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KWAME NKRUMAH UNIVERSITY OF SCIENCE AND

TECHNOLOGY, KUMASI
INSTITUTE OF DISTANCE LEARNING
CHE 451
Chemical Process Design & Economics
(Credits: 4)

Benjamin Afotey, PhD


Chemical Engineering Department
August, 2014

Course Introduction
Design is the synthesis of ideas to achieve a desired goal (product). The designer starts with
an idea and proceeds to develop several alternative designs that he evaluates and finally
settles on the one that satisfies his objective (goal).
The search for alternative designs is important to the economic viability of the design project.
CHE 451 is a fourth year core course offered in first semester in BSc. Chemical Engineering.

Course Overview
Methodology of the Design Process: Constraints on a Design Problem; Fixed/Rigid
constraints, Less rigid constraints, The design process; Design objectives, Data collection,
Generation of possible designs,Selection, Chemical manufacturing processes, Continuous
and batch processes, Organization of a chemical engineering design project.
Codes and Standards, Design Factors, Variable & Mathematical Representation of Design
Problems: Codes and standards, Design factors, Systems of units, Mathematical
representation of the design problem, Selection of design variables. Optimization and Batch
Production Process: Introduction, Simple models, Multiple variable systems, Methods of
analysis, Other optimization methods, Batch production process.
Process Synthesis: Introduction, Raw materials and chemical reactions, Summary of process
design heuristics, Heuristics in equipment design. Process Simulation: Introduction, Process
simulator, Types of process simulation, Units operation solvers, Uncertainty and sensitivity
issues. Flow sheeting, Piping and Instrumentation: Introduction, Piping & instrumentation
diagrams, Valve selection, Pumps, Classification of pumps, Factors to consider in pump
selection, Centrifugal pumps, Effective characteristics curves, Design parameters of
centrifugal pumps, Operating point, Choice of rotational speed,. Process Economics: Cost
estimation, Cash flow for industrial operation, Factors affecting investment and production
costs, Capital investment, Estimation of capital investment, Types of capital cost estimates,
cost indices, Methods of estimating capital investment, Turnover ratio, Estimation of total
product cost, Break-even point. Process Economics: Depreciation and profitability analysis,
Service life, Salvage value, Present value, Methods for determining depreciation,
Profitability standards, Basis for evaluating project profitability, Mathematical methods for
profitability evaluation, Rate of return on investment, Discounted cash flow, Capitalized cost,
Pay-back time, Sensitivity analysis.

Course Objective
The following is the main course Objective
1. To enable students understand and acknowledge the importance of economic analysis
in chemical process design, by way of efficiently maximizing profit.

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Course Outline
The course outline is divided into eight units. Each of the eight units is broken into subtopics.
Each unit addresses one or more of the course objectives.
Unit 1: Methodology of the Design Process
Unit 2: Codes and Standards, Design Factors, Variable &Mathematical Representation of
Design Problems
Unit 3: Optimization and Batch Production Process
Unit 4: Process Synthesis
Unit 5: Process Simulation
Unit 6: Flow Sheeting, Piping and Instrumentation
Unit 7: Process Economics: Cost Estimation
Unit 8: Process Economics: Depreciation and Profitability Analysis

Grading
Continuous Assessment: 30%
End of Semester Examination: 70%

Reading List/Recommendation Textbooks/Websites/CDs


1. Plant Design and Economics for Chemical Engineers: By Peters and Timmerhaus
2. Coulson & Richardsons Chemical Engineering Design: By Sinnot, Volume 6

Course Writer
Dr. Benjamin Afotey received his BSc. Degree in Chemical Engineering in 2000 at Kwame
Nkrumah University of Science and Technology, Kumasi. He received his MSc. and PhD
Degrees at the University of Texas, Arlington, and U.S.A in 2003 and 2008 respectively.
He worked with the Texas Commission on Environmental Quality, U.S.A between 2008 and
2009 and joined the Chemical Engineering Department in 2010.

Acknowledgement
I wish to thank the Almighty God for His guidance throughout the write up. I would also like
to thank my colleagues who provided encouragement of any kind. Finally, I acknowledge the
effort of my Teaching Assistant who contributed in a way to the successful completion of the
material.

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TABLE OF CONTENT
1.0 METHODOLOGY OF THE DESIGN PROCESS
SESSION 1-1 :
1-1.1 Introduction
1-1.2.Constraint on a Design Problem
1-1.2.1 Fixed/Rigid constraint
1-1.2.2 Less rigid constraint
1-1.3 The Design Process
1-1.3.1 The design objective
1-1.3.2 Data collection
1-1.3.3 Generation of possible designs
1-1.3.4 Selection
1-1.4 Chemical Manufacturing Processes
1-1.5 Continuous and Batch Processes
1-1.5.1 Choice of continuous verses Batch processes
1-1.5.2 Organization of a chemical engineering design project
2.0 CODES AND STANDARDS, DESIGN FACTORS, VARIABLE &
MATHEMATICAL REPRESENTATION OF DESIGN PROBLEMS
SESSION 2-1
2-1.1 Codes and Standards
2-1.2 Factors of Safety
2-1.3 System of Units
2-1.4 Mathematical Representation of the Design Problem
2-1.5 Selection of Design Variables
3.0 OPTIMIZATION AND BATCH PRODUCTION PROCESS
SEESION 3-1
3-1.1 Introduction
3-1.2 Simple Methods
3-1.3 Multiple Variable Systems
3-1.4 Methods of Analysis
3-1.5 Other Optimization Methods
3-1.6 Batch Production Process
4-0 PROCESS SYNTHESIS
SESSION 4-1
4-1.1Introduction
4-1.2 Raw Materials and Chemical Reactions
4-1.3 Summary of Process Design Heuristics
4-1.4 Heuristics in Equipment Design
5.0 PROCESS SIMULATION
SESSION 5-1
5-1.1 Introduction
5-1.2 Process Simulator
5-1.3 Types of Process Simulation
5-1.4 Unit Operation Solvers
5-1.5 Uncertainty and Sensitivity Issues
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6.0 FLOW SHEETING, PIPING AND INSTRUMENTATION


SESSION 6-1
6-1.1 Introduction
6-1.2 Piping and Instrumentation Diagrams
6-1.3 Valve Selection
6-1.3.1 Gate valves
6-1.3.2 Globe valves
SESSION 6-2
6-2.1 Introduction of Pumps
6-2.2 Classification of Pumps
6-2.3 Factors to Consider in Pump Selection
6-2.4 Centrifugal Pumps
6-2.4.1 Effective characteristics curves
6-2.4.2 Design parameters of centrifugal pumps
6-2.4.3 Operating point
6-2.4.4 Q/H Curve versus Technical choices
6-2.4.5 Choice of rotation speed
6-2.4.6 Suction Conditions: Concept of NPSH
7.0 PROCESS ECONOMICS: COST ESIMATION
SESSION 7-1
7-1.1 Cost Estimation
7-1.2 Cash Flow for Industrial Operations
7-1.3 Factors affecting Investment and Production Costs
7-1.4 Capital Investment
7-1.5 Estimation of Capital Investment
7-1.5.1 Introduction
7-1.5.2 Types of capital cost estimates
7-1.5.3 Cost indexes
7-1.5.4 Methods for estimating capital investment
7-1.5.4.1 Power factor applied to plant-capacity ratio
7-1.5.4.2 Detailed item estimate
7-1.5.4.3 Other Methods for Estimating Equipment or Capital Investment
7-1.5.5 Turn-over ratio
SESSION 7-2
7-2.1 Estimation of Total Product Cost
7-2.2 Break-even Point
8.0 PROCESS ECONOMICS: DEPRECIATION AND PROFITABILITY ANALYSIS
SESSION 8-1
8-1.1 Depreciation
8-1.2 Service Life
8-1.3 Salvage Value
8-1.4 Present Value
8-1.5 Methods for Determining Depreciation
8-1.5.1 Straight-line method
8-1.5.2 Declining balance ( or fixed percentage) method
8-1.5.3 Other methods for determining depreciation
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SESSION 8-2
8-2.1 Profitability Analysis
8-2.2 Profitability Standards
8-2.3 Basis for Evaluating Project Profitability
8-2.4 Mathematical Methods for Profitability Evaluation
8-2.4.1 Rate of return on investment
8-2.4.2 Discounted cash flow
8-2.4.3 Capitalized cost
8-2.4.4 Payout period (or Pay-back time)
8-2.4.5 Sensitivity Analysis

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LIST OF FIGURES
Figure 1-1.1 Design Constraints
Figure 1-1.2 The Design Process
Figure 1-1.3 Anatomy of a Chemical Process
Figure 1-1.4 The Structure of a Chemical Engineering Project
Figure 1-1.5 Project Organisation
Figure 3-1.1 Effect of Constraints on the Optimum of a Function
Figure 3-1.2 Yield as a Function of Reactor Temperature and Pressure
Figure 6-1.1 Flow-sheet of Simplified Nitric Acid Production Process
Figure 6-1.2 Polymer Production Diagram
Figure 6-1.3 Commonly used Valves
Figure 6-2.1 Approximate Range of Operation for the Three Main Types of Pump
Figure 6-2.2 Basic Curves Characterizing a Centrifugal Pump
Figure 6-2.3 Curve Characteristic of the System
Figure 6-2.4 Variation of Operating Point by means of a Valve
Figure 6-2.5 Variation in Specific Speed versus the Type of Impeller used
Figure 6-2.6 Different Types of Characteristic Curves
Figure 6-2.7 Variation in the Operating Point versus the Rotation Speed
Figure 7-1.1 Cash Flow for an Overall Industrial Operation
Figure 7-2.1 Cost Involved in Total Product Cost for a Typical Chemical Process Plant
Figure 7-2.2 Break-even Chart for Chemical Processing Plant
Figure 7-2.3: Project Cash Flow Diagram

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LIST OF TABLES
Table 6-2.1 Main Types of Pumps
Table 7-1.1: Cost indexes as Annual Averages
Table 7-1.2 Typical Exponents for Equipment Cost vs. Capacity

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UNIT

METHODOLOGY OF THE DESIGN PROCESS


Introduction
This unit discusses the methodology of the design process and its application to the
design of chemical manufacturing processes.
Learning Objectives
After reading this unit, you should be able to:
1. Explain chemical process design
2. Distinguish between fixed and less rigid constraints
3. Know what constitutes the design process
4. List the basic components of a chemical manufacturing process
SESSION 1-1 In this session we shall discuss what a chemical process design is,
the constraints of the design problem, the components of the chemical manufacturing
process and the difference between a continuous and a batch process.

1-1.1 Introduction: Design is the synthesis of ideas to achieve a desired goal (product).
The designer starts with an idea and proceeds to develop several alternative designs that
he evaluates and finally settles on the one that satisfies his objective (goal).
The search for alternatives: this step becomes necessary because the designer will be
constrained by several factors.

1-1.2 Constraints on a Design Problem


1-1.2.1 Fixed/Rigid constraints: these are constraints the designer must live with outside
his influence. E.g. physical laws, government regulations and standards. The fixed
constraints define the outer boundary of all possible designs.

