CHAPTER IV

ECONOMIC ANALYSIS

This chapter presents all the required calculations and the data regarding

the financial aspects of the proposed High Density Oxo-biodegradable Resin

Plant. These calculations and data will be used to know if the plant is

economically viable.

Capital Costs

A simple technique that is used to estimate the fixed capital investment

(FCI) of a chemical plant is the Lang Factor method. The Lang Factor method

has a tendency to produce high results. The total cost is determined by

multiplying the total purchased for all the equipments by a constant.

According to KLM Technology Group (2014), the multipliers depend on the

type of the plant to be constructed.

Source: Practical Engineering Guidelines for Processing Plant Solutions, 2014

Since the proposed plant is a majority of a solid processing plant, the

fixed capital investment is determined using the factor, 3.10. According to KLM

Group, the computed FCI is considered apparent and used as basis for the

calculation of the true fixed capital investment.

Cellulose Extraction

Equipment Quantitiy Cost ($)

Nitric Acid Storage tank 1 15000
Water Storage Tank 1 18000
DINSS storage tank 1 12000
NaOH storage tank 1 13200
Sodium Hypochlorite tank 1 17700
Grinder 1 20000
Screen 3 42000
Feeder 5 30488
Mixer 1 64000
Vacuum Washer 2 50000
Digester 1 35000
Bleaching tank 1 51200
Dryer 1 120000
Cellulose tank 1 21000
Total 509588

Polymerization

Equipment Quantity Cost ($)

Ethylene Storage tank 1 30000
Hexene Storage tank 1 34000
Nitrogen Storage tank 1 10000
Resin Degassing 1 20000
Reactor 1 2337000
Adsorber 3 27000
HDPE tank 1 23000
Cooler 1 45000
Total 2526000

Mixing

Equipment Quantity Cost ($)

Mixer 2 64000
Pelletizer 1 20000
Compressor 1 23000
Packaging Machine 1 5000
Extruder 1 270000
Total 382000
The FCI computation is determined by this equation:

𝐹𝐶𝐼 = 𝐹𝑙𝑎𝑛𝑔 ∑𝑛𝑖=1 𝐶𝑝

FCI = 3.10 ($ 3 417 588)

FCI = $ 10 594 522.80

CAPITAL EXPENDITURES (CAPEX)

I. Direct Costs

a. Purchased Equipment

The most accurate estimate of the purchased cost of equipments

for the proposed plant is provided by a current price quote from a suitable

vendor.

Purchased Equipment Cost (PEC) = $ 3 417 588.00

b. Purchased Equipment Installation

The installation cost of the process equipments is estimated as

being an amount equivalent to 43 percent of the purchased equipment

cost. (KLM, 2014)

- Foundations Cost (7% of the PEC)

i. Material Cost (4% of the PEC)

Material Cost = 0.04 x $ 3 417 588

Material Cost = $ 136 703.52

ii. Labor Cost (3% of the PEC)

Labor Cost = 0.03 x $ 3 417 588

Labor Cost = $ 102 527.64

 - Platforms and Support Cost (11% of the PEC)

i. Material Cost (7% of the PEC)

Material Cost = 0.07 x $ 3 417 588

Material Cost = $ 239 231.16

ii. Labor Cost (4% of the PEC)

Labor Cost = 0.04 x $ 3 417 588

Labor Cost = $ 136 703.52

- Erection of Equipment (25% of PEC)

i. Labor Cost (25% of PEC)

Labor Cost = 0.25 x $ 3 417 588

Labor Cost = $ 854 397.00

Total Purchased Equipment Installation Cost = $ 1 469 562.84

c. Piping Installation

This covers labors, valves, fittings, pipe, supports, and all other

terms involved in the complete erection of all piping used directly in the

process.

The cost of piping depends upon the type of process involved.

(KLM Group, 2014) Since the proposed plant is a fluid processing plant,

the cost is estimated at 66 percent of the purchased equipment value.

