Introduction

The purpose of chemical plants are built is to make a profit. An

understanding of process economics is therefore critical in process design.
Process economics has three basic roles in process design:
i.
Evaluation of design options
ii.
Process optimization
iii.
Evaluation overall project profitability
A lower investment will have a lower risk factor and also a faster payback
period. However a higher investment may be more promising for the long
run if the process has a high profit margin. These factors will also be kept
in mind and proposed to the investors.
Capital Costs
Fixed capital cost is the total cost of the plant ready for start-up. It is the
cost paid to the contractor and is not recovered at the end of project life.
Total Purchased Equipment Cost (PEC)
Based on the Palm Oil Mill Biomass Boiler designed in this case, the
costing of the equipment forms the main cost of the entire system.
Therefore, the costing can be done for the equipment by calculating each
individual equipment used in the system. The cost of a specific item of
equipment will be a function of size, material of construction, design
pressure ad design temperature. Based on the calculations, the equipment
cost is as shown in below:
Table 1: Equipment Costing
Equipment
Units
Cost, $
Water Ion Exchange Plant
1
46,908.13
Furnace
1
307,483.44
Boiler
1
176,732.81
HP Condensing Turbine
1
28,567.20
MP Condensing Turbine
1
131,120.23
Total Purchased Equipment Cost (May 13), $
5
690,812.82
As the price of the equipment is based on the production at year 2006 and
the price is scaled up by using the Chemical Engineering Plant Cost Index
(CEPCI, 2014) at the most recent year of October 2014.
Table 2: Chemical Engineering Plant Cost Index
Year
2006
2015

CEPCI
478.60
579.8

Direct Costs
The total purchased equipment cost is further improved with the direct
costs installation factors for solid type process is shown at below. The
improved value after multiplying the installation factors had become

Table 3: Direct Costs Installation Factors (Sinnott & Towler, 2013)

Item
Process type: Fluid
$ 690,812.82
Major Equipment, total purchase cost
fer: Equipment errection
0.60
fp: Piping
0.20
fi: Intrumentation and control
0.20
fel: Electrical
0.15
fc: Civil
0.20
fs: Structure and buildings
0.10
fl: Lagging and paint
0.05
Total factor (1+fp)+(fer+fel+fi+fc+fs+fl)/fm
2.5
ISBL cost, C($)
1,188,196.34
** fm=1.3 for stainless steel
Site Costing
The chosen area for the development is Tanjung Langsat in Johor. The
price of the land is found to be RM12.50/m. As an assumption, the plant
will be considered to be using 500m. The cost of the site is calculated to
be RM 67,274.38 which is equivalent to USD$ 18,182.26. This value is
added into the equipment costing as the factor of site costing is not
considered in the calculation above. Therefore, the new value for the
equipment cost is $ 1,206,378.60.
Total Fixed Capital Cost
Indirect Costs
Total fixed capital cost of the process can be obtained by multiplying
indirect costs installation factors to the total purchased equipment cost.
Thus the total fixed capital cost for the Palm Oil Mill Biomass Boiler is $
2,195,609.06.
Table 4: Indirect Costs Installation Factors (Sinnott & Towler, 2013)
Offsite (OS)
Design and Engineering
(D&E)
Contingency (X)

0.40
0.20
0.10

Working Capital
Working capital is what must be invested to get the plant into productive
operation. This is money invested before there is a product to sell and
includes raw material for plant start-up, raw materials, intermediate and
product inventories, cost of transportation of materials for start-up and
money to meet payroll when starting. Theoretically, this money is not lost
but can be recovered when the plant is shut down. An estimation of 20%
of total fixed capital investment is made in this case and thus working
capital is $ 439,121.81.

Total Capital Cost

The total investment required for this process is the sum of the total fixed
capital costs and working capital. Hence the total capital cost is
$2,634,730.87.
Operating Costs
The operating cost is used to judge the viability of the project, and to
make choice between alternative processing schemes. These costs are
estimated using the plant flow sheet, which gives the raw material and
service requirements and the capital investment. The operating cost is
divided into two main groups which are fixed operating costs and variable
operating costs.
Fixed Operating Costs
These are bills which must be paid even if the plant is off, where these
costs are independent with the amount of the production. These include:
Maintenance cost
Operating labour
Laboratory costs
Supervision
Plant overheads
Capital charges
Local taxes
Insurance
License fees
Maintenance Cost
Every plant requires maintenance in order to last longer in the production.
This will allow the plant to continue without having to change the
equipment used. Therefore, in this case, the maintenance cost is
estimated to be 15% of the installed capital cost as the plant is designed
to operate for 6000 hours per annum. Therefore, the maintenance cost for
the plant is estimated to be $ 395,209.63
Operating Labour
The cost of manpower required to operate and directly contributed to the
plant operational should be estimated upon the number of employees and
the shift pattern. Three shifts daily, with 1 operator each shift. Assuming
each worker works 6 hours per day, the number of workers required
would be 4 operators per day. The pay of workers is assumed to be
USD1.5/hour for each operator in Malaysia.
Table 5: Labour Cost
Number of Operator
4.00

