FORMALDEHYDE Cost Estimation

12. PRELIMINARY COST ESTIMATION

Number of working hours per year = 8000

Cost of 1kg of formaldehyde = Rs.17

Production of formaldehyde = 8333.33 kg/hr

Gross sales for 1yr or total income = 8333.33 x 8000 x 17 = Rs.1133333333

12.1 TURN OVER RATIO

It can be defined as the ratio of total income to fixed capital investment.

Turnover ratio = Total Income/Fixed capital investment

For chemical industries the turnover ratio is one.

Thus, Fixed capital investment or gross sales = Rs.1133333333

But, Fixed capital investment = Direct cost + Indirect cost

12.2 ESTIMATION OF TOTAL CAPITAL INVESTMENT COST

I. DIRECT COST:

Materials & labours involved in actual installation of complete facility

(Assumed 70-85% of FCI )

Assuming 77.5% of FCI= 0.775*113.33 = 87.83

The costs involved in the direct cost are, A. Equipment cost

B. Installation & Painting cost

C. Instrumentation Cost

D. Electrical cost

E. Piping Cost

F. Building, process and auxiliary cost

G. Service facilities & yard improvement cost

H. Land cost

Equipment + Installation + Instrumentation + Piping + Electrical + Insulation +

Painting

(50-60% of FCI)

Assuming value is 55% of FCI = 0.55 * 113.3 = 62.315crores

(a) Purchased equipment cost ( PEC) (15 to 40% of FCI)

Assuming Value is 27.5% of FCI= 0.275*113.3= 31.16 crores

(b) Installation including insulation & painting (35-45% of PEC)

Assuming 40% of PEC = 0.4 * 113.3 = 12.464 crores.

(c) Instrumentation & control installation ( 6-30% of PEC)

Assuming value is 18% of PEC = 0.18 * 113.3 = 5.61 crores.

(d)Piping Installation (10-80% of PEC)

Assuming 40% of PEC = 0.4 * 113.3 = 12.464 crores.

(e) Electrical Installation (10-20% of PEC )

Assuming 15% of PEC = 0.15% * 113.3 = 4.674 crores.

(f) Building process & auxillary (10-70% of PEC)

Assuming 40% of PEC = 0.4 * 113.3 = 12.464 crores

(g)Service facility & yard improvement (40-50% of PEC)

Assuming 40% of PEC = 0.4 * 113.3 = 12.464 crores

(h)Land (1-2% of FCI or 4-8% PEC)

Assuming 1.5% of FCI = 1.5* 113.3 = 1.6995 crores

(i) Direct cost (DC) = 92.4395 crores

Indirect Cost-

Expenses which are not directly involved with material & labour of actual

installation of complete facility (15-30% of FCI)

(1) Engg. & supervisors (5-15% of DC)

Assuming 6% of DC = 0.06 * 92.4395 = 5.60637 crores

(2) Construction expenses & contractor¡¦s fees (6-30% of DC)

Assuming 8% of DC= 0.08 * 92.4395 = 7.47516 crores

3) Contingency ( 5-15% of FCI)

Assuming 8% of FCI = 0.08 * 113.3 = 9.064 crores

Indirect Cost = 5.60637 + 7.47516 + 9.064 = 22.1455 crores

Working Capital (10-20% of FCI)

Assuming 15% of FCI = 0.15 *113.3 = 16.995 crores

Total Capital investment = FCI + working Capital = 113.3+ 16.99= 5.64 crores

Estimation of Total product cost (TPC)

Manufacturing Cost = Direct product cost + fixed charges + plant overhead cost

I. Fixed Charges (10-20% of TPC)

1) Depreciation depends on life period, salvage value, method of calculation

about 10% of FCI for machinery & equipment 2-3% for building value.

= 0.1 * 113.4 + 0.02 * 12.464 = 11.583 crores

2) Local Taxes (1-4% of FCI)

Assuming 2% of FCI = 0.02 *113.3 = 2.266crores

3) Insurance (0.4 ¡V 1% of FCI)

Assuming 0.5% of FCI = 0.005 * 113.3 = 0.5665 crores

4) Rent (8 - 10% value rented land & building )

Assuming 9% of rented land & building= 0.09* [12.46 + 1.6995 ] = 1.274crores

Fixed charges = 1.2743 + 0.5665 +13.596 + 2.266 = 17.7028 crores

Total product cost (TPC) = 5 to 10 times of fixed charges

Assuming 5 times of fixed charges = 5 * 17.7028 = 88.5144 crores

II. Direct Product Cost

1) Raw material (10-50% of TPC )

Assuming 20% of TPC = 0.2 * 88.5144 = 17.7028 crores

2) Operating labour cost (10-20% of TPC)


3) Direct supervisory & Electrical labour (10-25% of operating labour)

= 0.15 * 88.5144 = 13.2771 crores

4) Utilities (10-20% of TPC)


5) Maintenance & repairs (2-10% of FCI)

Assuming 5% of FCI = 0.05 * 113.3 = 5.665 crores

6) Operating expenses (0.5-1.0% of FCI)

Assuming 0.75% of FCI = 0.0075 * 113.3 = 0.8496 crores

7)Lab charges (10-20% of TPC)

Assuming 12% of operating labour = 0.12 * 88.514 = 10.62168 crores

8) Patent & Royalties (0-6% of TPC)

Assuming 0.5% of TPC = 0.005 *88.514 = 0.4426 crores

Direct Product cost = 70.69 crores

III. Plant overhead Cost (5-15% of TPC)

It involves cost of general plant up keep & overhead payroll, packaging,

medical services, safety & production, restaurant recreation, salvage, lab &

storage facilities.


Manufacturing Cost = fixed charge + Direct product cost + plant overhead cost

= 7.08112 + 70.69 + 17.7028 = 95.474 crores.

General ExpensesGeneral Expenses = Administration cost + Distribution & Selling cost

(a) Administration cost (2-6% of TPC)

It includes cost for executive salaries, clerical wages, legal fees, and

communication.


(b) Distribution & Selling cost (2-6%) of TPC)

Assuming 4% of TPC = 0.04 *88.514 = 3.5406 crores

(c) R & D ( 2-5% of TPC)


(d) Finances (0-7% of Total capital investment )

Assuming 1.5% of Total capital investment = 0.015 * 135.96 = 2.7192 crores

General expenses = 1.77028 + 3.5406 + 2.656 + 2.7192 = 10.686 crores

Total product cost = Manufacturing cost + General expenses

= 95.474 + 10.6864 = 106.16 crores

Gross earnings = total income - total production cost

For 1 kg of Formalin selling price is Rs. 17/-

Assuming 20% profit for seller

Selling price = Rs. 17 * 0.80 = Rs. 13.6

Gross Annual earning = 103 * 200 * 334 * 13.6 = 90.85 crores

Net annual income = gross annual earning - Total product cost

=90.85 – 88.514 = 2.336 crores

Net annual earning after depreciation = 13.596 – 2.336 = 11.26 crores

Net profit after tax (46% tax rate) = (1 - 0.46) * 1.5995 = 6.0804 crores

Payout period = FCI / (Net profit after tax depreciation + FCI)

=113.3 / (6.0804 + 11.26) = 6.534 years

Rate of return = Net profit / Fixed capital investment

= [(6.0804 + 11.26)/113.3]*100 = 15.305%

FORMALDEHYDE Cost Estimation

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