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TECHNOLOGY, KUMASI
INSTITUTE OF DISTANCE LEARNING
CHE 451
Chemical Process Design & Economics
(Credits: 4)
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.
ii
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%
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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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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2
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5
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9
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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
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.
1-1.2.2 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.
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.
1-1.3.4 Selection
The selection process can follow the following screening stages:
To select the best design from the probable designs, detailed design work and costing will
be necessary.
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 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 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.
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.
6
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.
.
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UNIT
11
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
13
Information flows are the values of the variables which are involved in the design.
Example:
Input stream
Output stream
variables
variables
Flow rate
Composition
Temperature
Pressure
Enthalpy
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.
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.
14
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.
Input
Process Unit
Output
15
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.
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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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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.
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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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A DL 2 D 2 DL D 2
2
4
D2
2
(1)
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
4V
D
D
(3)
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.
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.
-
m m (v1 , v 2 , v3 ,.......v n ) 0
-
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).
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.
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Nonproductive period; this is the period when the product is discharged and
equipment prepared for the next batch.
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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.
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)
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
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;
-
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Heuristic 5: Do not purge valuable species or species that are toxic and hazardous, even
in small concentrations
-
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
Dichloropropane
dichloropropene
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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.
EtOAc +H2O
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Heuristic 9: attempt to condense vapour mixtures with cooling water, then use heuristic
8.
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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.
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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:
understanding the importance of selecting reaction paths that do not involve toxic
or hazardous chemicals.
Towers/ Columns
o Height: 2-50m
o L/D: 2-30m
2. Heat Exchangers
Several kinds are used
-
Area: 10-1000m2
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Minimum temperature approach: for fluids 10oC and for refrigerants, 5oC
4. Towers/ Columns
Tower operating pressure is usually determined by the temperature of condensing
medium or maximum allowable reboiler temperature
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.
Tower design
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For a liquid use a pump; for a vapour first condense it and pump it into an
evaporatior
Note that , compressors are high cost items: large capital cost and high power
consumption
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)
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Chilled water
Active refrigeration
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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.
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Flowsheet topography
Uses are:
-
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Convergence tolerance
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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
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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.
In the polymer production flow sheet above, all the following information should be
included in the P&ID:
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Figure 6-1.3a
Plug
Figure 6-1.3b
Ball
Figure 6-1.3c
Globe
Figure 6-1.3d
Diaphragm
Figure 6-1.3e
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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.
Centrifugal pumps
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Types
Single-stage
Structure
Volute
Diffuser
Multi-stage
Regenerative
Vertical
Hellico-centrifugal
Axial flow
Positive
Rotary
Gear
displacement
Screw
Vane
Reciprocating
Piston
Diaphragm
Plunger
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.
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Figure 6-2.1: Approximate Range of Operation for the Three Main Types of Pump
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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.
Q2 Q1
N2
N1
As a result, the power absorbed varies with the cube of the speed
N
P2 P1 2
N1
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Figure 6-2.7: Variation in the Operating Point versus the Rotation Speed.
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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
pipe diameters
Entry
0.5
25
Elbows
(0.84)
(404)
6.0
300
200
Exit
1.0
50
Total
14.7
735
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u2
1.98 2
0.20m of liquid,
2 g 2 9.8
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
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.
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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.
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.
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Sources of equipment
Price fluctuations
Company policies
Governmental policies
Working capital
The capital necessary for the operation of the plant
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.
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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.
Working capital: the working capital for an industrial plant consist of the total
amount of money invested in
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.
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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.
C n CFeR
Where:
R = size (or capacity) ratio of equipment=
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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,
444
0 .6
2 $968,378
303
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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
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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
Where the product of the annual production rate and the average selling price of the
commodities produced is the gross annual sales figure.
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.
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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
Gross earnings (Gross Profit)= The total income the total product cost.
Figure 7-2.1 shows the components constituting the estimation of total product cost
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Figure 7-2.1: Cost Involved in Total Product Cost for a Typical Chemical
Process Plant
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(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.
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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.
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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
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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.
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75
V Vs
n
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
Therefore,
1
V n
f 1 s .
V
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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
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
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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
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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
4
15
4
$18,000 $4,800
15
3
15
3
$18,000 $3,600
15
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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.
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.
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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.
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Profit
100%
Total initial investment Years
NOTE :
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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
Annual % ROR
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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 )
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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
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
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%.
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
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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?
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SOLUTION 8-2.4
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.
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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.
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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%
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