- Material Cost (36% of the PEC)

Material Cost = 0.36 x $ 3 417 588

Material Cost = $ 1 230 331.68

- Labor Cost (30% of the PEC)

 Labor Cost = 0.30 x $ 3 417 588

Labor Cost = $ 1 025 276.4

Total Piping Installation Cost = $ 2 255 608.08

d. Instrumentation and Controls Installation

This includes not only the instruments but also all auxiliaries for the

entire plant.

Instrumentation cost is calculated depending upon the type of

controls is to be operated, either few or no controls, specific controls, or

the use of extensive controls with their equivalent percentages. (KLM

Group, 2014) Since our plant is to use extensive controls, it is estimated to

be at 30 percent of the purchased equipment value.

- Material Cost (24% of the PEC)

Material Cost = 0.24 x $ 3 417 588

Material Cost = $ 820 221.12

- Labor Cost (6% of the PEC)

Labor Cost = 0.06 x $ 3 417 588

Labor Cost = $ 205 055.00

Total Instrumentation and Controls Installation Cost = $ 1 025

276.4

e. Electrical Installation

This includes power wiring, lighting, transformation and service,

and instrumentation and control wiring.

 The complete installed cost of electrical may be estimated as being

equivalent to 15 to 10 percent of the purchased equipment cost. (KLM

Group, 2014)

Electrical Cost = 0.15 x $ 3 417 588

Electrical Cost = $ 512 638.00

f. Buildings

This covers the costs of buildings to be erected and the building

components including the cost for plumbing, heating, lighting, and

ventilation of the plant.

The costs of the buildings including services depend upon the

different type of the process plant. Since nitric acid plant is a new plant at

a new site, the cost is estimated to be at 45 percent of the purchased

equipment price. (KLM Group, 2014)

Building Cost = 0.45 x $ 3 417 588

Building Cost = $ 1 537 914.6

g. Yard Improvements

This consists of construction for fencing, grading, roads, sidewalks,

railroad sidings, and landscaping.

The cost of yard improvements for chemical plants is estimated as

an amount equivalent to 10 to 20 percent of the purchased equipment

cost. (KLM Group, 2014)

Yard Improvements Cost = 0.20 x $ 3 417 588

Yard Improvements = $ 683 517.6

h. Service Facilities Installation

This includes the utilities of the plant for supplying steam, water,

power, compressed air, and fuel. Waste disposal, fire protection, and

miscellaneous service systems are also included.

The costing for service facilities depend upon the type of services

that is used in the plant, either the use of minimum additional services, or

average services or the use of the complete new services, with their

respective percentages. For the proposed plant, complete new services

are to be installed and this covers a 75 percent of the purchased

equipment value. (KLM Group, 2014)

Service Facilities Installation Cost = 0.75 x $ 3 417 588

Service Facilities Installation Cost = $ 2 569 319.00

i. Land

Land cost for the plant amount to be 4 to 8 percent of the

purchased equipment cost.

According to KLM Group (2014), the value of land does not usually

decrease with time that is why this cost should not be included in the fixed

capital investment when estimating certain cash flow, such as

depreciation.

Land Cost = 0.08 x $ 3 417 588

Land Cost = $ 273 407.04

 Table 3. Summary of the Total Direct Cost Estimates

Direct Costs

Component Cost (USD)

Purchased Equipment 3 417 588.00

Purchased Equipment Installation 1 469 562.84

Piping Installation 2 255 608.08

Instrumentation and Control Installation 1 025 276.4

Electrical Installation 512 638.00

Buildings 1 537 914.6

Yard Improvements $ 683 517.6

Service Facilities 2 569 319.00

Land 273 407.04

Total 13 744 831.56

II. Indirect Costs

a. Engineering and Supervision

This covers engineering services such as drafting, purchasing,

accounting, construction design and engineering, travel, and

communications cost.

This cost is approximately 8 percent of the fixed capital investment

(FCI). (KPL Group, 2014)

Engineering and Supervision Cost = 0.08 x $ 10 594 522.8

Engineering and Supervision Cost = $ 847 561.824

b. Construction Cost

This consists of temporary construction and operation, construction

tools and rentals, home office personnel located at the construction site,

construction payroll, travel and living, and taxes and insurance of the

plant.

