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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