ECONOMICS

Cost of Soda ash plant of capacity 10000 TPA in 1971 is Rs.3 x 106.
Chemical Engineering Plant Cost Index:
Cost index in 1971 = 132
Cost index in 2002 = 402
Thus, Present cost of Plant = (original cost) × (present cost
index)/(past cost index)
= (3 x 106) × (402/132) = Rs. 8.74×106
i.e., Fixed Capital Cost (FCI) = Rs. 8.74×106

Estimation of Capital Investment Cost:

I.Direct Costs: material and labor involved in actual installation of
complete facility (70-85% of fixed-capital investment)

a) Equipment + installation + instrumentation + piping + electrical +

insulation + painting (50-60% of Fixed-capital investment)
1. Purchased equipment cost (PEC): (15-40% of Fixed-
capital investment)
Consider purchased equipment cost = 30% of Fixed-capital
investment
i.e., PEC = 30% of 8.74×106= 0.3 × 8.74×106
= Rs. 2.622×106
2. Installation, including insulation and painting: (25-55%
of purchased equipment cost.)
Consider the Installation cost = 40% of Purchased
equipment cost
= 40% of 1.3325×108 = 0.40 ×2.622×106= Rs.1.05 x 106
 3. Instrumentation and controls, installed: (6-30% of
Purchased equipment cost.)
Consider the installation cost = 15% of Purchased
equipment cost
= 15% of ×= 0.15 ×2.622×106= Rs. 0.393×106
4. Piping installed: (10-80% of Purchased equipment
cost)
Consider the piping cost = 40% Purchased equipment
cost
= 40% of Purchased equipment cost = 0.40 ×2.622×106
= Rs. 1.04×106

5. Electrical, installed: (10-40% of Purchased equipment

cost)
Consider Electrical cost = 25% of Purchased equipment cost
= 25% of 2.622×106= 0.25 ×2.622×106= Rs. 0.655×106

B. Buildings, process and Auxiliary: (10-70% of Purchased equipment

cost)
Consider Buildings, process and auxiliary cost = 40% of PEC
= 40% of 2.622×106= 0.40 ×2.622×106= Rs. 1.048×108
C. Service facilities and yard improvements: (40-100% of Purchased
equipment cost)
Consider the cost of service facilities and yard improvement = 50%
of PEC
= 50% of 1.3325 ×108 = 0.50 ×2.622×106= Rs. 1.311×106
D. Land: (1-2% of fixed capital investment or 4-8% of Purchased
equipment cost)
Consider the cost of land = 6% PEC = 6% of 1.3325 ×108
= 0.06 ×2.622×106
= Rs 0.1311×106

Thus, Direct cost = Rs. 8.5651 x 106

II. Indirect costs: expenses which are not directly involved with material
and labour of actual installation of complete facility (15-30% of
Fixed-capital investment)
A. Engineering and Supervision: (5-30% of direct costs)
Consider the cost of engineering and supervision = 15% of
Direct costs
i.e., cost of engineering and supervision = 15% of 4.41 ×108
= 0.15×8.5651 x 106= Rs. 1.275×106
B. Construction Expense and Contractor’s fee: (6-30% of direct
costs)
Consider the construction expense and contractor’s fee = 10% of
Direct costs
i.e., construction expense and contractor’s fee = 10% of 8.5651 x
106
= 0.1×8.5651 x 106= Rs. 0.85×106

C. Contingency: (5-15% of Fixed-capital investment)

Consider the contingency cost = 5% of Fixed-capital investment
i.e., Contingency cost = 5% of 5.33×108 = 0.05 × 8.5651 x 106
 = Rs. 0.425 ×106

Thus, Indirect Costs = Rs. 2.72×106

III. Fixed Capital Investment:
Fixed capital investment = Direct costs + Indirect costs
= (2.72×106) + (8.5651×106)
i.e., Fixed capital investment = Rs. 11.23×106

IV. Working Capital: (10-20% of Fixed-capital investment)

Consider the Working Capital = 15% of Fixed-capital
investment
i.e., Working capital = 15% of 5.9316×108 = 0.15 × 11.23×106
= Rs. 1.6845×108

V. Total Capital Investment (TCI):

Total capital investment = Fixed capital investment + Working
capital = (11.23×106) +
(1.6845×106)
i.e., Total capital investment = Rs. 12.91×106

Estimation of Total Product cost:

I. Manufacturing Cost = Direct production cost + Fixed charges +
Plant overhead cost.
A. Fixed Charges: (10-20% total product cost)
i. Depreciation: (depends on life period, salvage value and
method of calculation-about 13% of FCI for machinery and
equipment and 2-3% for Building Value for Buildings)
 Consider depreciation = 10% of FCI for machinery and equipment
and 3% for Building Value for Buildings)
i.e., Depreciation = (0.10×11.23×106) + (0.03×1.048×106)
= Rs. 1.154×106

ii. Local Taxes: (1-4% of fixed capital investment)

Consider the local taxes = 4% of fixed capital investment
i.e. Local Taxes = 0.04×11.23×106= Rs. 0.674×106
iii. Insurances: (0.4-1% of fixed capital investment)
Consider the Insurance = 0.6% of fixed capital investment
i.e. Insurance = 0.006×11.23×106= Rs. 0.0674×106

iv. Rent: (8-12% of value of fixed capital investment)

Consider rent = 10% of value of fixed capital investment
= 0.10× 11.23×106
Rent = Rs. 1.123x106
Thus, Fixed Charges = Rs. 2.794×108

