TA3290 Life-Cycle Modeling and Economic Evaluation

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December 15, 2011

Vermelding onderdeel organisatie

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TA3290 Life-Cycle Modeling and Economic Evaluation

CiTG, minor Mining and Resource Engineering

Economie 3: Vervolg Investment Projects Dr.ir. Gerard P.J. Dijkema

Energy & Industry Group

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(c) G.P.J. Dijkema, TU Delft, 2009

December 15, 2011 2

Project (economic) evaluation Focus on a new >100M€ facility

• What does one (management) have to do?

• Market research

• Life-cycle economic estimate

• Investment & production cost

• Economic performance

• Funding strategy

• Risk assessment

• Strategic alignment – project portfolio!

• Initial go/no go on business case

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December 15, 2011 3

Life cycle economic estimates

Activity

• D – Design

• B – Build

• F – Finance

• O – Operate

• M – Maintain

• D – Dismantle

When looking at a “project” life of decades!

Estimate

• Investment capital cost

• Lead time (go <-> live)

• Interest rate

• Operating cost/revenue

• Maintenance time & cost

• Dismantling cost

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December 15, 2011 4

Industrial project life cycle

Production

Design

Technical perspective

Optimization?

Build

Decision perspective

Where?

What?

How?

Go?

No-Go?

Improve process for Environment….

Economic reasons…

License to operate?

Economic

perspective Design Build Production

Dedicated money on project

Profit Go?

No-Go?

Slope of curve is Industry-specific!

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December 15, 2011 5

Hoe nu een investering evalueren?

Voor de onderneming geldt:

Winst_{after tax} =

Verkopen + Andere inkomsten – Kosten – Taxes

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December 15, 2011 6

Investeringsselectie

• Bij het beoordelen en selecteren van investeringen maken ondernemingen gebruik van cashflow of

kasstroom

• Cashflow is het verschil tussen de uitgaande en binnenkomende kasstroom in een onderneming

• “Cash in hand”

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December 15, 2011 7

Kasstroom / Cash flow

• te gebruiken of je iets kunt betalen...

• ...dan wel moet lenen

• brood, benzine, huur, kleren etc.

• kun je meestal betalen uit je lopende kasstroom

• huis, auto, (scooter, flatscreen) niet  lenen

• kun je de rente betalen uit je lopende kasstroom?

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December 15, 2011 8

Kasstromen

• drie hoofdcategorien kasstromen

• operating – de activiteiten van de onderneming

• investing – merger, acquisities, investeringen

• financing – aflossingen, dividenden, aandelen-inkoop

• Voor het beoordelen van investeringsprojecten wordt de operating cash flow gebruikt.

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December 15, 2011 9

Operating cash flow

• Direct gekoppeld aan winst (uit een project)

• Cashflow = kasstroom in – kasstroom uit

• Winst = opbrengst – kosten

• Omdat afschrijving wèl bij de kosten is meegerekend (terwijl het géén uitgave is) moeten we deze

afschrijvingen weer bij de winst optellen om de operating cashflow te bepalen

• Operating Cashflow = Winst + Afschrijvingen

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December 15, 2011 10

Voorbeeld

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Voorbeeld

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Voorbeeld

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Voorbeeld

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Voorbeeld

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Voorbeeld

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Voorbeeld

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Investeringsselectie

• Terugverdientijd

• Netto contante waarde

• Return-on-Investment

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Terugverdientijd

• Na hoeveel tijd is de investering terugverdiend

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Terugverdientijd

• Na hoeveel tijd is de investering terugverdiend

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Terugverdientijd vs. netto contante waarde

• Voordeel: eenvoud

• Nadelen:

• Revenuen na de terugverdientijd niet meegenomen

• Verdeling van cash-flow over de tijd

• Geld dat eerder binnenkomt is 'meer waard'

• Ondervangen door Netto-Contante-Waarde berekening

• Cash flows worden contant gemaakt m.b.v.

rentevoet

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Return-on-Investment

• Naast terugverdientijd & NCW

• Veel gebruikt in kapitaalsintensieve industrie

• “wat is de verdienkracht van een project over de looptijd uitgedrukt in fictief rentepercentage”

• ROI is gelijk aan het rentepercentage i waarbij de

NCW van de cash-flow serie over de looptijd n van het project gelijk is aan 0.