Roughly average amount of the construction expenses is 10

percent of the fixed capital investment. (KLM Group, 2014)

Construction Cost = 0.10 x $ 10 594 522.8

Construction Cost (CC) = $ 1 059 452.28

c. Contractor’s Fee

It is estimated as being equivalent to 2 to 8 percent of the direct

plant cost which is the sum of the fixed capital investment and

construction expense.

Contractor’s Fee = 0.08 x (FCI + CC)

Contractor’s Fee = $ 932 318

d. Contingency

This includes extra costs added into the project budget for

unpredictable expense, minor process changes, and estimating errors of

the plant.

It may be estimated depending upon the contingency level of the

installation used. For the proposed plant which will be using extensive

installation of controls, there is a high level of contingency and is

approximately 25 percent of the fixed capital investment.

 Contingency Cost = 0.25 x $ 10 594 522.8

Contingency Cost = $ 2 648 630.7

Table 4. Summary of Indirect Cost Estimates

Indirect Costs

Component Cost (USD)

Engineering and Supervision 847 561.824

Construction Cost 1 059 452.28

Contractor’s fee 932 318

Contingency 2 648 630.7

Total 5 487 962.804

True Fixed Capital Investment = Direct Costs + Indirect Costs

= $ 13 744 831.56 + $ 5 487 962.804

True Fixed Capital Investment = $ 19 232 794.36

III. Working Capital

The total working capital represents an investment in storage of feed

ammonia for one week, product acid for one week, stores catalyst and others.

According to KLM Group (2014), it is found to be amount equal to 15 to 20

percent of the fixed capital investment or 25 percent of annual product sales

value.

Working Capital = 0.20 x FCI

= 0.20 x $ 10 594 522.8

 Working Capital = $ 2 118 904.56

∴ 𝐶𝐴𝑃𝐸𝑋 = 𝑇𝑟𝑢𝑒 𝐹𝑖𝑥𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

= $ 19 232 794.36 + $ 2 118 904.56

𝑪𝑨𝑷𝑬𝑿 = $ 𝟐𝟏 𝟑𝟓𝟏 𝟔𝟗𝟖. 𝟗𝟐 (estimated)

OPERATING EXPENDITURES (OPEX)

The operating expense will be interpreted to mean all expenses required

to make a product and to ready it for shipment. These expenses are divided into

three classifications as follows: direct production costs, fixed charges, and plant

overhead costs.

I. Direct Production Costs

a. Raw Material Costs

Table 5. Raw materials Cost

Raw Materials Feed Operation Annual Cost Annual Cost

(tons/day) (days/yr) Consumption Php/ton (Php/yr)
(tons/yr)
Bagasse fiber 69.6 300 20880 154 3215520
DINSS 0.024 300 7.2 25352 182534.4
NA 0.0885 300 26.55 10422 276704.1
Caustic Soda 0.0996 300 29.88 2842 84918.96
Water/batch 37 300 11100 25 277500
Sodium 1.011 300 303.3 20300 6156990
hypochlorite/batch
Ethylene 130.479 300 39143.7 6611 258779000.7
Hexane 7 300 2100 2436 5115600
H2 7 300 2100 893 1875300
N2 31.806 300 9541.8 730 6965514
Total 282929582.2
b. Operating Labor

Based on KLM Group (2014), the cost of personnel required for

plant operations should be itemized. It should be the second largest cost

of the plant.
 Table 6. Detailed Manning Estimates

Personnel No. of Annual Total Annual Annual Total Annual

Employee Wage Wage Deduction Deduction
General Manager 1 $216,100 $216,100 $ 97 000 $ 97 000