1-1.2.2 Less rigid constraints: these are constraints the designer can manipulate inorder
to arrive at the best design. E.g. materrials of construction, time. These are interrnal
constraints over which the designer has some control.
In summarry we have the following diagramatic sketch.

Figure 1-1.1: Design Constraints


1-1.3 The Design Process
The design process can be shown in schematic form in Figure 1-1.2.

Figure 1-1.2: The Design Process

The diagram shows the design process as an iterative procedure because as the design
proceeds the designer will be looking for information and ideas to refine the design.

1-1.3.1 The Design objective


In the particular case of a chemical process plant, the objective/goal is to satisfy the
public need for a product. In large commercial organizations, this need is identified by
the sales/ marketing department. Before starting to work, the designer should obtain
complete information/background on the need for the product and its application
areas/uses.

1-1.3.2 Data collection


To proceed with the design, the designer must assemble all the relevant facts and data
required. For process design, the information should include process alternatives,
equipment performances, physical property data. In large design companies, they have
in house manuals containing all the process know how on which the design is based
and preferred methods and data for the frequently used design procedures.

1-1.3.3 Generation of possible designs


At this stage the designer must come up with all possible solutions for analysis,
evaluation and selection. To do this, he must rely on his own experience or that of others,
using tried or tested methods.
Chemical engineering projects can be divided into 3 types:
1. Modification, additions to existing plant often undertaken by the plant design
group.
2. New production capacity to meet growing sales demand, and the sale of
established processes by contractors. Repetition of existing designs, with only
minor design changes.
3. New processes, developed from laboratory research, through pilot plant, to a
commercial process. Here most of the unit operations and process equipment will
use established designs.

1-1.3.4 Selection
The selection process can follow the following screening stages:

Possible designs (credible) within the external constraints

Plausible designs (feasible)- within the internal constraints

Probable designs likely candidates

Best designs (optimum) judged the best solution to the problem

To select the best design from the probable designs, detailed design work and costing will
be necessary.

1-1.4 Chemical Manufacturing Processes


The basic components of a typical chemical process can be shown using the block
diagram below.

Figure 1-1.3: Anatomy of a Chemical Process

Each block represents a stage in the overall process for producing a product from the raw
materials. Each stage is a collection of equipment required to accomplish a defined task.

Stage 1: Raw Material Storage


Unless the raw materials are supplied as intermediate products from a neighboring plant,
storage space is needed to hold several days or months supply. Types of storage required
will depend on the nature of the raw materials, and the methods of delivery.

Stage 2: Feed Preparation


Some purification of the raw materials will be necessary to render them in a form
required for feed to the reaction stage.

Stage 3: Reactor
In the reactor the raw materials are brought together under conditions that promote the
production of the desired product. However by-products and unwanted compounds/
impurities will also be formed.

Stage 4: Product Separation


After the reactor, the products and by-products are separated from any unreacted
material. If in sufficient quantity, the unreacted material will be recycled to either the
reactor directly or to the feed purification and preparation stage.

Stage 5: Purification
Before sale, the main product is purified to meet product specification. If the by-product
is also produced in sufficiently large quantities, it must also be purified for sale.

Stage 6: Product Storage


Provision for product packaging and transport will be required. Besides some inventory
of finished product must be held to match production with sales

Ancillary Process
In addition to the main process stages/ units, provision will have to be made for the
supply of utility services, process water, cooling water, compressed air, steam. Facilities
are required for maintenance, firefighting, offices, laboratories and accommodation.
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1-1.5 Continuous and Batch Processes


Continuous processes are designed to operate 24 hours a day, 7 days a week, throughout
the year (365 days). However down time is allowed for maintenance and process catalyst
regeneration.
Plant attainment: this is the percentage of the available hours in a year that the plant
operates. This is usually 90-95%.

1-1.5.1 Choice of continuous versus batch production


The choice will not be clear - cut, however one can use as a guide the following rules:
Continuous
1. Production rate greater than 5*106 kg/h (5000tonnes/h)
2. Single product
3. No severe fouling
4. Good catalyst life
5. Proven process design
6. Established market
7. Cost can be reduced
8. Less labor
Batch
1. Production rate less than 5*106 kg/h (5000tonnes/h)
2. A range of products or product specifications
3. Severe fouling
4. Short catalyst life
5. New product
6. Uncertain design

1-1.5.2 Organization of a chemical engineering design project


The design work required in the engineering of a chemical manufacturing process plant
can be divided into two broad phases:
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Phase 1.Process Design


This covers the steps from the initial selection of the process to be used, through to the
issuing of the process flow-sheets; and includes the selection, specification, and chemical
engineering design of equipment. In any organization, this phase is handled by the
process design group composed of chemical engineers. The group is also responsible for
the preparation of piping and instrumentation diagrams.
Organization of a project group is shown in Figure 1-1.4 below.

Figure 1-1.4: The Structure of a Chemical Engineering Project

Phase 2. The detailed mechanical design of equipment; the structural, civil and electrical
design; specification and design of ancillary services. Other specialist groups will be
responsible for cost estimation, and the purchase and procurement of equipment and
materials.

The sequence of steps in the design, construction and start up of a chemical process plant
is shown diagrammatically in Figure 1-1.5.
.

Figure 1-1.5: Project Organization


Project manager; a chemical engineer by training is responsible for the coordination of
the project.

SELF ASSESSMENT 1-1


(a) Distinguish between Fixed and less rigid constraints
(b) List the components of a basic chemical manufacturing process and in just two
sentences explain the importance of each in the manufacturing process.
(c) In a tabular form, list six differences between a continuous process and a batch
process.

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UNIT

CODES AND STANDARDS, DESIGN FACTORS, VARIABLE &


MATHEMATICAL REPRESENTATION OF DESIGN PROBLEMS
Introduction
This unit discusses the codes & standards, design factors and variables and mathematical
representation of the design problems.
Learning Objectives
After reading this unit, you should be able to:
1. Distinguish between codes and standards
2. Understand the importance of design factors as a margin of safety
in meeting design specifications
3. Appreciate the importance of mathematical representation of the
design problem
SESSION 2-1 In this session we shall study the difference between codes and standards,
design factors and their relation to equipment safety and the mathematical representation
of the design problem.

2-1.1 Codes and Standards


The terms CODE and STANDARD are used interchangeably, though CODE should be
reserved for a code of practices. That is a recommended design or operating procedure.
STANDARD on the other hand refers to preferred sizes, eg. pipes, composition etc.
In modern engineering practice we have standards and codes that cover various functions
e.g
1. Materials, properties and composition
2. Testing procedures for performance, composition and quality
3. Preferred sizes, eg tubes, plates, sections
4. Design methods, inspection, fabrication
5. Codes of practice, for plant operation and safety
All developed countries have national organizations responsible for the issue and
maintenance of standards for the manufacturing industries and for the protection of
consumers.

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In the U.K:; British Standards Institution


In the U.S; National Bureau of Standards
They are responsible for coordinating information on standards. Standards are issued by
the Federal State and various commercial organizations. The major ones of interest to
chemical engineers are:
American National Standards Institute (ANSI)
American Petroleum Institute (API)
American Society for Testing Materials (ASTM)
American Society of Mechanical Engineers (ASME)

International Organization for Standardisation (ISO) coordinates the publication of


International Standards.

In Ghana, there is no national standards organization to coordinate local standards for


industries. However there are national standard organizations with standards for the
protection of consumers eg. Standards Boards, Food and Drug Administration (FDA),
and the Environmental Protection Agency (EPA).
Equipment manufactures work together to produce standardized designs and size ranges
for commonly used items; electric motors, pumps, pipes, and pipe fittings.

2-1.2 Factors of Safety (Design Factors)


Design is an inexact act; errors and uncertainties can arise in the design data available
and in the approximations necessary in the design calculations. To meet design
specifications, factors are included to give a margin of safety in the design so that the
equipment will not fail to perform satisfactorily, and that it will operate safely.
e.g. in a mechanical and structural design, the magnitude of design factors used to allow
for uncertainties in material properties, design methods fabrication and operating loads
are well established. In process design, design factors are used to give tolerances in the
design e.g. process stream average flows calculated from material balances are often
increased by a factor of 10%, to give some flexibility in process operation. This factor
then sets the maximum flows for equipment, instrumentation and piping design.
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2-1.3 System of Units


Chemical engineering uses a diversity of units from American and British engineering
Systems, CGS (grain, centimeter, second)
MKS( kilogram, meter, seconds)
English and American pound mass (lb), foot, second or hours, pound force.
If working in S. I units is preferred, data expressed in the American and British
engineering systems can be converted to S.I units. Conversions factors are available in
the literature.

2-1.4 Mathematical Representation of the Design Problem


A process unit e.g. distillation unit in a chemical process plant performs some operation
on the inlet material stream to produce the desired outlet stream.

Inlet stream

Process
Unit

Outlet stream

In the design of such a unit, the design calculations model the operation of the unit. Thus
the flow of materials is replaced by flow of information into the unit and flow of derived
information out of the unit.

Input
Information

Calculation
method

Output
Information

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Information flows are the values of the variables which are involved in the design.
Example:

Input stream

Output stream

variables

variables

Flow rate

same as the input variables.

Composition
Temperature
Pressure
Enthalpy

Composition, temperature, pressure are called intensive variables, i.e. independent


of quantity of material flow (flow rate)(Nv).

The constraints on the design will place restrictions on the possible values that
these variables can take; for example the values of some of the variables will be
fixed directly by process specification. The values of other variables will be
determined by design relationships arising from constraints.

Some of the design relationships will be in the form of explicit mathematical


equations (design equations): such as those arising from material and energy
balances, thermodynamic relationships, and equipment performance parameters.

Other relationships will be less precise such as those arising from the use of
standards and preferred sizes and safety considerations (Nr).

The difference between the number of variables in the design and the number of
design relationships is called the number of degrees of freedom.

If Nv the number of possible variables in a design problem


Nr the number of design relationships
Nd = Nv Nr
Nd = number of degrees of freedom

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Case 1.
If Nv=Nr implies Nd = 0; this implies that there is only one unique solution to the
problem. The problem is not a true design problem and no optimization is possible.

Case 2
Nv is less than Nr, Nd is less than 0; this implies that the problem is over defined, and
only the trivial solution is possible.

Case 3
Nv >Nr, Nd > 0; implies there is an infinite number of possible solutions. However for a
practical problem, there will be only a limited number of feasible solutions. Nd represents
the number of variables which the designer must assign values to solve the problem.

EXAMPLE 2-1.1: Consider a single phase stream (liquid/vapour) containing C


components.

Input

Process Unit

Output

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Note
(1) The sum of the mass/mol fractions equal 1.
(2) The enthalpy is a function of stream composition, temperature and pressure.
Therefore, Degrees of Freedom, Nd = Nv Nr =(C+4) (2) = C+2
Specifying C+2 variables completely defines the stream.

