10%

Service life n = 10 years

The depreciation value is found using sum of sinking fund method

Depreciation value = (V - Vs) x (((1 + i)a - 1)/ ((1 + i)n - 1))

= (660.506 – 45.5) x (((1 + 0.1)1 - 1)/ ((1 + 0.1)10 - 1))

Depreciation value = 38.607 crores

6.2.4 Total Product Cost

The cost for operating plant and selling the products is called total
product cost.

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 This value is obtained from using the following formula.

Total product cost = Total direct product cost + Plant overhead cost

6.2.5 Total Direct Product Cost

Total direct product cost = Raw material cost + Direct product cost

6.2.6 Raw Material Cost

The raw material used in production of caustic soda is sodium chloride .

This raw material is obtained from DCW Limited. The other by-product are
Hydrochloric Acid which is produced at 40-500 Be. The product which is used
for the production of soaps, detergents and purification of pulps. The raw
material sodium chloride is mostly produced by evaporation of seawater and
other natural and artificial brines. These raw materials having various
compositions such as calcium, magnesium, sulphate, moisture an insolubles.
The equal amount of utilities are also needed for this electrolysis process.

The raw material cost data are given below,

Table 6.11 Raw Material Cost of SRS

Raw Material Cost per Kg (Rs.) Quantity per Amount (crores)

year (ton)
NaCl 5 178290000 8.914
Na2CO3 25 100170 0.25
NaOH 75 18732 0.14
Total 9.304

6.2.7 Direct Product Cost

The direct product cost data are given below,

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 Table 6.12 Direct product Cost of SRS

Direct Product Content % Amount (crores)

Labour Cost 15 1.396
Utilities 20 1.86
% of Raw
Material Royalty 6 0.558
% of Labour Cost Laboratory cost 15 0.209
% of Equipment Maintenance 2 0.186
Cost
Total 4.209

Total direct product cost = 9.304 + 4.209

= 13.513 crores

6.2.8 Plant Overhead Cost

Plant overhead cost is the costs incurred during the manufacturing

process, not including the costs of direct labour and direct materials.

The Plant Overhead Cost data are given below,

Table 6.13 Plant overhead Cost

Content % of Total Direct Amount (crores)

Product Cost
Depreciation 1.7 0.158
Insurance 4 0.372
Local Taxes 2.3 0.213
Medical and Safety 5.2 0.484
Total 1.227

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 Total product cost = Total direct product cost + Plant overhead cost

= 13.513 + 1.227

= 14.74 crores

6.2.9 Annual Income

It is the amount earned from selling all goods and services. Income is the
consumption and savings opportunity gained by an entity within a specified
timeframe, which is generally expressed in monetary terms. In the field of
public economics, the term may refer to the accumulation of both monetary and
non-monetary consumption ability.

No of working days = 350

Annual income per year = cost of product per Kg x no of working days

x Production rate

The Annual Income data are given below,

Table 6.14 Annual Income

Product Cost per Kg Quantity per Annual Income

year (Kg) (crores)
NaOH 75 99050000 742.88
Na2SO4 25 2982000 7.45
HCl 25 28000000 70
Total 820.33

6.2.10 Net Profit

This is the amount remaining after paying the income tax from the cost
obtained from the difference between annual income and total product cost.
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 Net profit NP = (annual income - total product cost) x (1- income tax)

Income tax = 35 % of net profit

NP = (820.33 – 14.74) x (1 - 0.35)

NP = 523.63 crores

6.2.11 PayBack Period

This is the length of the time necessary for the total return to equal the
capital investment.

Pay back period = (fixed capital investment)/(net profit + depreciation)

= 1261.804 / (523.63 + 38.607)

= 2.24 years

Table 6.15 Payback Period for conventional and sulphate removal system

Method Payback Period (Years)

Conventional Method 2.98
Sulphate Removal system 2.24

From the above table, we conclude that Sulphate Removal System is

more profitable than Conventional method.

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