Now we have Fixed charges = 10-20% of total product charges –

(given)
Consider the Fixed charges = 15% of total product cost
Ö Total product charge = fixed charges/15%
Ö Total product charge = 2.794×10 /15%
6

Ö Total product charge = 2.794×10 /0.15

6

Ö Total product charge (TPC) = Rs. 18.63×10 6

B. Direct Production Cost: (about 60% of total product cost)

 i. Raw Materials: (10-50% of total product cost)
Consider the cost of raw materials = 25% of total product
cost
Ö Raw material cost = 25% of 18.63×106
Ö = 0.25×18.63×106
Ö Raw material cost = Rs. 5.589×106
ii. Operating Labour (OL): (10-20% of total product cost)
Consider the cost of operating labour = 15% of total product cost
Ö Operating labour cost = 15% of 18.63×106= 0.15×18.63×106
Ö Operating labour cost = Rs. 2.79×106
iii. Direct Supervisory and Clerical Labour (DS & CL): (10-
25% of OL)
Consider the cost for Direct supervisory and clerical labour = 12% of
OL
Ö Direct supervisory and clerical labour cost = 12% of 2.79×106
= 0.12×2.79×106
Ö Direct supervisory and clerical labour cost = Rs. 0.335×106
iv. Utilities: (10-20% of total product cost)
Consider the cost of Utilities = 15% of total product cost
Ö Utilities cost= 15% of 18.63×106= 0.12×18.63×106
Ö Utilities cost = Rs. 2.79×106
v. Maintenance and repairs (M & R): (2-10% of fixed capital
investment)
Consider the maintenance and repair cost = 5% of fixed capital
investment
i.e. Maintenance and repair cost = 0.05×11.23×106
= Rs. 0.5615×106
 vi. Operating Supplies: (10-20% of M & R or 0.5-1% of FCI)
Consider the cost of Operating supplies = 15% of M & R
Operating supplies cost = 15% of 0.5615×106 = 0.15 ×0.5615×106
Operating supplies cost = Rs. 0.08422×106
vii. Laboratory Charges: (10-20% of OL)
Consider the Laboratory charges = 15% of OL
Laboratory charges = 15% of 2.79×106= 0.15×2.79×106
Ö Laboratory charges = Rs. 0.4185×10 6

viii. Patent and Royalties: (0-6% of total product cost)

Consider the cost of Patent and royalties = 5% of total product cost
Ö Patent and Royalties = 5% of 18.63×106
Ö = 0.05×18.63×106
Ö Patent and Royalties cost = Rs. 0.9315×106

Thus, Direct Production Cost = Rs. 13.49×106

C. Plant overhead Costs (50-70% of Operating labour, supervision, and
maintenance or 5-15% of total product cost); includes for the following:
general plant upkeep and overhead, payroll overhead, packaging, medical
services, safety and protection, restaurants, recreation, salvage, laboratories,
and storage facilities.
Consider the plant overhead cost = 60% of OL, DS & CL, and M & R
Plant overhead cost = 0.60 × ((2.79×106) + (0.335×106) +
(0.5615×106))
Plant overhead cost = Rs. 2.212×106
Thus, Manufacture cost = Direct production cost + Fixed charges +
Plant overhead costs.
Manufacture cost = (2.794×106) + (13.49×106) + (2.212×106)
 Manufacture cost = Rs. 18.496×106

II. General Expenses = Administrative costs + distribution and selling

costs + research and development costs
Administrative costs :( 2-6% of total product cost)
Consider the Administrative costs = 5% of total product cost
Ö Administrative costs = 0.05 × 2.79×106
Ö Administrative costs = Rs. 0.1395×108
A. Distribution and Selling costs: (2-20% of total product cost);
includes costs for sales offices, salesmen, shipping, and advertising.
Consider the Distribution and selling costs = 10% of total product
cost
Ö Distribution and selling costs = 10% of 18.63×10 6

Ö Distribution and selling costs = 0.15 × 18.63×10 6

Ö Distribution and Selling costs = Rs. 1.863×10 6

C. Research and Development costs: (about 3% of total product cost)

Consider the Research and development costs = 3% of total
product cost
Research and Development costs = 3% of 18.63×106
Ö Research and development costs = 0.05 × 18.63×10 6

Ö Research and Development costs = Rs. 0.5589×10 6

Thus, General Expenses = Rs. 2.5614×106

IV. Total Product cost = Manufacture cost + General Expenses
= (18.496×106) + (2.5615×106)
Total product cost = Rs. 21.057×108

V. Gross Earnings/Income:
Wholesale Selling Price of chlorine per ton = $ 60 (USD)
Let 1 USD = Rs. 50.00
Hence, Wholesale Selling Price of chlorine per ton. = 60 ×50
= Rs3000
Total Income = Selling price × Quantity of product manufactured
= 3000 × 10000
Total Income = Rs. 30×106
Gross income = Total Income – Total Product Cost
= (30×106) – (21.057×106)
Gross Income = Rs. 8.943×106
Let the Tax rate be 45% (common)
Net Profit = Gross income - Taxes = Gross income× (1- Tax rate)
Net profit = 8.943×106 (1 - 0.45) = Rs 4.92 x 106
Rate of Return:
Rate of return = Net profit×100/Total Capital Investment
Rate of Return = 4.92 x 106×100/ (12.91×106)
Rate of Return = 38.0%