EXAMPLE 2-1.2: Flash distillation / Equilibrium distillation


In this process unit, a feed is passed into a still (fractionating column), where part is
vaporized, and the vapour remaining in contact with the liquid. The mixture of vapor and
liquid leaves the still and is separated so that the vapour is in equilibrium with the liquid.

Where, F= Stream flow rate, P= pressure, T=temperature, xi= concentration of


component i, q = heat input.
Surfixes, 1= inlet; 2=outlet vapor; 3 =outlet liquid

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Note: 1. given the temperature and pressure, the concentration of any component in the
vapor phase can be obtained from the concentration in the liquid phase ( v-l-e data)
2. An equilibrium separation implies that the outlet streams and the still are the
same pressure and temperature.
This implies that

P2 = P

(1)

T2 = T

(3)

P3 = P

(2)

T3 = T

(4)

Gives 4 equations.
Degrees of freedom Nd (No of degrees of freedom)=Nv - Nr= (3C + 9) - (2C + 5) = C + 4
Though the total degrees of freedom calculated is (C+4), some of the variables will be
fixed by the process conditions and will not be free for the designer to select as design
variables. For example: the flash distillation unit will normally be one unit in a process
system and the feed composition and feed conditions will be fixed by the upstream
process. Hence defining the feed, fixes (C+2) variables and the designer is left with,
(C+4)-(C+2) = 2

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2-1.5 Selection of Design Variables


To solve a design problem, the designer has to decide which variables are to be chosen as
design variables, i.e the ones he can manipulate to produce the best design. This choice is
crucial to enable the simplification of the calculations.
Example: Flash distillation problem in the previous example.
For a binary mixture, C=2; this implies Nd=C+4=6
If the feed stream flow, composition, temperature, pressure are fixed by upstream
conditions, then the number of design variables is Nd=6-(C+2)=6-4=2. This implies, the
designer is free to select 2 variables from the remaining variables to proceed with the
calculation of the outlet stream composition and flows.

Scenerio 1

Suppose you select the still pressure implies for a binary system, vapour-liquid
equilibrium (V-L-e) relationship is determined, and one outlet stream flow rate, then the
outlet compositions can be calculated by the simultaneous solution of mass-balance and
(v-l-e) relations.

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Scenerio 2

If you select the still pressure and the liquid outlet stream composition, then the
simultaneous solution of the mass balance and the v-l-e relationship will not be
necessary. Following the procedure below, one can calculate the stream compositions.

1. Specify P determines the v-l-e curve from experimental data


2. Knowing the outlet liquid composition, the outlet vapor composition can be
calculated from the v-l-e.
3. Knowing the feed and outlet compositions, and the feed flow rate, the outlet
stream flows can be calculated from a material balance.
4. An enthalpy balance gives the heat input required.

SELF ASSESSMENT 2-1


(a) List 3 American organizations responsible for coordinating information on standards.
(b) List 3 national standard organizations with standards for the protection of consumers.

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UNIT
OPTIMIZATION AND BATCH PRODUCTION PROCESS
Introduction
This unit discusses batch production processes and the importance of optimization.
Learning Objectives
After reading this unit, you should:
1. Appreciate the importance of optimization in plant design
2. Understand the process of batch production

SESSION 3-1 In this session we shall discuss the steps involved in optimizing the design
of a chemical process plant. Further, we shall

3-1.1 Introduction
Optimizing the design of a chemical process plant is a foreboding task. This can be
achieved by subdividing the plant into subunits and optimizing each subunit. However
this does not result in the optimal design of the whole plant because the optimization of
each subunit is at the expense of the other.
The general procedure for optimizing process units and equipment design:
Step1: the first step is to clearly define the objective. i.e the criteria to be used for
measuring the performance of the system. For a chemical process plant, the overall
objective is to maximize profit.
This overall objective can be broken down into sub objectives such as; minimize
operating cost, minimize capital investment, maximize yield of the product, reduce labour
requirements, reduce maintenance, operate safely.
Step 2: the second step is to determine the objective function; the system of equations
and other relationships, which relate the objectives with the variables to be manipulated
to optimize the function.
Step 3: this step is to find values of the variables that give the optimum value of objective
function i.e maximum or minimum. The best technique to be used will depend on the
complexity of the system and the type of mathematical model used to represent it.

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3-1.2 Simple Models


If the objective function can be expressed as a function of one variable (single degree of
freedom), the function can be differentiated or plotted to find the maximum or minimum.
This situation arises only for exceptional cases. In most practical situations, the numbers
of variables exceed the number of relationships.
Example of a simple model: Determine the optimum proportions for a closed cylindrical
container.
D

The surface area A in terms of the dimensions is:

A DL 2 D 2 DL D 2
2
4

the objective function is f D, L D L

D2
2

(1)

for a given volume (V) we have,


V

D2
4V
L L
4
D2

(2)

exp res sin g the objective function in terms of one variable D, we have

f(D)

4V D 2

D
2

differenti ating ; f ' (D)

4V
D
D

(3)

finding the optimum D, we set the above equation to zero


4V
4V
4V
D 0 D3
D


4V 4V
substituti ng D in (2) above L 21

4V

For a cylindrical container, the minimum surface area to enclose a given volume is
obtained when the length (height) is made equal to the diameter.
In practice, when the cost is the objective function; L=2D; this is because the cost must
include that of forming the vessel, making the joints in addition to the cost of the
material.

3-1.3 Multiple Variable Systems


The general optimization problem can be represented mathematically as:

f f (v1 , v 2 , v3 ,.......v n )
where f objective function and v1 , v 2 , v3 ,.......v n are the variables
In a design situation, there will be constraints on the possible values of the objective
function due to constraints on the variables.
-

Equality constraints are expressed by equations of the form

m m (v1 , v 2 , v3 ,.......v n ) 0
-

Inequality constraints are expressed by equations of the form


p p (v1 , v 2 , v3 ,.......v n ) Pp

Optimization of the problem involves finding values for the variables v1 , v 2 , v3 ,.......v n
that will optimize the objective function ( i.e give maximum or minimum values within
the constraints).

3-1.4 Methods of Analysis:


a. Analytical method: objective functions can be expressed as a mathematical function;
use the methods of calculations to find maximum or minimum values.
-

For practical situations where the values of the variables are subject to constraints,
the optimum of the constrained objective function will not necessarily occur
where the partial derivatives of the objective function are zero.

e.g.

22

Figure 3-1.1: Effect of Constraints on the Optimum of a Function

The method of Lagranges undetermined multipliers is a useful analytical


technique for dealing with problems that have equality constraints (fixed design
values).

b. Search Methods: Relationships between variables and constraints that arise in


practical design problems are such that analytical methods are not feasible; hence the use
of search methods.
For single variable problems where the objective function is unimodal, the simplest
approach is to calculate the value of the objective function at uniformly spaced values of
the variable until a maximum or minimum is obtained.

Figure 3-1.2 Yield as a Function of Reactor Temperature and Pressure


23

3-1.5 Other Optimization Methods


- Linear programming; a technique used when the objective function and constraints can
be expressed as a linear function of the variables.
- Dynamic programming; used for the optimization of large systems.

3-1.6 Batch Production Process


-

Productive period: this is the period when product is being produced

Nonproductive period; this is the period when the product is discharged and
equipment prepared for the next batch.

Total batch time: productive period + nonproductive period

The rate of production is determined by the total batch time as follows:

Batches per year = 8760 x Plant attainment


Total batch time (batch cycle time)

Annual production rate = (quantities produced per batch)x(batches per year)

Cost per unit of production= annual cost of production


Annual production rate

SELF ASSESSMENT 3-1


A rectangular tank with a square base is constructed from 5 mm steel plates. If the
capacity required is eight cubic meters. Determine the optimum dimensions if the tank
has a closed top.

24

UNIT
PROCESS SYNTHESIS
Introduction
This unit discusses the synthesis of chemical processes.
Learning Objectives
After reading this unit, you should be able to:
1. Explain process synthesis
2. Define and explain heuristics

SESSION 4-1 In this session we shall discuss process synthesis and the importance of
heuristics in chemical process optimization.

4-1.1 Introduction: process synthesis aims at the optimization of the logical structure of
a chemical process; specifically the sequence of steps; reaction, separation (distillation,
extraction etc), the source and destination of recycle streams.
The logical structure of a chemical process: Given the following;
-

Raw materials, required products, allowed byproducts, a set of unit operations for
consideration, cost factors for materials and unit operations required to generate
and rank in order of preference and feasible chemical plant flow sheets.

Approach 1. Combinatorial algorithms are used to find all feasible flow sheets contained
in a toolkit of raw materials and operating steps. The flow sheets are then reviewed and
optimized based on performance, economic and safety criteria.
Approach 2. Heuristic rules based on experiences that are used for the selection and
positioning of processing operations as flow sheets are assembled.

4-1.2 Raw Materials and Chemical Reactions


Heuristic 1: select raw materials and chemical reactions to avoid or reduce the
handling and storage of hazardous and toxic chemicals.
e.x. Manufacture of ethylene glycol

C 2 H 4 1 O2 C 2 H 4 O
2

(1)

C 2 H 4 O H 2 O HOCH 2 CH 2 OH
25

(2)

Both reactions are extremely exothermic, therefore they need to be controlled


carefully. Such processes are designed with two reaction steps with storage of the
intermediate, to enable continuous production, even when maintenance problems
shut down the first reaction operation.

Alternative to the 2-step example process:


1. Use chlorine and caustic in a single reaction step, to avoid the intermediate:

CH 2 CH 2 Cl 2 2 NaOH (aq) HOCH 2 CH 2 OH 2 NaCl

2. Use the 2-step reaction with the following modifications:


-

As ethylene-oxide is formed, react it with carbon dioxide to form ethylene


carbonate, a much less active intermediate that can be stored safely. This can then
be hydrolysed to form the required ethylene glycol product

C 2 H 4 1 O2 C 2 H 4 O
2
C 2 H 4 O CO2 C3 H 4 O3
C3 H 4 O3 H 2 O HOCH 2 CH 2 OH CO2

Heuristic 2: Distribution of Chemicals


Use an excess of one chemical reactant in a reaction to completely consume a second
valuable, toxic or hazardous reactant.
e.x. use an excess of ethylene in the production of Dichloroethane.

Cl
C2

C2H4Cl2 +
C2H4

2H4

C2H4
26

Heuristic 3: when nearly pure products are required, eliminate the inert species before
the reaction operations, when the separations are easily accomplished, or when the
catalyst is adversely affected by the inert.

Heuristic 4: introduce liquid or vapour purge streams to provide exit for species that;
-

Enter the process as impurities in the feed

Produced by irreversible side reactions

e.x. Ammonia, NH3 synthesis loop

27

Heuristic 5: Do not purge valuable species or species that are toxic and hazardous, even
in small concentrations
-

Add separators to recover valuable species

Add reactors to eliminate toxic and hazardous species

e.g. catalytic converter in car exhaust

Heuristic 6: For competing series or parallel reactions, adjust temperature, pressure, and
catalyst to obtain high yields of desired products. In the initial distribution of chemicals,
assume that these conditions can be satisfied; obtain kinetic data, and check this
assumption before developing a base-case design.
e.x. Manufacture of alkyl-chloride

k1
CH 2 CHCH 3 Cl 2
CH 2 CHCH 2 Cl HCl

Cl 2
k2

k3

CH 3 CHClCH 2 Cl

CHCl CHCH 2 Cl HCl

Dichloropropane

dichloropropene

This is a series/parallel reaction;


-

for each reaction, obtain H R , K o , E

28

For each reaction, obtain kinetic data and examine the dependency of reaction rate on
temperature; implies k k o e

RT

Since for multiple reactions, high temperature favors the reaction of higher activation
energy and vice versa.

