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2. ISE 211 Engineering Economy Cost Estimating (continued)

3. Estimating Models (cont’d) 4) Power Sizing Model:  Used to estimate costs of industrial plants and equipment  It “scales up” or “scales down” previously known costs, thereby accounting for common “economic scales” Example: Building a refinery – would the cost to build the same refinery with double the capacity be twice as much? Answer:

4. Estimating Models (cont’d)  The Power Sizing Model Cost of equipment A Capacity of A Cost of equipment B Capacity of B x Where:x – power sizing exponent (from Handbooks) Cost of A and B are at the same time Capacity is measured in the same units  Note: You may need to use both power sizing and costs indexes together to account for capacity changes and time changes.

5. Example Power Sizing Exponent Values

6. Example Based on her work in the previous example, Miriam has been asked to estimate the cost today of a 2500 ft 2 heat exchange system for the new plant being analyzed. She has the following data:  Her company paid $50,000 for a 1000 ft 2 heat exchanger 5 years ago  Heat exchangers within this range of capacity have a power sizing exponent of 0.55.  The Heat Exchanger Cost Index (HECI) was 1306 five years ago and is 1487 today.

7. 5) Learning Curves  As the number of repetitions increase the faster and more accurate performance becomes -- “Learning and Improvement”  They capture the relationship between task performance and task repetition  In general, as output doubles, the time to do the task reduces by some amount -- For a 95% learning curve: this means the new time will be 95% of the old time.  Example: if it takes 300 minutes to make the 3 rd item, how long would it take to make the 6 th item if it has a 95% learning curve? Solution:  Also called: progressive curve, improvement, experience curve, etc. Estimating Models (cont’d)

8.  Expression for time estimating in repetitive tasks: T N = T initial x N b Where T N -- time requirement for the Nth unit of production T initial -- time requirement for the first/initial unit of production N -- number of completed units (cumulative production) b -- learning curve exponent (slope of the learning curve)  A learning curve is often referred to by its percentage learning slope  A curve with b = -0.074 is a 95% learning curve: 2 -0.074 = 0.95  This equation uses 2, because the learning curve percentage applies for doubling cumulative production  The learning curve exponent can be calculated as follows: b = log (learning curve expressed as a decimal)/log 2.0 Estimating Models (cont’d)

9. Calculate the time required to produce the 100 th unit of a production run if the first unit took 32.0 minutes to produce and the learning curve rate for production is 80%. Solution: Example 1

10. Estimate the overall labor cost portion due to a task that has a learning curve rate of 85% and reaches a steady state value after 16 units of 5 minutes per unit. Labor and benefits are $22.00 per hour and the task requires two skilled workers. The overall production run is 20 units. Solution: Example 2

11. Example 2 (cont’d)

12.  Fixed and variable benefits, recurring and non-recurring benefits, incremental benefits, etc  Benefits are more likely to be overestimated than under estimated  Many of the models, concepts and issues that apply in the estimation of costs also apply in the estimation of economic benefits. Estimating Benefits

13.  The costs and benefits of engineering projects occur over time and are summarized on a Cash Flow Diagram (CFD)  CFD illustrates the size, sign, and timing of individual cash flows Cash Flow Diagram

14. The expenses and receipts due to engineering projects usually fall into one of the following categories: 1) First cost: expense to build or to buy and install 2) Operations and maintenance (O&M): annual expense, such as electricity, labor, and minor repairs 3) Salvage value: receipt at project termination for sale or transfer of the equipment (can be salvage cost) 4) Revenues: annual receipt due to sale of product or services 5) Overhaul: major capital expense expenditure that occurs during the asset’s life Categories Cash Flow

15. Drawing Cash Flow Diagrams with a Spreadsheet

16. Homework # 02 (Practice Problems) 2.32.42.82.12 2.172.182.202.24 2.272.282.31