Chemical Engineering Economics

INTRODUCTION

Engr. Farhan Javed

Lecturer
Chemical Engineering Department
UET FSD Campus

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 Books Recommended

• Peters, M.S. and Timmerhaus, K.D.,

“Plant Design & Economics for
Chemical Engineers.” 5th Ed.

• Riggs’s J. L., “Engineering

Economics” 4th Ed., McGraw Hill
Book Co. Inc., 2004.

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 Books Recommended

• James R. Couper, “Process Engineering

Economics”.

• D.W. Green, R. H. Perry, “Perry’s

Chemical Engineers Handbook” 8th
edition.

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 Books Recommended

• C. S. Park, “Funamentals of
Engineering Economics”.

• L. Blank, A. Tarquin, “Engineering

Economy” 6th edition.

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Course outline

• Importance of economics in engineering;

• Market survey;
• Plant location;
• Estimation of capital investment;
• Physical-plant cost;
• Manufacturing cost;
• General expenses;
• Sales and profit;
• Cost accounting;
• Interest, taxes, insurance, and depreciation;
• Marketing.
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What is Economics?

• Word Economics is derived from two greek words

• Oikus Household
• Nemein Management
• Economics is a social science that studies the production,
distribution and consumption of the goods and services and their
management.
• Engineering economics deals with the methods that enable one to
take economic decisions towards minimizing costs or maximizing
benefits to organization.

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Microeconomics and Macroeconomics

• Microeconomics focuses on the individual parts of the

economy. How households and firms make decisions and
how they interact on specific markets

• Macroeconomics looks at the economy as a whole. How the

markets, as a whole, interact at the national level.

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Importance of economics for engineers

• Improving and increasing production

• Reducing human efforts and increasing wealth

• Cost minimization

• Profits maximization

• Plays a major role in engineering starting from the selection

of an adequate plant site to production, planning and control
to replacement, analysis and to wage structure of workers.
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Applications of economics

• Plant location, planning and analysis

• Capital cost estimation of plant
• Process optimization
• Depreciation, taxes and interest
• Marketing
• Research and development

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 Plant design project Stages involving
Economics
• A plant-design project moves to completion through a series of
stages such as is shown in the following:
• Inception
• Preliminary evaluation of economics and market
• Development of data necessary for final design
• Final economic evaluation
• Detailed engineering design
• Procurement
• Erection
• Startup and trial runs
• Production

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Role of Chemical Engineer

• The chemical engineer will be making economic evaluations

of new processes, designing individual pieces of equipment
for the proposed new venture, or developing a plant layout
for coordination of the overall operation.
• A chemical engineer Specializing in the design Aspects Is
referred to as a design engineer
• A chemical engineer specializing in the economic aspects of
the design is often referred to as a cost engineer

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General Overall Design Considerations

• Record keeping and accounting procedures are also

important factors in general design considerations, and it is
necessary that the design engineer be familiar with the
general terminology and approach used by accountants for
cost and asset accounting

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Cost estimation

• Evaluation of costs in the preliminary design phases is

sometimes called “guesstimation” but the appropriate
designation is predesign cost estimation.
• The chemical engineer (or cost engineer) must be certain to
consider all possible factors when making a cost analysis.
Fixed costs, direct production costs for raw materials, labor,
maintenance, power, and utilities must all be included along
with costs for plant and administrative overhead, distribution
of the final products, and other miscellaneous items.

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PROFITABILITY OF INVESTMENTS

• A major function of the directors of a manufacturing firm is

to maximize the long-term profit to the owners or the
stockholders. A decision to invest in fixed facilities carries
with it the burden of continuing interest, insurance, taxes,
depreciation, manufacturing costs, etc., and also reduces the
fluidity of the company’s future actions. Capital-investment
decisions, therefore, must be made with great care.

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Time value of Money

• Money, or any other negotiable type of capital, has a time

value. When a manufacturing enterprise invests money, it
expects to receive a return during the time the money is being
used. The amount of return demanded usually depends on the
degree of risk that is assumed

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Taxes and Insurances

• Expenses, for various types of taxes and insurance can

materially affect the economic situation for any industrial
process. Because modern taxes may amount to a major
portion of a manufacturing firm’s net earnings, it is essential
that the chemical engineer be conversant with the
fundamentals of taxation.

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Depreciation

• Since all physical assets of an industrial facility decrease in

value with age, it is normal practice to make periodic charges
against earnings so as to distribute the first cost of the facility
over its expected service life.

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Optimum Economic Design

• If there are two or more methods for obtaining exactly

equivalent final results, the preferred method would be the
one involving the least total cost. This is the basis of an
optimum economic design

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Optimum Operation Design

• Many processes require definite conditions of temperature,

pressure, contact time, or other variables if the best results
are to be obtained. It is often possible to make a partial
separation of these optimum conditions from direct economic
considerations

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 Engineering Economic Decisions

Manufacturing Profit

Planning Investment

Marketing
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Predicting the Future

• Estimating a Required
investment
• Forecasting a product
demand
• Estimating a selling price
• Estimating a manufacturing
cost
• Estimating a product life

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Role of Engineers in Business

Create & Design

• Engineering Projects

Analyze Evaluate Evaluate

• Production Methods • Expected • Impact on

• Engineering Safety Profitability Financial Statements
• Environmental Impacts • Timing of • Firm’s Market Value
• Market Assessment Cash Flows • Stock Price
• Degree of
Financial Risk

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Accounting Vs. Engineering Ecom.

Evaluating past performance Evaluating and predicting future events

Accounting Engineering Economy

Past Future
Present

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Two Factors in Engineering Economic
Decisions

The factors of time and uncertainty are

the defining aspects of any engineering
economic decisions

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A Large-Scale Engineering Project

• Requires a large sum of

investment
• Takes a long time to see
the financial outcomes
• Difficult to predict the
revenue and cost streams
and Cash flow

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Types of Strategic Engineering Economic
Decisions in Manufacturing Sector

Service Improvement
Equipment and Process Selection
Equipment Replacement
New Product and Product Expansion
Cost Reduction

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Equipment Replacement Problem

• Now is the time to replace

the old machine?
• If not, when is the right
time to replace the old
equipment?

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New Product and Product Expansion

• Shall we build or acquire a

new facility to meet the
increased demand?
• Is it worth spending money
to market a new product?

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Cost Reduction

• Should a company buy

equipment to perform an
operation now done
manually?
• Should spend money now
in order to save more
money later?

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