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Investeringsproject- evaluatie

• Tot zover: financiële methoden

• Voor deze gebruikte methoden zijn inputs nodig:

• Te verwachten / geschatte opbrengsten

• Te verwachten / geschatte kosten

• Probleem: looptijd investering > 20 jaar!

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Vervolg: schatten investeringskosten

• Project

• Arbeid, materialen, grondstoffen enz.

• Afzetmarkt, opbrengst produkten enz.

• Kapitaalgoederen / bedrijfsmiddelen

• Kapitaalsintensieve industrie: investeringskosten / kapitaalslasten werken sterk door op elk project

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Annualized costs

• K_t = Total Annual Cost

• K_p = direct Production Cost

• a = model parameter > 1 indirect production costs→

• L = direct Labour costs

• d = parameter to convert to total Labour cost

• i = depreciation and interest

• f = other capital related cost

• I_B = Total On-Site Investment

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Cost Types

• Investment related cost

• Direct capital cost

• Cost of working capital

• Startup expense

• Goodwill, engineering & license fees

• Operating cost

• maintenance

• operating labor

• overhead

• charges, taxes, insurance

• raw materials

• operating materials

• utilities

shipping/packaging

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Working capital

• Funds required to actually operate the plant:

• to pay for initial raw materials

• to pay salaries

• to fill up tanks

• to fill up equipment

• to buy catalysts

• etc.

• Estimate: 10 to 20% of capital cost

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Operating cost - I

• raw materials

• quotations from literature and suppliers

• operating materials

• safety clothing, instrument charts, etc.

• 10% of maintenance cost

• utilities

• steam, power, air, water

• depends on location

• shipping/packaging

• depends on product

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Operating Cost - II

• maintenance

• 5 to 15% of capital cost

• operating labour, incl. supervision

• operators in shifts plus overheads

• appr. 15% of total operating cost, 20% extra

• overhead

• general management, security, etc.

• appr. 50-100% of total labour cost

• charges, taxes, insurance

• 15-20% of fixed capital

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Capital Cost Estimation

Detailed Design Basic Design

Conceptual Design Strategic

How?

Accuracy Phase

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Capital Cost Estimation

• Cost of making the estimate increases from 0,1% to 2% of total project cost

Detailed cost estimation;

procurement +/- 2-5%

Detailed Design

Refined Lang Factor method;

+/- 10-15%

Basic Design

e.g. Guthrie + Lang Factor method; FUM

+/- 20-30%

Conceptual Design

Indices (e.g. Nelson Refinery Index)

+/- 40-50%

Strategic

How?

Accuracy Phase

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Working with Indices

• “Weather forecast”

• Cost of a new plant = Last Plant * Index

• Simplest index = Inflation

• Order of Magnitude Estimates: Capacity*Index

• Index may be sector specific

• Nelson (Oil) Refinery Index

• CE (Chem. Eng) Plant cost index

• Or location specific

• U.S. Gulf Coast Plant Cost Index

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Chemical Engineering Plant Cost Index (CEPI) / Producer Price Index (PPI

• CEPI

• 1957-1959 = 100

• 1960 = 102

• 1970 = 126

• 1980 = 261

• 1990 = 358

• 2000 = 394

• 2005 = 468

• PPI

• 1984 = 100

• 1990 = 121

• 2000 = 157

• 2005 = 187

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Economy-of-scale

• ECONOMY OF SCALE (Guthrie)

• I = I₀ * (C / C₀) ⁿ

• Process Industry: n = 0.6

• A plant of double capacity costs only 50% more!

• In many a sector, only world-scale plants are competitive

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Evolution of Plant Size

Capacity of new construction W.Europe Product X

- 50 100 150 200 250 300 350 400

1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

KT / Plant

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Capital cost when operating

• DBFOM

• Typical plant utilisation rate is 85%

(Dutch Chemical Industry)

• AVERAGE PRODUCTION = 85% of RATED CAPACITY

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Evolution of Plant Age Distribution W.Europe as of 2002; Product X

1

2

0

6

3

1

14

10

5

7

0%

5%

10%

15%

20%

25%

30%

<=1965 1965 to 1969

1969 to 1973

1973 to 1977

1977 to 1981

1981 to 1985

1985 to 1989

1989 to 1993

1993 to 1997

>1997 Percent in Year

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Capacity Distribution W.Europe Product X as of 2002