Heuristic 7: for reversible reactions, consider conducting them in a separation device


capable of removing products, and hence driving the reaction to the right.
e.g. manufacture of ethyl-acetate (ethyl ethanoate) using reactive distillation
Conventionally, this will call for the reaction:
EtOH + HOAc

EtOAc +H2O

followed by separation of products using a sequence of separation of towers, using a


reactive distillation:

29

Heuristic 8: Separations : separate liquid mixtures using distillation, stripping towers


and liquid-liquid extractors.

Heuristic 9: attempt to condense vapour mixtures with cooling water, then use heuristic
8.

30

Heuristic 10: Heat Transfer in reactors: to remove highly exothermic heat of reaction,
consider the use of excess reactant, an inert diliuent.

Heuristic 11: For less exothermic heat of reaction, circulate reactor fluid to an external
cooler, or use a jacketed vessel or cooling coils.

31

Heuristic 12: Pumping and Compression: To increase the pressure of a stream, pump a
liquid rather than compress a gas: i.e condense a vapor as long as refrigeration ( and
compression) is not needed before pumping.

Instead of:

Compressors have large capital cost and consume a lot of power.


32

4-1.3 Summary of Process Design Heuristics


The discussion focused on the following:
-

understanding the importance of selecting reaction paths that do not involve toxic
or hazardous chemicals.

Be able to distribute the chemicals in a process flowsheet, to account for the


presence of inert species, to purge species that would otherwise build up to
unacceptable concentrations, to achieve a high selectivity of the desired products.

Apply heuristics in in selecting separation processes to separate liquids, vapours,


and vapour-liquid mixtures.

Understand the advantages of pumping a liquid rather than compressing a vapor.

4-1.4 Heuristics in Equipment Design


1. Equipment Size
Need information on the required throughput to determine vessel size
-

General guidelines for vessel size


o Height: 2-10 m
o L/D: 2-5m

Towers/ Columns
o Height: 2-50m
o L/D: 2-30m

Note: Do not specify units outside these ranges

2. Heat Exchangers
Several kinds are used
-

Area: 10-1000m2

For shell and tube (tubular)


o Tube diameter: 1-2 cm
o Tube length: 2-6m
o Shell diameter:0.3-1m

33

Plate and frame


Newer technology- thin, gasketed plates separate hot and cold fluids.
Advantage: more compact and very efficient

3. Heat transfer considerations


-

Minimum temperature approach: for fluids 10oC and for refrigerants, 5oC

Cooling water in: 30oC; Cooling water out: 45oC

Equipment heat transfer(overall) coefficient in decreasing order of magnitude


Reboiler>Condenser>Liquid-to-Liquid>gas-to-gas

Heat Exchangers:tlm < 100oC

4. Towers/ Columns
Tower operating pressure is usually determined by the temperature of condensing
medium or maximum allowable reboiler temperature

Sequencing multiple towers: typically

Do easy separation first and leave difficult ones for last

If relative volatilities of all species are close , remove one-by-one from overhead

When volatilities are close but feed concentrations vary, remove high
concentrations first.

Distillation operating conditions

Economically reflux ratio is typically 1.2-1.5 times Lmin

Optimum number of theoretical trays trays is typically 2 times Nmin

Find Nmin from Fenske-Underwood equation

Tower design

Tray spacing are typically 20-24

Pressure drop typically 0.1psi per tray

Tray efficiencies: 60-90% for gas absorption and stripping

34

5. Process Conditions: General Guidelines


(a) High Pressure
To achieve a high pressure in a process:
-

For a liquid use a pump; for a vapour first condense it and pump it into an
evaporatior

For a gas compression; P/Po<3

Note that , compressors are high cost items: large capital cost and high power
consumption

Advantages of high pressure


o Smaller volumes
o Greater concentration
o Change thermodynamics

Lower pressures processing conditions


o 1-10 bar is preferable
o Higher pressure or vacuum requires special equipment
o Unless there is a compelling reason, operate at 1-10 bar pressure

(b) High Temperature

Operate at high temperature to achieve the following:


o High reaction rates
o Change equilibrium of reaction or VLE

Achieve a high temperature in a process by the following means:


o Furnaces(using fuel gas, oil)- very high temperatures
o Heat exchangers(using steam, thermal fluids, molten salt)

Steam
o High pressure steam: 40 50bar (approx. 260oC)
o Medium pressure steam: 20 bar(approx. 200oC)
o Low pressure steam: 5- 10 bar(approx. 150oC)

35

(c) Low Temperature

Operate at low temperature to achieve the following:


o Slow reaction rate
o Prevent thermal sensitive species from degradation
o Change thermodynamics

Achieve a high temperature in a process by the following means:


o Using a heat exchanger with the following fluids( cold steam)

Cooling tower water

Chilled water

Active refrigeration

SELF ASSESMENT 4-1


In the manufacture of ethylene glycol, a two step reaction process is used; the first step is
the formation of the intermediate ethylene oxide which can be stored, followed by its
hydrolysis to form the ethylene glycol. Since both reactions are extremely exothermic
and explosive, show with balanced chemical equations a safer two step approach after the
initial production of ethylene oxide.

36

UNIT
PROCESS SIMULATION
Introduction
This unit discusses the simulation of a chemical process.
Learning Objectives
After reading this unit, you should be able to:
1. Explain what process simulation is.
2. Identify the types of process simulations
SESSION 5-1 In this session we shall discuss the importance of process simulations, the
various types of simulations available and the importance of mathematical models in
process simulation.

5-1.1 Introduction
-

Process simulation is the act of representing some aspects of the real world by
numbers or symbols that may be easily manipulated to facilitate their study.

The important step in process simulation is the representation of that aspect of the
real world to be studied in terms of a mathematical model.

With respect to chemical engineering, the real world is a chemical process


described by a process flow sheet. Therefore process simulation is used to solve
problems related to the process flow sheet, i.e process design, process analysis,
process control etc.

The mathematical model that simulates an aspect of the process needs an


appropriate method of solution.

A process simulation is a computer program developed to solve the model and


study its behavior by manipulating the model parameters.

37

5-1.2 Process Simulator


Computational package that enables predictions of the process behavior
Inputs for the package are:
Basic engineering relationships such as:
-

Mass and energy balances

Phase and chemical equilibrium

Flowsheet topography

Uses are:
-

For design of new plants

Increase profitability in existing plants

Run many possible cases

Sensitivity studies, and optimization

Accuracy depends on the use of


-

Reliable thermodynamic and property data

Realistic operating conditions

Rigorous equipment models

5-1.3 Types of Process Simulation


There are several commercial packages. E.g Aspen Plus, Chemcad, Hysis Pro/II.
Common features of all these are:
1. Database of hundreds thousands( a large number) of compounds
2. A parameter library to compute /estimate properties of these compounds
3. Flowsheet builder- graphical interface that enables units to be defined and
connected.
4. Thermo Solver; computes phase equilibrium and thermodynamic properties given
the database
5. Unit operations Solver: short cut and rigorous solvers for equipment
6. Overall flowsheet solver; mathematical convergence of the flowsheet

38

5-1.4 Unit Operations Solvers; e.g Reactors


- specifies the reaction stoichiometry, temperature, pressure and conversion
- when the reaction is equilibrium limited, specifies the stoichiometry , the approach to
equilibrium and equilibrium constants
- for the reaction involved, specifies the kinetic expression, reactor type and enables the
reactor size calculation.
- distillation columns
- Uses the Feuske, Underwood methods to provide a good initial guess for subsequent
calculations
- for rigorous plate-by-plate approach, it solves simultaneously, material and energy
balance equations, and VLE relations for each plate.

5-1.5. Uncertainty and Sensitivity Issues


It is important to be able to quantify the uncertainty of results:
-

Determine the probability of accuracy of results

Determine what part of results obtained is most likely to be incorrect, and


estimate error range

Sensitivity issues; in cost estimation and profitability studies, estimate the


sensitivity of the results to variations in capital cost, operating cost etc.

Other causes of uncertainty of results using a simulator.


-

Thermo model used

Physical properties data

Convergence tolerance

Simulation method ( simulator)


Because there are disturbing variations between different process simulators using
the same models.

39

What can we do?


o Estimate uncertainties by performing simulations using a range of
parameters, different models.
o Determine the sensitivity of results
o Use statistical methods to design experiments over ranges of parameters
and the results will provide confidence limits
o Ultimately, final designs should be tested on pilot studies.

40

UNIT
FLOW SHEETING, PIPING AND INSTRUMENTATION

Introduction
This unit discusses flow sheeting, piping and instrumentation in chemical process design.
Learning Objectives
After reading this unit, you should be able to:
1. Appreciate the importance of flow sheet in chemical process design
2. Understand why instrumentation in plant design is critical
3. Acknowledge the processes involved in valves and pumps selection
SESSION 6-1 In this session we shall study the essence of flow sheets in process design.
We shall also look at piping and instrumentation diagram and the types of valves used in
a process plant design.

6-1.1 Introduction
Industrial equipment are always arranged and interconnected in a certain fashion. The
process flow sheet gives a pictorial representation of the various equipment selected to
carry out the process. The process flow sheet always convey information on the operating
conditions, stream flow-rates and composition. The information included in a typical
flow sheet is either essential or optional. An example flow sheet is shown in Figure 6-1.1

Figure 6-1.1: Flow-sheet of Simplified Nitric Acid Production Process

41

The essential information included in the flow-sheet are;


1. Stream composition, either:

The flow-rate of each individual component, kg/h, which is preferred, or

The stream composition as a weight fraction.

2. Total stream flow-rate, kg/h.


3. Stream temperature, degrees Celsius preferred.
4. Nominal operating pressure (the required operating pressure).

Optional information
1. Molar percentages composition.
2. Physical property data, mean values for the stream, such as:

Density

Viscosity

3. Stream name, a brief, one or two-word, description of the nature of the stream
4. Stream enthalpy, kJ/h.
Figure 1 below shows the information included in a polymer production process.

6-1.2 Piping and Instrumentation Diagram (P&ID)


The piping and instrumentation diagram shows the engineering details of the equipment,
instruments, piping, valves and fittings; and their arrangement.