Supervisor 1 $149,320 $149,320 $ 40 362 $ 40 362

Marketing/ 1 $143,110 $143,110 $ 23 064 $ 23 064

Advertising
Manager
Sales Manager 1 $136,280 $136,280 $ 23 064 $ 23 064

Financial Manager 1 $149,380 $149,380 $ 23 064 $ 23 064

C&IS Manager 2 $139,810 $279 620 $ 23 064 $46128

Process Operators 7 $149,320 $1045240 $ 72 980 $510860

Chemical 10 $133,290 $1332900 $ 28 830 $288300

Engineer
Laboratory Analyst 2 $55,990 $111980 $ 28 830 $57660

Safety Engineer 3 $95,180 $285540 $ 28 830 $86490

Chemist 5 $89,430 $447150 $ 28 830 $144150

Mechanical 5 $59,240 $296200 $ 18451. 20 $92256

/Electrical/ICE
Technician
Helpers, 6 $46,700 $280200 $17 298 $103788
Maintenance and
Repair Workers
Security 3 $32,650 $97950 $ 17 298 $51849

Janitor 4 $26,400 $105600 $ 15 022 $60088

Driver 5 $33,350 $166750 $ 15 022 $75110

Total 57 $5243320 $1723173

𝑇𝑜𝑡𝑎𝑙 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐿𝑎𝑏𝑜𝑟 𝐶𝑜𝑠𝑡 = $5243320 − $ 1723173

𝑻𝒐𝒕𝒂𝒍 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑳𝒂𝒃𝒐𝒓 = $ 𝟑𝟓𝟐𝟎𝟏𝟒𝟕

 c. Direct Supervisory and Clerical Labor

It includes the cost of administrative, engineering and

supportive personnel of the plant. It is estimated to be 15 percent of the

operating labor value. (KLM Group, 2014)

Direct Supervisory and Clerical Labor Cost = 0.15 x $ 3520147

Direct Supervisory and Clerical Labor Cost = $528022.05

d. Utilities

It is based on the process requirement per year of production.

Table 7. Summary of Yearly Utility Costs

Utilities

Utilities Requirement Based Cost Total Cost ( Per

300 Days)
Water 107m3/batch $ .416/m3 $40 060.8

Steam 3225.0309 kg/batch $10.95/tons $31 782.68

Total $ 71 843. 48

e. Maintenance and Repairs

This covers the amount of labor and materials associated with the

maintenance of the plant. For the plant operating and using complicated

process, it is estimated to be 7 to 11 percent of the true fixed capital

investment.

Maintenance and Repair Cost = 0.11 x TFCI

Maintenance and Repairs Cost (M&RC) = $2 115 607.38

f. Operating Supplies

This includes miscellaneous supplies that support daily operation

but not considered as raw materials. These are chart papers

miscellaneous chemicals, filters, respirators and protective clothing for

operators.

According to KLM Group (2014), it is based upon the maintenance

and repairs value that is estimated to be 15 percent.

Operating Supplies Cost = 0.15 x (M& RC)

Operating Supplies Cost = $ 317 341.1069

g. Laboratory Charges

This includes the cost of routine and special laboratory tests

required for product quality control and troubleshooting of the plant.

It is estimated to be 10 to 20 percent of the operating labor. (KLM

Group, 2014)

Laboratory Charges = 0.20 x $ 317 341.1069

Laboratory Charges = $ 63 468.22139

 Table 8. Summary of Direct Operating Cost Estimated and Itemized

Direct Operating Costs

Components Cost (USD)

Raw Material $ 5 658 591.644

Operating Labor $ 3 520 147

Direct Supervisory and Clerical Labor $ 528 022.05

Utilities $ 71 843. 48

Maintenance and Repairs $ 2 115 607.38

Operating Supplies $ 317 341.1069

Laboratory Charges $ 63 468.22139

Total $ 12 275 020.88

II. Fixed Charges

These are expenses that remain practically constant from year to year and

independent of changes in the production rate.

a. Depreciation

It considers the costs associated with the physical plant which are

the buildings and the equipments. It is estimated to be 10% of the fixed

capital investment. (KLM Group, 2014)

Depreciation = 0.10 x $ 19 232 794.36

Depreciation = $ 1 923 279.436

b. Local Taxes

It is considered to be 1 to 2 percent of fixed capital investment.

