Engineering Economics and Economic Design for Process Engineers

358 Pages·2006·5.48 MB·English

by  Thane Brown

ENGINEERING
ECONOMICS
AND ECONOMIC
DESIGN
FOR PROCESS
ENGINEERS
ENGINEERING
ECONOMICS
AND ECONOMIC
DESIGN
FOR PROCESS
ENGINEERS
Thane Brown
University of Cincinnati, Ohio
Boca Raton London New York
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Version Date: 20130916
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About the Author
Thane Brown is presently an adjunct pro-
fessor at the University of Cincinnati, where
he teaches engineering economics. He is a
member of the Advisory Council for the
Chemical and Materials Engineering
Department at the University of Dayton. He
gives several seminars each year at both
schools.
Prior to teaching, Mr. Brown worked for
Procter & Gamble for over 36 years. His
last position there was Director of North
American Engineering. His organization,
comprised of P&G and contractor engi-
neers, designed and built over $1 billion of plant facilities per year. At P&G, he
worked in a variety of engineering and manufacturing roles. His engineering work
mainly involved the conceptualization, design, construction, and startup of plants in
the shortening and oil, coffee, soft drink, juice, feminine products, and papermaking
businesses. His manufacturing assignments were in shortening, oil, and juice.
He has written a number of articles on engineering economics, batch pressure
filtration, and heat transfer. Mr. Brown is a registered professional engineer in Ohio
and has a B.S. in chemical engineering from Oregon State University.
Introduction
This book contains the material I wish I’d known when I started working.
Engineers play a big role in how much money a company makes. By bringing
economic thinking into all parts of their work, they maximize their impact on profits.
In broad terms, they deal with two types of economic decisions:
• Is the project economically justifiable?
• Of the options available, which is best from an economic standpoint?
The book provides the tools and methodology to answer these questions. It will
help engineers (and students about to enter the workforce) integrate technical and
economic decision making, creating more profit and growth for their companies. It
covers two broad topics: engineering economics and economic design methodology.
Its methods are simple, fast, and inexpensive to use and apply.
The first section of the book covers the basics of Engineering Economics —
time value of money, capital and production cost estimation, economic evaluation
methods, and risk analysis. The focus is on the early stages of engineering — process
development, feasibility engineering, and conceptual design. This is the time when
the economic structure of a project is set and when the engineer’s impact on profits
is greatest.
Secondly, the book presents a methodology for economically designing a plant
or process. During my Procter & Gamble career I observed that there are almost
always several technically acceptable answers to any design question. One can
use economic factors to select the best of them, and this part of the book is based
upon that premise. It shows how to combine technical and economic decision
making to create economically optimal designs. Whereas the book focuses on the
early project stages, one can use the thought processes and most of the methods
in all project phases
ECONOMICS IN ENGINEERING
Companies exist for one reason — to make money (profits). Profits, sales, expenses,
and taxes are interrelated:
Profit = Sales + Other Income – Expenses – Taxes
AT
For a company making money, profits are the crucial part of its cash flow. They
determine whether the company will have enough money to invest in capital, to
acquire other companies, acquire other brands, and to pay dividends to its share-
holders.
When they create new products or processes and design and build plants and
processes, engineers affect both profits and cash flow. Their main impact is in the
areas of:
• Production cost spending (This is the main expense in the profit equation.)
• Depreciation (This is a part of production cost.)
• Capital spending (This is one of the uses of profits.)
• Sales (This and production cost spending are the main factors in the profit
equation. Engineers affect sales by inventing new or improving products,
building new capacity, and reducing the cost of producing products.)
Good engineers develop sound cost structures for their products and projects.
These cost structures:
• Enable the company’s products to be competitively priced in the market
place.
• Enable the company to earn a reasonable profit margin on these products.
• Have financial returns that meet the company’s return on investment (ROI)
criteria.
When developing projects, engineers continually review their economic attrac-
tiveness. Additionally, most companies require formal assessments several times
during the life of a project. These assessments check whether a project is still on
track to meet its objectives. For example, will the project still deliver its intended
business result? Does it meet or exceed the company’s ROI criteria (plus any other
financial objectives)? Is the projected startup date acceptable? Are the project risks
still manageable? These risks include market risks, technical risks, project cost risk,
and schedule risk. Of them, market risk is the most significant:
• Market risk — The sales volume or selling price is lower than expected.
Introductory marketing expenses are higher, and so on.
• Technical risk — Yields or operating efficiencies are lower than estimated.
Emissions are higher. Equipment does not work correctly, and so on.
• Project cost risk — The capital cost or production costs are higher than
expected.
• Schedule risk — The startup is late or prolonged.
Engineers are responsible for controlling the last three and may get involved
assessing all four. They often use sensitivity analysis and decision-tree tools to
understand the risks and manage decision making.
ECONOMIC DESIGN
Economic design is one of the ways engineers create profit. It involves knowing the
economic impact of engineering choices and finding the economic balance between
capital spending and production cost spending. (The balance point is defined by a
company’s ROI criteria.) It seeks the answers to:
• Is it better to spend more capital and have lower production costs?
• Is it better to spend less capital and have higher production costs?
These two questions are asked over and over again while the process is being
developed and the plant or process is being designed. Balancing capital and produc-
tion cost is what helps ensure the overall project is economically justifiable.
HOW DOES ONE DO ECONOMIC DESIGN — A MODEL
Engineers are continually deciding among alternates or options. The economic
optimization model provides a framework — a method — for doing this. It has three
phases:
