Cost Estimating

Cost Estimating - Cost Estimating Objectives (Chapter 6 of...

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Copyright 2003 John Baldwin 1 ChEn 425 – Cost Estimating – Slide 1 Cost Estimating Objectives (Chapter 6 of Peters, Timmerhaus and West) Understand the dynamics of industrial operation cash flow. Recognize the factors for investment and production costs. Understand the types of industrial capital investments. Understand what is included in capital investment estimation. Understand the types and quality of capital cost estimates. Understand when and how to use cost indexes. Recognize the components of cost for capital investment. Understand the methods to estimate capital investment. Be able to estimate revenue. Be able to determine gross profit, net profit and cash flow. ChEn 425 – Cost Estimating – Slide 2 Cash Flow Note diagram at right for flow of funds using tree growth analogy: § Stock/loans/bonds (roots). § Capital source/sink (reservoir). § Total Capital Investment (trunk): • Manufacturing fixed capital investment. • Nonmanufacturing fixed capital investment. • Working Capital necessary because income and costs occur irregularly. § Operations use working capital and replenish with income from sales but also produces profit. § Profit (sales minus operation costs) used for taxes and replenishes capital source/sink reservoir. § Depreciation (d j ) reduces the profit exposed to income taxes.
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Copyright 2003 John Baldwin 2 ChEn 425 – Cost Estimating – Slide 3 Project Cash Flow Relationships In Year j Total Capital Investment = W (Working Capital) + A x (Nonmanufacturing fixed capital investment) + V (Manufacturing fixed capital investment) Gross Profit (before depreciation charge) = s j (sales income) - c oj (costs of operations) Gross Profit = s j - c oj - d j (depreciation charge) Income Taxes = (s j – c oj – d j ) F (Tax rate; generally 35%) Net Profit After Taxes = (s j – c oj – d j )(1 - F ) Net Cash Flow Including Depreciation Charge = A j = (s j – c oj – d j )(1 - F ) + d j = (s j – c oj )(1 - F ) + d j F ChEn 425 – Cost Estimating – Slide 4 Cumulative Cash Position This is an extension of the single-year picture given above to multi-years. § Land value is included. § Zero time is when construction is complete and plant is ready to start operation. § Diagram assumes constant cash flow. § In this case. • The initial investment is repaid in 5 years. • The depreciation spans 10 years. § At shutdown, the working capital and land value are recovered along with salvage value of plant. § While this is a large simplification of the overall picture, it is useful to help the understanding of the factors to be considered in cost estimation.
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Copyright 2003 John Baldwin 3 ChEn 425 – Cost Estimating – Slide 5 Factors Affecting Investment and Production Costs Sources of Equipment. § The load in a supplier’s shop.
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This note was uploaded on 03/26/2008 for the course CHEN 425 taught by Professor Johnbaldwin during the Fall '03 term at Texas A&M.

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Cost Estimating - Cost Estimating Objectives (Chapter 6 of...

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