Figure 6-1.2: Polymer Production Diagram


42

In the polymer production flow sheet above, all the following information should be
included in the P&ID:

1. All process equipment identified by an equipment number. The equipment should be


drawn roughly in proportion, and the location of nozzles shown.
2. All pipes, identified by a line number. The pipe size and material of construction
should be shown. The material may be included as part of the line identification number.
3. All valves control and block valves, with an identification number. The type and size
should be shown. The type may be shown by the symbol used for the valve or included in
the code used for the valve number.
4. Ancillary fittings that are part of the piping system, such as inline sight-glasses,
strainers and steam traps; with an identification number.
5. Pumps, identified by a suitable code number.
6. All control loops and instruments, with an identification number.
For simple processes, the utility (service) lines can be shown on the P and I diagram.
For complex processes, separate diagrams should be used to show the service lines, so the
information can be shown clearly, without cluttering up the diagram. The service
connections to each unit should, however, be shown on the P and I diagram.

6-1.3 Valve Selection


Control of flow in lines and provision for isolation of equipment when needed are
accomplished with valves. Depending on primary function, valves are classified as:
1. Shut-off valves (block valves), whose purpose is to close off the flow.
2. Control valves, both manual and automatic, used to regulate flow.
Figure 6-3 shows the valves commonly encountered in industry.

43

Figure 6-1.3: Commonly used Valves


The main types of valves used are:
Gate

Figure 6-1.3a

Plug

Figure 6-1.3b

Ball

Figure 6-1.3c

Globe

Figure 6-1.3d

Diaphragm

Figure 6-1.3e

6-1.3.1 Gate valves


In gate valves, the flow is straight through and is regulated by raising or lowering the
gate. The majority of valves in the plant are of this type. In the wide open position they
cause little pressure drop.

44

6-1.3.2 Globe valves


In globe valves, the flow changes direction and results in appreciable friction even in the
wide open position. This kind of valve is essential when tight shutoff is needed,
particularly of gas flow.

The ball and plug valves are also frequently used for the purpose of flow shutoff.
Butterfly valves are often used for the control of gas and vapor flows. Automatic control
valves are basically globe valves with special trim design.

SESSION 6-2: In this session we shall discuss the classification of pumps and factors to
consider in pump selection.

6-2.1 Introduction of Pumps


They are mechanical devices used to increase the energy of a liquid stream flowing in a
closed conduit or pipe. This energy may be used to increase the velocity (move the fluid),
the pressure or the elevation of the fluid.

6-2.2 Classification of Pumps


Pumps are generally classified into two main categories namely:

Centrifugal pumps

Positive displacement pumps

45

Table 6-2.1: Main Types of Pumps


Category
Centrifugal

Types
Single-stage

Structure
Volute
Diffuser

Multi-stage

Regenerative
Vertical
Hellico-centrifugal
Axial flow

Positive

Rotary

Gear

displacement

Screw
Vane
Reciprocating

Piston
Diaphragm
Plunger

There are many subgroups of pumps as indicated in Table 6-2.1.

6-2.3 Factors to Consider in Pump Selection

Capacity (flow rate in m3/h)

The pressure head that is generated by the pump

The type of liquid pumped (its viscosity and vapour pressure under inlet
conditions)

An initial selection is generally made based on the first two criteria mentioned, i.e. the
capacity and the pressure generated.
The centrifugal pump is often the only possible choice for high capacities whereas
positive displacement pumps are better suited to generating high pressure heads.
Other criteria such as the viscosity of the liquid can modify this initial choice. A positive
displacement pump is generally recommended to pump liquids with a viscosity higher
than 2000 cP. Figure 6-2.1shows the approximate range of operation generally covered
by the main types of pump mentioned above.

46

Figure 6-2.1: Approximate Range of Operation for the Three Main Types of Pump

6-2.4 Centrifugal Pumps


Basically consists of an impeller equipped with radial vanes rotating inside a shell called
the pump casing. It works by the transfer of centrifugal force of the rotating impeller into
kinetic energy of the liquid. This energy is then converted into pressure when the fluid
velocity decreases.

6-2.4.1 Effective characteristic curves


A centrifugal pump is characterized by 4 basic curves, all of which are expressed versus
the flow rate as shown in Figure 6-2.2.
A. The head generated
B. The mechanical/hydraulic conversion efficiency
C. The mechanical power input consumed at the shaft
D. The pump suction capacity or NPSH.

47

Figure 6-2.2: Basic Curves Characterizing a Centrifugal Pump.

6-2.4.2 Design parameters of centrifugal pumps


-

The rotation speed

The number of impellers

The impeller diameter

The impeller design

6-2.4.3 Operating point


The pressure head HA required by the installation is represented by the system curve
versus flow rate, Q. It is the sum of the static and dynamic heads of the installation as
shown in Figure 6-2.3. The static heads are independent of the flow rate and include
differences in height and pressure between the unit inlet and outlet. The dynamic heads
correspond to pressure drops and are proportional to the square of the flow rate.

48

Figure 6-2.3: Curve Characteristic of the System.

A centrifugal pump adjusts itself on an operating point B, corresponding to the


intersection between the Q/H curve of the pump and the H A curve of the system (Figure
6-2.4). A variation in the operating point (and therefore in the flow rate and the head) can
be obtained by a physical modification in the pump, but also by modifying its speed or
the system curve, usually by means of a valve.

Figure 6-2.4: Variation of Operating Point by means of a Valve.

49

6-2.4.4 Q/H Curve versus Technical Choices


1. Basic choices; concept of specific speed
The number Nq, called the specific speed, allows all centrifugal pumps to be compared
with one another. It is calculated from the following expression:

Nq

N Q
60H

With:
N = rotational speed in rpm
Q= flow rate the best efficiency in m3/h (through one eye if double-suction impeller)
H= head in m generated at the best efficiency (for one stage)
For the same specific speed, the hydraulic designs will be similar on varying scales. The
choice of Nq is a major parameter in impeller hydraulic design (Figure 6-2.5). The
specific speed also considerably influences the best efficiency achievable by a pump. If
high pressure is required, a compromise will have to be found between a reasonable
number of stages and an acceptable number efficiency.

Figure 6-2.5: Variation in Specific Speed versus the Type of Impeller used.

2. Choice of Design: Concept of Q/H Curve Slope


For a given hydraulic choice, the different design parameters, in particular the number of
vanes can modify the curve shape downward, flat or bell-shaped (Figure 6-2.6). These
curves should be considered according to the requirements of the resisting network. Bellshaped curves in particular, should be avoided for pumps that have to work in parallel
(risk of instability).
50

Figure 6-2.6: Different Types of Characteristic Curves

6-2.4.5 Choice of Rotation Speed


The rotation speed is a dominant parameter for the characteristic curve of a centrifugal
pump. Figure 6-2.7 shows how the operating point varies with speed. The flow rate varies
linearly with speed:

Q2 Q1

N2
N1

The head generated varies with the square of the speed:


N
H 2 H 1 2
N1

As a result, the power absorbed varies with the cube of the speed
N
P2 P1 2
N1

51

Figure 6-2.7: Variation in the Operating Point versus the Rotation Speed.

6-2.4.6 Suction Conditions: Concept of NPSH


Vapour pressure
For a given temperature, each liquid has a specific boiling pressure, called the vapour
pressure Tv. if the pressure at one point in the liquid becomes less than T v, the liquid
vaporizes instantly.
Cavitation
The lowest static pressure inside a centrifugal pump is located at the impeller inlet. If
vaporization begins at this point, the liquid will be repressurized nearby downstream. The
bubbles formed condense by collapsing suddenly, most often near a wall. This very noisy
phenomenon is called cavitation. The head generated by the pump and the absorbed
power then drop, the vibrations and noise increase and erosion can be observed, mainly in
the impeller, in the form of characteristic pits. If the pump is kept working under these
conditions, permanent damage may occur.
Required NPSH
To prevent cavitation, the total liquid pressure at the inlet must be such that no
vaporization can occur. The minimum value depends on the pump design
Available NPSH
It is the pressure available to force a given flow through the suction piping into the pump.
This is a function of the system. It is easily calculated with the formula below.

52

EXAMPLE 6-1.1: Pressure drop calculation


A pipeline connecting two tanks contains four standard elbows, a plug valve that is fully
open and a gate valve that is half open. The line is commercial steel pipe, 25mm internal
diameter, length120m. The properties of the fluid are: viscosity 0.99mNm-2s, density
998kg/m3.Calculate the total pressure drop due to friction when the flow rate is 3500
kg/h.
SOLUTION 6-1.1
Cross-sectional area of pipe =
Fluid velocity, u =

25 10 3
4

0.491 10 3 m 2

3500
1
1

1.98m / s
3
3600 0.491 10
998

998 1.98 25 10
3

Reynolds number, Re =

9.9 10 4

49,900 5 10 4
Absolute roughness commercial steel pipe = 0.046mm
Relative roughness =

0.046
0.0018 , round to 0.002
25 10 3

From friction factor chart, f = 0.0032


Fitting/valve

Number of velocity Equivalent


heads, K

pipe diameters

Entry

0.5

25

Elbows

(0.84)

(404)

Globe valve, open

6.0

300

Gate valve, open 4.0

200

Exit

1.0

50

Total

14.7

735
53

Method 1, velocity heads


A velocity head

u2
1.98 2

0.20m of liquid,
2 g 2 9.8

Head loss = 0.20 14.7 = 2.94 m


As pressure = 2.94 998 9.8 = 28,754 N/m2
Friction loss in pipe, Pf 8 0.0032

120
1.98 2

998

2
25 10 3

= 240,388 N/m2
Total pressure = 28,754 + 240,388 = 269,142 N/m2 = 270 kN/m2

Method 2, equivalent pipe diameters


Extra length of pipe to allow for miscellaneous losses
= 735 25 10-3 = 18.4 m
So total length for P calculation = 120 + 18.4 m

Pf 8 0.0032

138
1.98 2

998

2
25 10 3

= 277 kN/m2
Note: the two methods will not give the same results. The method of velocity heads is the
more fundamentally correct approach. But the use of equivalent diameters is easier to
apply and sufficiently accurate for use in design calculations.

54

SELF ASSESSMENT 6-1


A process fluid is pumped from the bottom of one distillation column to another, using a
centrifugal pump. The line is standard commercial steel pipe 75 mm internal diameter.
From the column to the pump inlet the line is 25 m long and contains six standard elbows
and a fully open gate valve. From the pump outlet to the second column the line is 250 m
long and contains ten standard elbows, four gate valves (operated fully open) and a flowcontrol valve. The fluid level in the first column is 4 m above the pump inlet. The feed
point of the second column is 6 m above the pump inlet. The operating pressure in the
first column is 1.05 bara and that of the second column 0.3 barg. Determine the operating
point on the pump characteristic curve when the flow is such that the pressure drop across
the control valve is 35 kN/m2. The physical properties of the fluid are: density 875 kg/m3,
viscosity 1.46 mNm-2s.
Pump characteristic
Flow-rate, m3/h 0.0 18.2 27.3 36.3 45.4 54.5 63.6
Head, m of liquid 32.0 31.4 30.8 29.0 26.5 23.2 18.3

55

UNIT
PROCESS ECONOMICS: COST ESIMATION
Introduction
This unit discusses the estimation of capital investment, total product cost and the
determination of breakeven point.