1 6

6 22

6 3

0% 0

10%

20%

30%

40%

50%

60%

<=50 50 to 100 100 to 150 150 to 200 200 to 250 250 to 300 >300 2001 KTA Capacity

Percent in size Distribution

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Capacity of new construction W.Europe Product X

- 50 100 150 200 250 300 350 400

1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

KT / Plant

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General structure of an industrial plant:

An assemblage of unit operations

Puri- fication

Recycle Flow Separation Reaction

Feed Product

Purge Feed

preparation

T

Fuel

Dijkema, G.P.J., Process System Innovation by Design, 2004

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General structure of an industrial plant:

An assemblage of unit operations

Unit operations model and cost engineering:

This model is the basis for a number of methods of cost estimation (early phase)

Puri- fication

Recycle Flow Separation Reaction

Feed Product

Purge Feed

preparation

T

Fuel

Dijkema, G.P.J., Process System Innovation by Design, 2004

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Functional Unit Method

Zevnik and Buchanan (1963)

• Investment = f (capacity, complexity)

• A plant is divided into “functional units”

• I_B= Investment estimated

• C_I = plant cost index (e.g. 361.3 in 1991; 1970=100)

• C_f,i = complexity factor per functional unit

• P_i = capacity per functional unit; m = 0.6

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Functional Unit Methode (2)

• Complexity factor

• F_t=Temperature

• F_p=Pressure Factor

• F_m= Material Factor”

• Steel, wood = 0

• Al, Cu, Bronz, 400-steel = 0.1

• Monel, Ni, Inconel 300 = 0.2

• Hastelloy etc. = 0.3

• Precious Metals = 0.4

•

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Functional Unit Method

• Advantages?

• Disadvantages?

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Capital Cost Estimation - Lang

• Modified Lang factor method

• A plant is thought to be composed of a collection of (major) equipment items, each with their own cost characteristics

• These determine the cost of the item

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Capital Cost Estimation – Lang (2)

• The plant cost is given by C_f = ∑ f_L,i * C_e,i

Where

• C_f = Fixed capital cost

• C_e,i = Cost of major equipment i

(from quotes or estimates)

• F_L,i = Lang factor of equipment i:

3.1 for solids processing 4.7 for fluids processing

3.6 for solid/fluid processing

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Equipment cost estimation

C_e = C*Sⁿ

• C_e = equipment cost

• C = cost constant

• S = size parameter

• n = index for that equipment (-1.0 to 1.3) C_e = C*Sⁿ

• C_e = equipment cost

• C = cost constant

• S = size parameter

• n = index for that equipment (-1.0 to 1.3)

10⁰ 10¹ 10² 10³ 102 103 104

Vessel height

Vessel cost

D=1 m D=2 m

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Compounded Lang factor

• f_L = Σ f_i

• f₁ = equipment erection

• f₂ = pipes

• f₃ = instrumentation

• f₄ = electrical

• f_10-12 = design and engineering, contractor

• Compounded Lang factor helps estimating the total fixed capital cost

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Capital cost when operating

• DBFOM

• Typical plant utilisation rate is 85%

(Dutch Chemical Industry)

• AVERAGE PRODUCTION = 85% of RATED CAPACITY

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Aluminium smelters in Ijsland

Alcoa Fjardaál smelter in Reydarfjordur, Iceland

Opened June 2007

•System perspective (?

• The author of an anti-smelter book says efforts to please aluminum giants like Alcoa have created a "heroin economy"

and worries that leaders are "diverting the whole ecosystem of the east.“

• Er zijn niet alleen effecten in Ijsland (alumina smelting) maar ook elders (bauxiet-mining, red-mud)

• Aluminium-boom  overcapaciteit drijft prijzen naar beneden; boom &bust

cyclus?

• enz. enz.

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Literature

• Investment Estimation Theory

• Thane Brown (2007), Engineering Economics and Economic Design for Process Engineers, CRC Press, Boca Raton, Chapter 1 & 3 (in electronic reader)

•

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Industrial design

technology/system

Design of new production facilities has become more efficient:

• Computer aided design methods.

• Better understanding of underlying engineering problems.

Process efficiency

Time Theoretical maximum efficiency

Design efficiency gains

50’s 2003

Operational efficiency

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ta3290

Vragen, Discussie?

Dr.ir. Gerard P.J. Dijkema

Faculty of Technology, Policy and Management Energy and Industry Group

PO Box 5015, 2600 GA Delft-NL