• Defining the business and technical purposes of the design before starting
work
• Creating a list of options to be analyzed
• Analyzing the options and selecting the most economic. Three steps are
involved:
• Eliminating the technically inadequate options
• Economically analyzing those that are acceptable
• Selecting the option having the best after-tax economics
Every practicing engineer — whether involved in developing processes, design-
ing a process or a plant, or making plant upgrades — can use the tools presented
here. The economic design model is shown in Figure I.1.
WHEN DOES ONE DO ECONOMIC DESIGN?
Simply put, economic design is done in every phase of a design. Because the
economic framework in a project is set in what this book calls the Process Devel-
opment, Feasibility, and Conceptual phases of a design, this book will deal only
with those. (Companies may subdivide projects differently or use different names
for the phases but the work is the same. You will find the inputs to and outputs for
each project phase described in Appendix V.) The following briefly describes these
phases:
• Process development. In this phase, one defines the process steps, oper-
ating conditions, and raw and packaging material specs. When this phase
is complete, one will have defined a technically feasible process. Some
typical options or studies are:
• What process steps (functions) and operating conditions are feasible?
• What unit operations are best for each process function?
ANALYZE&
DEFINEOBJECTIVES CREATEOPTIONS SELECTANOPTION
Define Define Select Createan Analyze Selectan
Business Design & OptionList Each Option
Objectives Objectives Define Option
Technical
Functions
Continuetothe
nextphase
ofengineering
FIGURE I.1 The economic design model.
• From product quality, environmental, safety, and economic standpoints,
what are the proper raw materials and packaging materials?
• Should recycle or purge streams be used?
• Feasibility. Here one begins to develop design details to decide whether
a proposal is economically feasibility. Some typical options or studies are:
• How should the tradeoffs among the reactor (or dominant unit opera-
tion), separation systems, and the heat recovery systems be optimized?
• How many separate processes or plants should exist? Where should
they be located?
• Should the process be batch or continuous?
• For health, safety, or environmental reasons, should the plant or process
be located in an unpopulated area?
• Conceptual. In this phase, one develops the major features of the feasible
option or options. Some typical options or studies are:
• For the major equipment, which of the technically feasible types are
the most cost-effective?
• What is the heat recovery plan? What process streams will exchange
energy with each other? About how much energy is economical to
exchange?
• Should a surge exist between unit operations? How much?
HOW THIS BOOK IS ORGANIZED
SECTION I: ENGINEERING ECONOMICS
Chapter 1 sets the stage by explaining the engineer’s role in creating economically
feasible projects. It then discusses the economics of projects — how they are funded,
what kinds of investments are needed, and how revenues, expenses, profits, and risks
are interrelated. Last, it covers how cash flows into and out of a company.
Chapter 2 deals with the time value of money. It discusses present and future
values, annuities, interest rates, inflation, and inflation indices. These are the pre-
cursor materials for Chapter 5.
Chapter 3 details how to create order-of-magnitude and study grade estimates
for the investments in a project — capital, startup expenses, and working capital.
The estimating methods are ideal for use when there is little design detail.
Chapter 4 concerns itself with production costs. It explains how to make study
grade production cost estimates.
Chapter 5 applies the time value basics from Chapter 2 to proposal and project
evaluation. It covers net present value, annual cost, ROI, breakeven volume, sensi-
tivity analysis, and decision trees. It also briefly mentions other evaluation methods.
SECTION II: ECONOMIC DESIGN METHODOLOGY
Chapter 6 explains the economic design model. This three-phase model — Defining
Objectives, Creating Options, and Analyzing/Selecting an Option — describes a
process for doing economic design in a project.
Chapter 7 covers the reasons for setting business and technical objectives early
in a project. It then explains both business and technical objectives and how to go
about setting them.
Chapter 8 and Chapter 9 cover methodology designed to foster the creation of
a thorough list of options for study. Today, inadequate option list creation is the
major shortcoming in the creation of economic designs. Chapter 8 presents a disci-
pline for flow sheet creation designed to keep options open. This involves specifying
the technical function for each process step before selecting unit operations and
equipment types. Chapter 9 discusses how to create a list of options for study. It
presents several tools that will stimulate one’s thinking and help create a complete
list.
Chapter 10 explains how to anayze different options and how to select the most
economic of the technically feasible options. It covers a general method for economic
analysis, the economics of selecting equipment, and the economics of plant siting.
As an added topic, it explains how to decide whether or not to install extra capacity

for an assumed future need.
Chapter 11 presents a number of common economic design case studies:
• Finding the optimal cooling water outlet temperature in a heat exchanger
that is cooling a hot stream
• Finding the optimal catalyst usage in a reactor/filter system
• Finding the optimal amount of heat recovery in a heat exchanger loop
• Determining whether to build a grass-roots plant or whether to expand an
existing plant
• Finding the economically optimal number of plants
Appendices: There are five Appendices — Definitions of Key Terms, Inflation
Indices, Compound Interest Tables, Equipment Pricing Data, and Project Phase
Inputs and Outputs.
This is a practical book for every student and practicing engineer. It presents
the tools of engineering economics and economic design. Using them, every engineer
can increase their company’s profits.
TERMINOLOGY
I need to clarify a few terms. I use three words in their broadest sense — project,
design, and engineer. All three include the work done from the process development
(or process synthesis) phase through detailed design engineering. A project or design
may thus refer to work being done by a research and development (R&D) engineer
defining a process or to the work being done by a plant engineer specifying equip-
ment for plant maintenance. Likewise, the term engineer refers to all types of
engineers — those in R&D, process design, facilities, a plant, and so forth.
Additionally, I use the convention of K = 1000 and M = 1,000,000.