Wage/Hour, $
Working Hour per week
Weeks Per Annum
Wage/month, $/month
Wage/year, $/year
Total Wage, $

1.50
42.00
43.00
225.75
2,709.00
10,836.00

Supervision
This covers the direct operating supervision and the number required will
depend on the plant size and the process nature. Generally, one
supervisor is needed for each four to five operators. Thus, one supervisor
are required for this plant. An estimation of USD$ 15,000 salary for each
of the supervisor is applied. Hence, supervision cost is $
Annual salary ($/year)
15,000.00
Number of supervisory member
1
Total supervision cost ($/year)
15,000.00
Laboratory
As the process monitoring and quality control of the feed to be burnt in a
biomass boiler is well within the specification required in order to ensure
the sufficient steam and electricity are produced. Hence the laboratory
cost is considered in the plant. An actual consideration would consider
based on the actual experience from the process. However, a rough
estimate of 30% is considered in this case based on the operating labour
cost. Therefore, the laboratory cost obtained is $ 3,250.80
Plant Overheads
The general cost which is related to the operation of the biomass boiler
but not included under other headings such as security, medical coverage,
canteen, general management and staffs pay as well. An estimation of
100% of the total labour cost is considered in this case as the plant is a
newly built plant instead of extension of an existing site. This provides the
plant overhead cost with $ 10,836.00
Capital Charges
The capital charge is often recovered as depreciation charge where it
provides a sum that is considered to repay the cost of the plant. The
operating life of a plant is normally taken as 15 years which turn out to
have a capital charges of 10% from total fixed capital Cost. Thus the
capital charge cost is set to be $ 219,560.91.
Local Taxes
Government tax is a must to be paid to the local government authorities
upon the jurisdiction and legislation. It is assumed to be 2% of the fixed
capital cost. Thus, the local tax is USD$ 43,912.18

Insurance
The cost for the site and plant insurance should be considered in every
plant for the coverage in case of uncertain incident that caused damage to
the plant. This is usually set to be 2% of fixed capital cost which cost
$43,912.18
License Fee
Companies doing business in Malaysia are required to apply for business
premise licenses and signboard licenses from the respective State
Authorities. The requirements for the application of a business premise
license and a signboard license may vary according to each local authority.
The annual license fee is estimated to be 1% of the fixed capital cost.
Thus the license fee is estimated to be $21,959.09.
Variable Operating Costs
These costs depend on the production rate so nothing will be paid when
the plant is off. These include:
Utility costs
Miscellaneous materials
Raw Material Costs
Raw material cost is not considered in this case. This is because the raw
material used is a byproduct which produced from the Fresh Fruit
bunches. Hence, the byproduct is recycled to generate power, steam and
electricity for plant in house usage.
Utility Costs
These are usually the most significant variable operating cost after the
raw materials costs. Utility costs includes: power, steam, cooling water
and chilled water for this case.
Cost of Cooling water, Chilled Water, Steam for 6000 hours of operating
hour. (Sinnott, 2004)
Table 8: Cost of Cooling Water
Types
Cooling Water
3
Flowrate, m /hr
18
Cost, USD/m3
0.62
Cost, $/annum
66,551.35
Total Utility Cost
Table 10: Summary of Total Utility Cost
Cost Criteria
Cost of Cooling water
Total Utility Cost, USD$
Miscellaneous Materials

Total Cost ($)

66,551.35
66,551.35

These including all the miscellaneous materials required to operate the

plant but are not covered under the raw materials or maintenance
materials. These materials will include: safety clothing, instrument charts
and accessories, cleaning materials and pipe gaskets. As a rough
estimation, these can be taken as 10% of the total maintenance cost
which is $ 39,520.96
Annual Production Cost
Based on the fixed and variable operating costs obtained,
production cost can be obtained as below:
Table 11: Summary of Direct Production Cost
Operating Cost
Direct Production Criteria
Variable Operating Cost Miscellaneous Materials
Maintenance
Fixed Operating Cost
Annual Operating Labor Cost
Laboratory Cost
Supervision
Plant Overheads
Capital Charges
Insurance
Local taxes
License Fees
Total Direct Production Cost, USD$

the total direct

Cost, USD$
39,520.96
395,209.63
10,836.00
3,250.80
15,000.00
10,836.00
219,560.91
43,912.18
43,912.18
21,956.09
3,000.286.89