Learning Objectives
After reading this unit, you should be able to:
1. Define total capital investment
2. Apply the Marshall & Swift cost index and capacity ratio to estimate
equipment cost
3. Distinguish between fixed capital and working capital
4. Define turnover ratio
SESSION 7-1 In this session we shall discuss the estimation of capital investment.
Further we shall discuss fixed capital investment, working capital, cost indices and turnover ratio.

7-1.1 Cost Estimation


An acceptable plant design must present a process that is capable of operating under
conditions which will yield a profit. Since net profit equals total income minus all
expenses, it is essential that the chemical engineer be aware of the many different types
of cost involved in manufacturing process. Capital must be allocated for direct plant
expenses, such as those for raw materials, labor and equipment. Besides direct expenses,
many other indirect expenses are incurred and these must be included if a complete
analysis of the total cost is to be obtained. Examples of these indirect expenses are
administrative salaries, product-distribution cost, and cost for interplant communications.

A capital investment is required for any industrial process, and determination of the
necessary investment is an important part of a plant-design project. The total investment
for any process consist of fixed-capital investment for physical equipment and facilities
in the plant plus working capital which must be available to pay salaries, keep raw
materials and products on hand and handle other special items requiring a direct cash
outlay.

56

Thus in an analysis of cost in industrial processes, capital investment costs,


manufacturing costs, and general expenses including income taxes must be taken into
consideration.

7-1.2 Cash Flow for Industrial Operations


Figure 7-1.1 shows the concept of cash flow for an overall industrial operation.

Figure 7-1.1: Cash Flow for an Overall Industrial Operation.

57

7-1.3 Factors affecting Investment and Production Costs

Sources of equipment

Price fluctuations

Company policies

Operating time and rate of production

Governmental policies

7-1.4 Capital Investment


Before an industrial plant can be put into operation, a large sum of money must be
supplied to purchase and install the necessary machinery and equipment. Land and
service facilities must be obtained, and the plant must be erected complete with all
piping, controls, and services. In addition it is necessary to have money available for the
payment of expenses involved in the plant operation.

Fixed capital investment


The capital needed to supply the needed manufacturing and plant facilities.

Working capital
The capital necessary for the operation of the plant

Total capital investment = Fixed capital investment + Working capital

Fixed capital investment= Manufacturing fixed capital investment + Nonmanufacturing fixed capital Investment.

Manufacturing fixed capital investment: the fixed capital necessary for the
installed process equipment with all auxiliaries that are needed for complete
process operation. These include expenses for piping, instruments, insulations,
foundations, and site preparation.

58

Non- manufacturing fixed capital investment: the fixed capital required for
construction overhead and for all plant components that are not directly related to
the process operation. These plant components include the land, processing
buildings, administrative and other offices, warehouses, laboratories,
transportation, shipping and receiving facilities, utilities and waste disposal
facilities, shops and other permanent parts of the plant.

Construction overhead cost: consists of field-office and supervision expenses,


home-office expenses, engineering expenses, miscellaneous construction costs,
contactors fees and contingencies. In most cases, construction overhead is
proportioned between manufacturing and non-manufacturing fixed-capital
investment.

Working capital: the working capital for an industrial plant consist of the total
amount of money invested in

o Raw materials and supplies carried in stock


o Finished products in stock and semi-finished products in process of being
manufactured
o Accounts receivable
o Cash kept on hand for monthly payment of operating expenses , such as
salaries, wages, and raw materials purchases
o Accounts payables
o Taxes payables

The ratio of working capital to total capital investment varies with different
companies. Most chemical plants use an initial working capital of 10 to 20 percent
of the total capital investment. It is 50% or more for companies producing
products of seasonal demand because of the large inventories which must be
maintained for appreciable period of time.

59

7-1.5 Estimation of Capital Investment


7-1.5.1 Introduction
Of the many factors which contribute to poor estimates of capital investments, the most
significant one is usually traceable to sizeable omissions of equipment, services, or
auxiliary facilities rather than to gross errors in costing. A check list of items covering a
new facility is an invaluable aid in making a complete estimation of the fixed capital
investment. A typical list of items for estimating fixed capital investment is:
Direct cost
1. Purchased equipment; all equipments listed on a flow sheet
2. Purchased-equipment installation
3. Instrumentation and controls
4. Piping
5. Electrical equipment and materials
6. Buildings(including services)
7. Yard improvements
8. Service facilities
9. land
Indirect cost
1. Engineering and supervision
2. Construction expenses
3. Contractors fees
4. Contingencies

7-1.5.2 Types of capital cost estimates


An estimate of the capital investment for a process may vary from a predesign estimate
based on little information except the size of the proposed project to a detailed estimate
prepared from complete drawings and specifications. The following five categories
represent the accuracy range and designation normally used for design purposes:
1. Order-of-magnitude estimate(ration estimate) based on similar previous cost data:
probable accuracy of estimate over 30 percent
60

2. Study estimate (factored estimate) based on knowledge of major items of


equipment; probable accuracy of estimate up to 30 percent

3. Preliminary estimate (budget authorization estimate; scope estimate) based on


sufficient data to permit the estimate to be budgeted; probable accuracy of
estimate within 20 percent.

4. Definitive estimate(project control estimate) based on almost complete data but


before completion of drawings and specifications; probable accuracy of estimate
within 10 percent

5. Detailed estimate (contractors estimate) based on complete engineering


drawings, specifications and site surveys; probable accuracy of estimate within
5 percent.
7-1.5.3 Cost indexes
Most cost data which are available for immediate use in a preliminary or predesign
estimate are based on conditions at some time in the past. Because prices may change
considerably with time due to changes in economic conditions, some methods must
be used for updating cost data applicable at a past date to costs that are representative
of conditions at a later time. This is done using a cost index.
A cost index is hence an index value for a given point in time showing the cost of an
equipment or plant at that time relative to a certain base time.

index value at present time

Pr esent cost Original cost


index value at time original cost was obtained
Cost indexes can be used to give a general estimate, but no index can take into
account all factors, such as special technological advancements or local conditions.
The common indexes permit fairly accurate estimates if the time period involved is
less than 10 years.

61

Some indexes are used for estimating equipment cost, others apply specifically to
labor, construction, materials etc.
The most common of these indexes are the Marshall and Swift all-industry and
process-industry equipment indexes, the Engineering New-Record construction index,
the Nelson refinery construction index and the Chemical Engineering plant cost
index. This is shown in Table 7-1.1.

Table 7-1.1: Cost indexes as Annual Averages

7-1.5.4 Methods for Estimating Capital Investment


7-1.5.4.1 Power factor applied to plant-capacity ratio:

C n CFeR

Where:
R = size (or capacity) ratio of equipment=

capacity of new equipment or plant


capacity of old equipment or plant
62

Fe = equipment cost index ratio=

index value in present time


index value at the time original cost was obtained

n = equipment size (or capacity) exponent


C = purchased cost of old equipment
Cn = purchased cost of new equipment
Table 7-1.2 shows typical exponents for equipment cost vs. capacity

Table 7-1.2 Typical Exponents for Equipment Cost vs. Capacity

63

EXAMPLE 7-1.1
If a process plant was erected in Kumasi at a fixed capital investment of $436,000 in
1970, determine what the capital investment will be in 1975 for a similar process plant
located near Dansoman in Accra with twice the process capacity but with an equal
number of process equipment.

SOLUTION 7-1.1

C n CFeR

Where:
R = size ( or capacity) ratio of equipment
Fe = equipment cost index ratio
n = equipment size exponent
C = purchased cost of equipment in 1970
Cn = cost of equipment in 1975
From Table 7-1.1
M & S index, 1970 =303,
M & S index 1975 = 444,

From Table 7-1.2


Equipment size exponent, n = 0.6
C n 436,000

444
0 .6
2 $968,378
303

64

7-1.5.4.2 Detailed item estimate


EXAMPLE 7-1.2
Initial design work was done for a chemical plant to revamp the process in order to
recover valuable product from an effluent gas stream. The gas will be scrubbed with a
solvent in a packed column and the recovered product and solvent separated by
distillation. The solvent will then be cooled and recycled. The major items of equipment
required and their purchased costs in cedis are:
Absorption column
Column purchased cost = 19,800
Cost of column packing = 6,786
Recovery column
Column purchased cost = 45,000
Cost of 30 sieve trays = 8,670
Reboiler
Cost of reboiler = 7,600
Condenser
Purchased cost = 4,800
Recycle solvent cooler
Cost of cooler = 2,550
Storage tank
Cost of tank = 7,790
The relevant component factors for this processing plant are;
f1: equipment erection = 0.40
f2: piping = 0.70
f3: Instrumentation = 0.2
f4: electrical = 0.10
f10: design and engineering = 0.30
f12: contingencies = 0.20
Estimate the total capital investment for the project, if the working capital can be taken as
10 % of the fixed capital cost.

65

SOLUTION 7-1.2
Total capital investment, TCI = Fixed capital investment, FCI Working capital, WC
Total purchased cost of equipment, PCE
Absorption column = 19,800 + 6,786 = 26,586
Recovery column = 45,000 + 8,670 = 53,670
Reboiler = 7,600
Condenser = 4,800
Recycle solvent cooler = 2,550
Solvent and product storage tank = 7,790
Total purchased cost of major equipment = 102,996
Equipment erection = 102,996 (0.4) = 41,198
Piping cost = 103,996 (0.70) = 72,097
Instrumentation cost = 102,996 (0.2) = 20,599
Electrical = 102,996 (0.10) = 10,300
Total physical plant cost (Direct cost) = 10,300 + 20,599 + 72,097 + 41,198 + 102,996
= 247,190
Indirect cost
Design and engineering, f10 = 0.30 (247,190) = 74,157
Contingencies = 0.20 (247,190) = 49,436
Total indirect cost = 123,595
Fixed capital investment (Direct cost + Indirect cost) = 247,190 + 123,595 = 370,785
Working capital = 0.10 (370,785) = 37,079
Total capital investment = 370,785 + 37,079 = 407,864
7-1.5.4.3 Other Methods for Estimating Equipment or Capital Investment
(i) Unit cost Estimate
(ii) Percentage of delivered-equipment Cost
(iii) Lang factors for approximation of capital Investment

66

7-1.5.5.Turnover Ratios:
A rapid evaluation method suitable for order-of-magnitude estimates is known as the
turnover ratio method.
Turnover ratio is defined as the ratio of gross annual sales to the fixed capital
investment

Turnoverratio

gross annual sales


fixed capital investiment

Where the product of the annual production rate and the average selling price of the
commodities produced is the gross annual sales figure.

Capital ratio or investment ratio

1
Turnover ratio

Turnover ratio ranges between 0.2 to 5. For chemical industries, as a very rough rule of
thumb, the ratio can be approximated to 1.

SESSION 7-2: In this session we shall study the estimation of total product cost and
determination of breakeven point.

7-2.1 Estimation of Total Product Cost

Manufacturing cost: all expenses directly connected with the manufacturing


operation or the physical equipment of a process plant itself.

