1

Introduction

Economics is ever present in our lives because we earn money from our jobs and
we spend money allocated by our personal budgets for housing, clothing,
transportation, entertainment, etc. We spend money for these items based upon
the perceived economic utility. Further, economics is the engine that drives
industry.
Chemical engineering students in their formal education devote most of
their efforts to the study of science and technology, including courses in
chemistry, physics, mathematics, thermodynamics, kinetics, transport theory,
unit operations, and design. The student learns how to utilize various physical
phenomena in the design and operation of chemical plants. To function in
industry today, the chemical engineer must understand and be able to apply more
than just science and technology. Unlike many of the subjects studied in the
chemical engineering curriculum, economics is not a science. In fact, it is more
art than science but there are certain definitions, techniques, and principles that
must be understood to use economics in a correct manner. The engineer must
apply this entire body of knowledge to accomplish something of benefit to
society.
Chemical engineering students in accredited programs take courses such as
those shown in Figure 1.1, beginning in the lower right-hand corner of the
triangular diagram with the technical/scientific courses [1]. As the student
progresses in the program, basic chemical engineering courses cited in the
previous paragraph are studied, culminating in the capstone process design
course. Engineering students take at least one engineering economics course
besides the classical economics course in business schools. Students may wish to

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Copyright © 2003 by Marcel Dekker, Inc. All Rights Reserved.
2 Chapter 1

FIGURE 1.1 Decisive factors and university courses.

take other business courses such as accounting and finance to increase their
knowledge of business. Of particular importance today are the humanities
courses with special emphasis on the sociopolitical issues that form a basis for
understanding political, environmental, health, and safety issues. These courses
are important and give insights to chemical engineering students, helping them to
appreciate the economic constraints affecting the application of technology that
management encounters in making decisions about future projects.
Chemical engineers in the performance of their jobs will employ
economics in the preparation of capital cost estimates, operating expense
estimates, profitability analyses including the time value of money, feasibility
studies, and to perform sensitivity and uncertainty analyses considering many
alternatives. To move up the management ladder, they must have a working
knowledge of balance sheets, income statements, and financial analyses of a
corporate venture. This fundamental information in annual reports is covered in
this text.
In the development of an industrial project, economics plays a significant
role at various stages as the project progresses. Initially, an idea or need for the
manufacture of a product may originate from customers, marketing, or research
personnel. The development of the project is a team effort involving research and
development, marketing, manufacturing, engineering, and management.
Research and development and engineering personnel will evaluate the idea
with thermodynamic and kinetic appraisals of the proposed process to determine
if the product can be made in reasonable quantities and rates. Small amounts of
the product may be made for customers to evaluate the product. If the product

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Copyright © 2003 by Marcel Dekker, Inc. All Rights Reserved.
Introduction 3

seems promising, crude estimates of the capital required and the operating
expenses may be made. If on the other hand, this process is not feasible at this
stage, it may be abandoned or alternate processes may be considered. As the
number of technical alternatives are developed, economic issues become
dominant. Some of these may be the availability and prices of equipment, sources
of raw materials, plant size, etc. to determine which alternative is most efficient in
the utilization of resources. Let’s assume that the original idea seemed to be
promising. A preliminary economic study of capital costs, operating expenses,
and profitability will be prepared. Simultaneously, marketing personnel will
conduct a domestic and global market survey to determine potential sales
volume. The results are reported to management and if they are promising, large-
scale laboratory or pilot plant studies are performed to obtain the required process
engineering data for the proposed plant. Marketing needs to be involved at every
stage in the development of the project, so further marketing information
including potential price structure, competition, and share of the market is
gathered. Again, if the results are not favorable, the project may be abandoned or
recycled back to a previous step for further study. If the project appears to be
feasible, then more detailed process engineering data, capital costs, operating
expenses and market data are obtained to prepare a request for an appropriation to
do definitive or detailed engineering. Once the appropriation meeting the criteria
for a capital expenditure has been approved, the detailed engineering begins.
Again there is the possibility that the economics may not be attractive and the
project may be curtailed or recycled back to a previous step. It is apparent from
the above project description that the overall procedure is an iterative one.
In today’s economy many companies outsource the detailed engineering to
consulting-design-engineering firms who have the dedicated staffs to perform
these tasks, as many chemical companies do not have large numbers of personnel
required due to downsizing. It should be pointed out that engineers continually
monitor costs and economics at every stage of a project, including detailed
design, construction, and startup of the facility. Once the unit comes on stream
and the plant has been turned over to operating personnel for routine operation,
economics are very important since the company is now committed to the
process. The final step may be to fine-tune the process by making necessary
process and plant improvements as more is learned during initial production.
At the initial stages of a project, there is a tendency to be optimistic about
markets, product prices, capital costs, operating expenses, cash flow, and
profitability. As the project proceeds through the various stages of development,
the costs tend to escalate and the returns diminish. Of approximately, 100 project
ideas, perhaps 2 of them may become operating plants.
Figure 1.2 depicts a typical career path irrespective of whether it is with one
or several companies. A chemical engineer in the early years of a career is
primarily concerned with the technical aspects of an assignment, but economics

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4 Chapter 1

FIGURE 1.2 A typical career path.

quickly enters the picture. As a person enters the first level of management, 0– 10
years, he or she is confronted with unfamiliar terminology used by corporate
executives. A company’s set of jargon is often foreign to a new employee. These
new terms are confusing to a person whose experience has been in the
engineering or scientific realm. As the young engineer advances up the corporate
ladder, in perhaps 5– 10 years, economics and financial matters play a significant
role in his or her career. Further, the young engineer soon realizes the importance
of marketing information and how that information may alter an investment
decision. The chemical engineer in performance of the job will employ
economics in the preparation of capital cost and operating expense estimates,
profitability analyses including the time value of money, feasibility studies, and
perhaps simple optimization studies. Further, there will be a need to understand
balance sheets and income statements. The engineer, after 10 – 20 years, may
move up to an upper-level managerial position in which the main requirements
will necessitate the handling of personnel, economic, and sociopolitical issues.
To learn the economics and financial terminology is not difficult, but the effective
application of the information contained in this text takes time and experience.
Economics underlies decisions in all these areas.
The chemical professional needs to master certain skills for a sucessful
management career. This person should be able to read, analyze, perform, and
comprehend financial reports to understand how management views a rational
basis for decisions [2]. In addition to the classical approach to profitability, the
new economy approach and terminology, e.g., value added (VA), economic value
added (EVA), and market value added (MVA), are presented.

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Introduction 5

The fundamentals of process engineering economics are the focus of the

material in this text. The book was written with the senior-level undergraduate
student in mind and the contents are based upon pragmatic application of
economics. The text also may be useful to the experienced engineer who needs a
review or as a continuing education course text.

REFERENCES
1. JR Couper, OT Beasley, WR Penney. The Chemical Process Industries
Infrastructure: Function and Economics. New York: Marcel Dekker, 2001.
2. JR Couper, WH Rader. Applied Finance and Economic Analysis for Scientists and
Engineers, New York: Van Nostrand Reinhold, 1986.

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Copyright © 2003 by Marcel Dekker, Inc. All Rights Reserved.