From the total direct production cost, the annual production cost can be
calculated by including 20% of the total direct production cost as the
sales, overheads, research (SOR) cost. Therefore, the annual production
cost is as follow:
Table 12 : Summary of Annual Production Cost
Cost Criteria
Sales, overheads, research cost
Total direct production cost
Annual Production Cost, $

Total Cost ($)

600,057.38
3,000,286.89
3,600,344.26

Annual Revenue
The revenues for a project are the income earned from the sales of
electricity, steam and by-product which are not used as boiler feed.
Table 13: Annual Revenue Cost
Product
Annual Production,
tonne/year
Empty Fruit
bunches
Palm Mesocarp
Fiber
Palm Kernel Shell

Revenue,
USD$/annual

22,494.06

Price
USD$/tonn
e
4

21,600

35

756,000

14,400

60

864,000

89,976.24

Medium Pressure
54,000
Steam
Boiler Ash
1005.084
Total Annual Revenue, USD$/annual
Saving on Electricity
Electricity
Annual
generated,
Production,
kW/hr
kW/year
1685.26
10,111,560

20

1,080,000

150

150,762.6
2,940,738.84

Price, USD$/kW

Revenue,
USD$/annual

0.20

2,022,312

Gross Earning
This is the plant profit that the plant would be generating after deducting
the annual production from total annual revenue. Thus the gross earning
is $ 1,362,706.58.
Net Earning
Considering the gross earnings from the plant, the profit does not take
into account the taxes available in Malaysia. Therefore, based on the taxes
set by the government of Malaysia for income above RM500, 000, the tax
rate would be 25%. (Inland Revenue Board of Malaysia, 2013) Net
Earning is $1,022,029.93
Project Cash Flow Diagram
The cash flow is the life blood of any commercial organisation. A cash flow
diagram shows the forecast cumulative net cash flow over the life of a
project. It is based on the best estimates of investment, operating costs,
sales volume and sale price, that can be made for the entire project. It
also gives a clear picture of the resources required for a project and the
timing of the earnings.
Figure 1: Project Cash Flow Diagram

Debt

A-B
B-C
C-D

D-F

F-G
G-H

The investment required to design the plant. This is estimated to

be 30% of the fixed capital cost.
The estimated 60% of fixed capital cost is used to invest in
buildings, plants and equipment.
The remaining 10% of total fixed capital cost is used to finalize all
of the required facilities and equipments. Plants startup with 30%
scale with 100% working capital, 100% fixed operating cost and
30% of variables operating cost. With this, it reaches the
maximum investment required for the plant as investment is not
paid off.
Now, the plant startup with to 100% scale. Hence, the cash flow
slowly turns postive and revenue was made from the 4 th years
onward until F point. Point F is known as the break-even point at
which the income equals the cost of production. The time from
point A to point F is the payback time. In this project, the payback
time is 6 years.
The net cash flow is now positive as the income is generated from
sales.
Net cash flow decreases.

Economic Analysis

Payback Time
Payback time is the time required after the start of the project to
pay off the initial investment from income. Figure 1 shows that the
payback time for this project is 6.5 years.

Return on Investment (ROI)

Return on investment is a simple measure of economic performance while
rate of return which is the ratio of annual profit to investment. The value
got from simple ROI calculation for this project is 38.79%.
Depreciation Charge
A Constant 8% depreciation every year is take into consideration to helps
to improve project economics by giving higher cash flows in the early
years. By this, the taxable income will be reduced
Net Present Value

Net Present Value is calculated with a constant of 10% interest rate

per year. It is calculated to take account of future inflation. By this,
we are able to determine whether the project is still worthy oh not
because of the discounting of future cash flow.
Discount Cash Flow Rate of Return (DCROR)/ Initial Rate of Return
(IRR)
DCROR is a measure of maximum interest rate hat the project could
pay and still break even by the end of project life. The DCROR/IRR
of the project is 33.58%
Conclusion
As a conclusion, this project is economic feasible with return on
investment greater than 20% and attractive payback period.
Table 14: Summary of Economic Analysis
Criteria

Cost/Profit ($)

Total Capital Investment

3,600,344.26

Total Sales
Net Earning
Discounted Cash Flow Rate of
Return
Payback Period

4,963,050.84
1,022,029.93
33.58%
6.5 years