There are 3 classifications of these expenses:


Direct production cost: expenses directly associated with the
manufacturing operation. E.g. expenses for raw materials ( including
transportation, unloading)

67

Fixed charges: expenses that remains practically constant from year to


year. Do not vary widely with changes in production rate. E.g. property
taxes, insurance.
Plant overhead cost: are for medical and hospital services; general plant
maintenance and overhead; safety services; social security

General Expenses:
Administrative expenses
Distribution and marketing expenses
Research and development
Financing expenses: extra costs involved in procuring the money
necessary for the capital investment.
Gross earnings expenses

Total Product Cost= Manufacturing cost + General Expenses.

Gross earnings (Gross Profit)= The total income the total product cost.

Net annual earnings = Gross annual earnings income taxes.

Figure 7-2.1 shows the components constituting the estimation of total product cost

68

Figure 7-2.1: Cost Involved in Total Product Cost for a Typical Chemical
Process Plant

7-2.2 Break-even Point


(a) Break-even point occurs (or is the percentage of plant capacity) when the total
annual product cost equals the total annual sales.
i.e: Total Annual Product Cost = Total Annual Sales (total income from all products
sold).This is shown by Figure 7-2.2.

69

Figure 7-2.2 Break-even Chart for Chemical Processing Plant

(b) In a different context, Break-even point is the time reached at which all the
investment has been paid off and the plant begins to make profit as shown in Figure
7-2.3.

70

Figure 7-2.3: Project Cash Flow Diagram

A-B The investment required to design the plant.

B-C The heavy flow of capital to build the plant, and provide funds for start-up.

C-D The cash-flow curve turns up at C, as the process comes on stream and
income is generated from sales. The net cash flow is now positive but the
cumulative amount remains negative until the investment is paid off, at point D.

Point D is known as the break-even point and the time to reach the break-even
point is called the pay-back time. In a different context, the term "break-even
point" is used for the percentage of plant capacity at which the income equals the
cost for production.

D-E In this region the cumulative cash flow is positive. The project is earning a
return on the investment.

E-F Toward the end of project life the rate of cash flow may tend to fall off, due
to increased operating costs and falling sale volume and price, and the slope of the
curve changes.

The point F gives the final cumulative net cash flow at the end of the project life.

71

EXAMPLE 7-2.1
The annual direct production costs for a plant operating at 70 % capacity is $ 280,000
while the sum of the annual fixed charges, overhead costs and general expenses is $
200,000. What is the break-even point in units of production per year if the total annual
sales are $ 560,000 and the product sells at $ 40 per unit?
(ii) What are the annual gross earnings and net profits for this plant at 100 % capacity in
the year 1974 when corporate income taxes required 22 %, normal tax on the total gross
earnings plus 26 % surtax on gross earnings above $ 25,000?

SOLUTION 7-2.1
Units sold per annum selling price per unit = total annual sales
Units sold = $ 560,000 per yr. / $ 40 per unit
= 14,000 units
Total product cost per unit = $ 280,000/14,000
= $ 20 per unit
At break-even,
Total product cost per annum = Total annual sales
$ 200,000 + 20x = 40x
Where x is the units required to break-even
x = 10000 units
Therefore at break-even, 10000 units will be produced.
(ii) Gross annual earnings = total annual sales total annual product cost
= 14,000 units $ 40 per unit/0.70 ($ 200,000 + (14,000 units $ 20per unit/0.7))
= $ 200,000
Net annual earnings
= $ 200,000 [0.22(200,000) + 0.26(175,000)]
= $ 110,500

72

SELF ASSESSMENT 7-1


The total capital investment for a chemical plant is $1 million, and the working capital is
$100,000. If the plant can produce an average of 8000 kg of final product per day during
a 365-day year, what selling price in dollars per kilogram of product would be necessary
to give a turnover ratio of l.0?
SELF ASSESSMENT 7-2
The total capital investment for a conventional chemical plant is $1,500,000, and the
plant produces 3 million kg of product annually. The selling price of the product is
$0.82/kg. Working capital amounts to 15 percent of the total capital investment. The
investment is from company funds, and no interest is charged. Raw-materials costs for
the product are $0.09/kg, labor $0.08/kg, utilities $0.05/kg, and packaging $0.008/kg.
Distribution costs are 5 percent of the total product cost. Estimate the following:
(a) Manufacturing cost per kilogram of product.
(b) Total product cost per year.
(c) Profit per kilogram of product before taxes.
(d) Profit per kilogram of product after taxes (use current rate)

SELF ASSESSMENT 7-3


What is the breakeven point (units/year) for a process plant making 2,000,000 units per
year of products with direct production cost of $1million per year? The selling price per
unit of product is $1.2. Assume 100% capacity production and other fixed charges
amounts to $700,000.

73

UNIT
PROCESS ECONOMICS: DEPRECIATION AND PROFITABILITY ANALYSIS
Introduction
This unit discusses depreciation and the various methods for determining depreciation.
Further, it discusses profitability analysis of process plants..
Learning Objectives
After reading this unit, you should be able to:
1. Define depreciation and distinguish between physical and functional
depreciation.
2. Understand the different methods for estimating depreciation
3. Solve depreciation problems
4. Explain profitability analysis and its importance in process
economics.
SESSION 8-1 In this session we shall discuss depreciation, the different types of
estimating depreciation, service life, salvage value and present value or book value.

8-1.1 Depreciation
An analysis of costs and profits for any business operation requires recognition of the fact
that physical assets decrease in value with age. This decrease in value may be due to
physical deterioration, technological advances, economic changes, and other factors
which ultimately will cause retirement of the property. The reduction in value due to any
of these causes is a measure of the depreciation.
Types of Depreciation
1. Physical depreciation: is the measure of the decrease in value due to changes in
the physical aspect of the property. Wear and tear, corrosion, accidents and
deterioration due to age.
2. Functional depreciation: depreciation due to all other causes. One common type
of functional depreciation is obsolescence. This is caused by technological
advances or developments that make an existing property obsolete. Though the
property does not has suffered no physical change, its economic serviceability is
reduced because it is inferior to improved types of similar assets that have been
made available through advancements in technology.

74

8-1.2 Service life


The period during which the use of a property is economically feasible. Both physical
and functional depreciation are considered in determining service life and the term is
synonymous with economic or useful life. In estimating the probable service life, it is
assumed that a reasonable amount of maintenance and repairs will be carried out at the
expense of the owner.

8-1.3 Salvage Value


It is the net amount of money obtainable from the sale of used property over and above
any charges involved in removal and sales. If a property is capable of further service, its
salvage value may be high. However, other factors such as location of the property,
existing price levels, market supply and demand, and difficulty of dismantling, may have
an effect.
If the property cannot be disposed of as a useful unit, it can often be dismantled and sold
as junk to be used again as a manufacturing raw material. The profit obtainable from this
type of disposal is scrap or junk value.

8-1.4 Present Value


It is the value of an asset in its condition at the time of valuation. Types of present values
are:
1. Book value or unamortized cost: the difference between the original cost of a
property, and all the depreciation charges made to date.
2. Market value: the price which could be obtained for an asset if it were placed on
sale in the open market.
3. The cost necessary to replace an existing property at any given time with one at
least equally capable of rendering the same service.

75

8-1.5 Methods for determining Depreciation


8-1.5.1 Straight line method
With this method, it is assumed that the value of the property decreases linearly
with time. Equal amount are charged for depreciation each year throughout the
entire service life of the property.

V Vs
n

where d annual depreciation, $/year


V original value of the property at start of the service life period, completely
installed and ready for use, dollars.
Vs salvage value of property at end of service life, dollars
n service life, years

The book value ( or asset value)of the equipment at any time during the service
life may be determined from:

Va V ad
where Va book value, dollars
a number of years in actual use
8-1.5.2 Declining balance ( or Fixed percentage) method
When this method is used, the annual depreciation cost is a fixed percentage of the
property value at the beginning of the particular year. The fixed percentage factor
remains constant throughout the entire service life of the property, while the annual cost
for depreciation is different each year. Under these conditions, the depreciation cost for
the first year of the propertys life is Vf.
where f = the fixed-percentage factor.
At the end of the first year,

Asset value Va V (1 f )

76

At the end of the second year,


Asset value Va V (1 f ) 2

At the end of the a year,


Asset value Va V (1 f ) a

At the end of the n year ( i.e. at the end of service life)


Asset value Va V (1 f ) n Vn

Therefore,
1

V n
f 1 s .
V

8-1.5.3 Other methods for determining depreciation:


(i) Sum-of-the-Years-Digits Method and
(ii) Sinking-Fund Method.

77

EXAMPLE 8-1.1
The original cost of a piece of equipment is $ 30,000 completely installed and ready to
use. The salvage value of the equipment is estimated to be $ 5000 at the end of a service
life estimated to be 20 years.
(i) Determine the book value of the equipment at the end of 10 years using (a) straight
line method (b) textbook declining balance method.
(ii) Using the textbook declining method:
(a) What will be the first year depreciation?
(b) What will be the depreciation at the end of the 6th year?

SOLUTION 8-1-1
Original cost, v = $ 30,000
Salvage value, vs = $ 5000
Service life, n = 20 yrs.
Depreciation, d by the straight line method:

v vs
n

30,000 5,000
$1,250
20

Book value at the end of 10 yrs.


v10 = v ad
= 30,000 10(1,250)
= $17,500
(i) b. textbook declining balance method
First year depreciation, d = v f
1

5,000 20
v n
f 1 s 1
0.0857
v
30,000

d = 30,000(0.0857) = $2,571
Asset value after 10 years
v10 = v (1-f)10
= 30,000 (1- 0.0857)10 = $ 12,246
78

(ii) a. first year depreciation


d=vf
= $30,000 0.0857
= $2,571
b. depreciation at the end of 6th year
= $30,000 - $17,525 = $12,475

EXAMPLE 8-1.2
A piece of equipment having a negligible salvage and scrap value is estimated to have a
service life of 10 yrs. The original cost of the equipment was $ 40,000. Determine the
following (i) the depreciation charge for the fifth year if double declining balance
depreciation method is used.

SOLUTION 8-1.2
d

v vs
n

40,000 0
$4,000
10

f = 2(4,000/40,000) = 0.2
The asset value at the end of year 5 is given by:
v5 = 40,000 (1 0.2)5
v5 = $13,107
The asset value at the end of year 4 is given by:
v4 = 40,000 (1 0.2)4
v4 = $16,384
The depreciation for year 5 is:
d = v 4 v5
d = $16,384 - $13,107
d = $2,277
79

EXAMPLE 8-1.3
Consider an equipment costing $20,000 and with a service life estimated at 5 years. If the
scrap value is $2,000, find the depreciation cost for the 1st , 2nd and 3rd years using the
sum-of-the-years-digits method.

SOLUTION 8-1.3
Yearly depreciation factor =
Year 1 depreciation factor

5
0.33
15

Annual depreciation factor = yearly depreciation factor total depreciable value at the
start of the service life
Total depreciable value = $20,000 - $2,000 = $18,000
Year 1 depreciation

5
$18,000 $6,000
15

Depreciation factor for second year

4
15

Second year depreciation cost

4
$18,000 $4,800
15

Third year depreciation factor

3
15

Third year depreciation cost

3
$18,000 $3,600
15

80

SESSION 8-2: In this session, we will discuss profitability analysis, indicating the basis
for evaluating profitability. Further, we will discuss the mathematical methods for
profitability evaluation.

