ECONOMIC ANALYSIS

This chapter is on analyzing the economic feasibility of the project. The key factor of

designing a chemical plant is to maximize profits of the company. Therefore it is vital to

make sure that there will be profits generated and that the project won’t be running at a

loss. Reaching the break even in a short period is critical as it is less risky for investors to

invest and to gain a good profit. Identifying the capital cost, the total revenue and total cost

of the project throughout a time period will lead us in concluding whether this project is

viable or not.

There are numerous cost categories which need to be considered. First comes the capital

cost. It is estimated a construction period of 2 years for this plant. Then estimates for setting

up costs and all the operating costs are identified. The pricing for equipment, raw material

and the final product are in USD $. These figures were converted into LKR by using an

exchange rate of 134.04.

Since there are many aspects to be considered the investment decision cannot be made

based on one economic indicator. Various aspects need to be considered before making the

final decision. The economic indicators used to evaluate this project are the Simple Payback

Time, Return on Investment (ROR), Net Present Value (NPV), and the Internal Rate of Return

(IRR). These different tools have their own advantages and drawbacks. Therefore every

calculation needs to be analyzed accordingly before deciding to take up the investment

decision or not.

Capital investment

The capital investment is the initial cost which is incurred to start up the plant. This is a one

off cost which needs to be recovered from the profits earned during the production process.

This will be distributed among the 2 years of construction of the project. The capital

investment comprises of fixed costs and working capital components

1. Fixed costs

The fixed capital costs can be divided into direct costs and indirect costs.

Type of direct costs Value

Land (70,000/perch * 220perches) 15,400,000

Site Preparation (1.5% of land) 231,000

Buildings and structures 25,000,000

Equipment cost 26,875,020

Piping & fittings 4600000

Installation and wiring (10% of equipment cost)  

Total Direct Capital Costs (DCC)  

Indirect Costs  

Design & Engineering (20% of DCC) 16997117

Contractors fees (5% of DCC) 4249279

Contingency Allowance (1% of DCC) 849856

Total Indirect Capital Costs  

Total Fixed Capital Cost  

Total Equipment Cost in LKR ($/LKR = 134.04) = 295,000*134.04 = LKR 39,332,350

1. Working capital

Equipment Unit cost $ No. of units Cost $

Feed drum 20000 1 20000

Vapourizer 5000 1 5000

Fired heater 6000 1 6000

Tubular Flow Reactor 16000 1 16000

Furnace 6000 1 6000

Scrubber 10000 1 10000

Cooler 6000 1 6000

Condenser 7500 1 7500

Flash Distillation Column 25000 1 25000

Distillation column 65000 2 130000

Other Equipment     9000

Total Equipment Cost     200500

Working capital is the additional investment needed, over and above the fixed capital, to start

the plant up and operate it to the point when income is earned. It includes the following

components;

1. Start-up.

2. Initial catalyst charges.

3. Raw materials and intermediates in the process.

4. Finished product inventories.

5. Funds to cover outstanding accounts from customers.

Most of the working capital is recovered at the end of the project. The total investment

needed for a project is the sum of the fixed and working capital. The working capital

requirement for a chemical plant is generally 12% of the fixed capital cost.

Fixed Capital Cost (FCC)

Working Capital Cost (12% of FCC)

Total Capital Cost

*The construction period of the plant is estimated to be 2 years. The total capital cost will be

distributed among these 2 years of construction.

Year Capital Cost

0 Land and Site preparation

1 Buildings and Structures, Design and Engineering, Contractors

Fees

2 Equipments, Piping and Fittings, Installation and wiring,

Contingency Allowance, Working Capital