(KLM Group, 2014)

Local Taxes = 0.02 x $ 19 232 794.36

Local Taxes = $ 384 655.8872

c. Insurances

It is considered to be 1 percent of fixed capital investment. (KLM

Group, 2014)

Insurances = 0.01 X $ 19 232 794.36

Insurances = $ 192 327.9436

Table 9. Summary of Fixed Charges Estimates

Fixed Charges

Components Cost (USD)

Depreciation $ 1 923 279.436

Local Taxes $ 384 655.8872

Insurance $ 192 327.9436

Total $ 2 500 263.267

III. Plant Overhead Costs

a. Payroll Overhead Costs

It considers all the costs associated with the operations of the

auxiliary facilities supporting the manufacturing process of the plant.

It is considered to be 10 percent of the operating labor plus the

supervision. (KLM Group, 2014)

Payroll Overhead Costs = 0.10 ( $ 3520147 + $ 528022.05)

Payroll Overhead Costs = $ 404816.905

b. Plant Overhead Costs (8 percent of the fixed capital investment)

Plant Overhead Costs = 0.08 x $ 19 232 794.36

Plant Overhead Costs = $ 1 538 623.549

Total Plant Overhead Costs = $ 1 943 440.454

∴ 𝑶𝑷𝑬𝑿 = 𝑫𝒊𝒓𝒆𝒄𝒕 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑪𝒐𝒔𝒕𝒔 + 𝑭𝒊𝒙𝒆𝒅 𝑪𝒉𝒂𝒓𝒈𝒆𝒔 + 𝑷𝒍𝒂𝒏𝒕 𝑶𝒗𝒆𝒓𝒉𝒆𝒂𝒅

𝑶𝑷𝑬𝑿 = $ 𝟏𝟔 𝟕𝟏𝟖 𝟕𝟐𝟒. 𝟔

IV. General Expenses

a. Administration Costs

It is consist of other salaries, other administration, buildings, and

other related activities. It is based upon operating labor that covers 20

to 30 percent. (KLM Group, 2014)

Administration Costs = 0.30 x $ 3 520147

Administration Costs = $ 1 056 044.1

b. Distribution and Selling Costs

It covers the costs for sales and marketing required to sell chemical

products, sales offices, shipping, and advertising of the plant. It is

estimated 0 to 7 percent of fixed capital investment.

Distribution and Selling Costs = 0.07 x $ 19 232 794.36

Distribution and Selling Costs = $ 1 346 291.405

c. Research and Development

It includes research activities for the development of processes and

product of the plant. It is estimated to have an equivalent percentage of

2 to 5 percent of fixed capital investment.

Research and Development Costs = 0.05 x $ 19 232 794.36

Research and Development Costs = $ 961 639.718

Total General Expenses = $ 3 363 975.223

Table 10. Summary of Cost Estimates for the Computations of Total

Capital Investment

Total Capital Investment

Components Cost (USD)

CAPEX 21 351 698.92

OPEX 16 718 724.6

General Expenses 3 363 975.223

Total $ 41 434 398.74

 Total Annual Income

= 60,340 Tons/ year x $300/ Ton = $ 18 102 000

Economic Indicators

a. Payback Period

𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒

$ 41 434 398.74
$ 18 102 000/year

𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝑷𝒆𝒓𝒊𝒐𝒅 = 𝟐. 𝟐𝟖 𝒚𝒆𝒂𝒓𝒔

b. Net Present Value (NPV)

𝑁𝑃𝑉 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒

= $ 41 434 398.74 − $ 18 102 000

𝑵𝑷𝑽 = $ 𝟐𝟑 𝟑𝟑𝟐 𝟑𝟗𝟖. 𝟕𝟒

c. Rate of Return

𝑻𝒐𝒕𝒂𝒍 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 − 𝑻𝒐𝒕𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆

𝑻𝒐𝒕𝒂𝒍 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕

$ 41 434 398.74 − $ 18 102 000

=
$ 41 434 398.74

𝑹𝑶𝑹 = 𝟓𝟔. 𝟑𝟏%