8-2.1 Profitability Analysis


Profitability is generally a term for the measure of the amount of profit that can be
obtained from a given situation. Before capital is invested in a project or enterprise, it is
necessary to know how much profit can be obtained and whether or not it might be more
advantageous to invest the capital in another form of enterprise. Thus, the determination
and analysis of profits obtainable from the investment of capital and the choice of the
best investment amongst various alternatives are major goals of an economic analysis.
The design engineer, however, usually deals with investments which are expected to
yield a tangible profit.

8-2.2 Profitability Standards


In the process of making an investment decision, the profits anticipated from the
investment of funds should be considered in terms of a minimum profitability standard.
The profitability standard, which can normally be expressed on a direct numerical basis,
must be weighed against the overall judgment evaluation for the project in making the
final decision as to whether or not the project should be undertaken.

The judgment evaluation must be based on the recognition that a quantified profitability
standard can serve only as a guide. Thus it must be noted that the profit evaluation is
based on a prediction of future results so that assumptions are necessarily included. Many
intangible factors, such as future changes in demand or prices, possibility of operational
failure, or premature obsolescence, cannot be quantitized. It is in areas of this type that
judgment becomes critical in making a final investment decision.
A primary factor in the judgment decision is the consideration of possible alternatives.
For example, the alternative to continuing the operation of an existing plant may be to
replace it with a more efficient plant, to discontinue the operation entirely, or to make
modifications in the existing plant.
81

8-2.3 Basis for Evaluating Project Profitability


Total profit alone cannot be used as the deciding profitability factor in determining if an
investment should be made. The profit goal of a company is to maximize income above
the cost of the capital which must be invested to generate the income. If the goal were
merely to maximize profits, any investment would be accepted which would give a profit,
no matter how low the return or how great the cost.

EXAMPLE 8-2.1
Assume two equally sound investments A and B could be made.
Investment A: Capital needed=$100,000; Profit yielded=$10,000/year
Investment B: Capital needed=$1 million; Profit yielded=$25,000/year
Which of the investments is worthy of undertaking?

SOLUTION 8-2.1
Investment B gives a greater yearly profit than A but annual rate of return on the second
investment is only
($25,000/$1,000, 000) x100=2.5%
While annual rate of return on $100,000 is 10%.

Because reliable bonds and other conservative investments would yield annual rates of
return in the range of 6 to 9%, the $1 million investment in this example would not be
very attractive; the 10% return on the $100,000capital would make this investment
worthy of careful consideration.

Therefore, the rate of return rather than the total amount of profit is the important
profitability factor in determining if the investment should be made.

82

8-2.4 Mathematical Methods for Profitability Evaluation


The most commonly used methods for profitability evaluation are:
1. Rate of return on investment
2. Discounted cash flow rate of return based on full-life performance
3. Capitalized cost
4. Payout period
5. Net present worth
Note: No single method is best for all cases.

8-2.4.1 Rate of return on investment


ROR

Profit
100%
Total initial investment Years

Profit= income expenses

Total investment determination; consider both fixed capital and working


capital

To determine profit; estimates must be made of direct production cost,


fixed charges including depreciation, plant overhead costs, general
expenses

Profits may be expressed on a before-tax or after-tax basis but the


condition must be indicated.

NOTE :

Pay-back time is the reciprocal of ROR

83

EXAMPLE 8-2.2
A proposed manufacturing plant requires an initial fixed capital investment of $900,000
and $100,000 of working capital. It is estimated that the annual income will be $800,000
and the annual expenses including depreciation will be $520,000 before income taxes. A
minimum annual return of 15% before income taxes is required before the investment
will be worthwhile. Income taxes amount to 48% of all pre-tax profits. Determine the
following:
a. The annual percent return on the total initial investment before income taxes.
b. The annual percent return on the total initial investment after income taxes

SOLUTION 8-2.2
(a ) Total Capital Investment 900,000 100,000 1,000,000
Annual Profit before tax 800,000 520,000 280 ,000
Pr ofit
100%
Total initial investment year
280,000
Annual % ROR
100%
1,000,000 1
% ROR 28%
Annual Percentage ROR

(b) Annual Profit after tax 0.52 280,000 145,600


145,600
100%
1,000,000 1
% ROR 14.56%

Annual % ROR

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8-2.4.2 Discounted cash flow


The method of approach for a profitability evaluation by discounted cash flow takes into
account the time value of money and it is based on the amount of the investment that is
unreturned at the end of each year during the estimated life of the project. A trial and
error procedure is used to establish a rate of return which can be applied to a yearly
cash flow so that the original investment is reduced to zero (or to salvage and land value
plus working-capital investment) during the project life. Thus, the rate of return by this
method is equivalent to the maximum interest rate ( normally after taxes) at which money
could be borrowed to finance the project under conditions where the net cash flow to the
project over its life would be just sufficient to pay all principal and interest accumulated
on the outstanding principal.

This particular rate is called the discounted cash flow rate of return (DCFRR) and it is a
measure of the maximum rate that the project could pay and still breakeven by the end of
the project life.
n t

NFW
0
n
n 1 (1 r )

The Total NPW (orNPV)


where
NPW net present worth
NPV net present value
NFW net future worth

r discounted rate (interest rate)


t life of project
n nth year

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EXAMPLE 8-2.3
Initial fixed capital investment = $100,000
Working capital investment = $10,000
Salvage value at end of service-life = $10,000
The predicted after-tax cash flow to project based on total income minus all costs except
depreciation in dollars is shown in the table below. Estimate the discounted cash flow
rate of return (DCFRR).
Year

Cash flow into


the project,$

110,000

30,000

31,000

36,000

40,000

43,000

SOLUTION 8-2.3
The discounted factor is given by:
1

1 i n
Where
i = discounted cash flow rate of return
n = year
Sample calculation of Present value
For i = 0.10
Present value in year 1 = $30,000
Present value in year 2 = $31,000

1
$27,273
1 0.1
1

1 0.12

$25,620

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The DCFRR is the interest rate at which the initial capital investment is equal to the sum
of the present values.
The DCFRR is estimated by a trial and error approach. The table of values is shown
below.
Year

Cash

Present

flow,$

value

Present

Present

Present

at value at value at value at

i=0.10

i=0.15

i=0.20

i=0.1763

30,000

27,273

26,087

25,000

25,504

31,000

25,620

23,440

21,528

22,404

36,000

27,047

23,671

20,833

22,118

40,000

27,321

22,870

19,290

20,892

43,000

26,700

24,585

17,281

19,093

Total

$133,961

$120,653

$103,932 $110,011

From the table, the discounted cash flow rate of return is estimated to be 17.63%.

8-2.4.3 Capitalized cost


The capitalized cost profitability concept is used for comparing alternatives which exists
as possible investment choices within a simple overall project.

For example, if a decision based on profitability analysis were to be made as to whether


stainless-steel or mild-steel should be used in a chemical reactor as one part of a chemical
plant, capitalized cost comparison will be a useful and appropriate approach.

Capitalized cost related to investment represents the amount of money that must be
available initially to purchase the equipment and simultaneously provide sufficient funds
for interest accumulation to permit perpetual replacement of the equipment.

If only one portion of an overall process to accomplish a set objective is involved and
operating costs do not vary, then the alternative giving the least capitalized cost would be
87

the desirable economic choice.

Basic equation for capitalized cost is:

K Cv

CR
C R (1 i ) n

Vs
(1 i ) n 1 (1 i ) n 1

where
K Capitalized cost
C R Re placement cost
C v Original cost of equipment
Vs Salvage value at end of estimated useful life
n Estimated useful life of equipment
i int erest rate
(1 i ) n
capitalised cost factor
(1 i ) n 1

EXAMPLE 8-2.4
A reactor, which will contain corrosive liquids, has been designed. If the reactor is made
of mild-steel, the initial installed cost will be $5000 and the useful life period will be 3
years. Since stainless- steel is highly resistant to the corrosive action of the liquids,
stainless- steel as the material of construction has been proposed as an alternative to mildsteel. The stainless-steel reactor will have an initial installed cost of $15,000. The scrap
value at the end of the useful life would be zero for either type of reactor, and both could
be replaced at the cost equal to the original price. On the basis of equal capitalized cost
for both types of reactors, what should be the useful life period for the stainless-steel
reactor if money is worth 4% compounded annually?

88

SOLUTION 8-2.4

Capitalized cost for mild steel is :


CR
5000
K Cv
5000
n
(1 i ) 1
(1 0.04) 3 1
K $45,030
therefore, capitalized cost for stainless steel reactor must also be $45, 030.
For stainless steel reactor,
CR
15000
45,030 C v
15000
n
(1 i ) 1
(1 0.04) n 1
n 10.4 years
Thus, the useful-life period of a stainless-steel should be 10.4 years for the two types of
reactors to have equal capitalized cost.

If the stainless-steel reactor would have a useful life of more than 10.4 years, it would be
the recommended choice, while the mild-steel reactor would be recommended if the
useful-life using the stainless-steel were less than 10.4 years.

8-2.4.4 Payout period (or Pay-back time)


Payout period or pay-back time is the minimum length of time theoretically necessary to
recover the original capital investment in the form of cash flow to the project based on
total income minus all costs except depreciation. In other words, it is the length of time to
reach a cumulative cash flow of zero. Generally for this method, original capital
investment means only the original, depreciable, fixed-capital investment, and interest
effects are neglected. Thus

Payout period in years

depreciable fixed capital investment


avg profit/yr avg depreciation/yr

89

Pay-back time (or payout period), is a useful criterion for judging projects that have a
short life, or when the capital is only available for a short time. It is often used to judge
small improvement projects on operating plants. Typically, a pay-back time of 2 to 5
years would be expected from such projects.
Pay-back time as a criterion of investment performance does not, by definition, consider
the performance of the project after the pay-back period.

8-2.5 Sensitivity Analysis


The economic analysis of a project can only be based on the best estimates that can be
made of the investment and the cash flows. The actual cash flows achieved in any year
would be affected by any changes in raw material costs and other operating costs and will
be very dependent on the sales volume and price.
A sensitivity analysis, therefore, is a way of examining the effects of uncertainties in the
forecasts on the viability of a project.

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SELF ASSESSMENT 8-1


The original value of a piece of equipment is $22,000, completely installed and ready for
use. Its salvage value is estimated to be $2000 at the end of a service life estimated to be
10 years. Determine the asset ( or book) value of the equipment at the end of 5 years
using:
(a) Straight line method
(b)Text book declining-balance method

SELF ASSESSMENT 8-2


A process modification to a small process unit has the following cash flow profile:
Year
0
1
2
3
4
5

Cash Flow $
-91,093
20,000
40,000
40,000
40,000
30,000

Calculate the discounted cash flow rate of return (DCFRR) of the project.
HINT: Use discount rates from 10% to 30%

91

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