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CAPEX estimation via scaling factor

How to estimate the capital cost of a project ?

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1. STEP 1 : Gather the data
2. STEP 2 : Validate the assumptions
3. STEP 3 : Calculate the estimated Capital investment
4. Example of capital cost estimation via scaling factor method

Engineers are constantly estimating capital costs to determine if a project is viable or not. There are different methods to do such estimation but one method that is particularly common is to estimate the cost of a new project from the cost of a past project having a different capacity, it is an estimation via scaling factor.

The scaling factor procedure is given below, step by step.

1. STEP 1 : Gather the data

To be able to use the scaling factor methodology, one must have a reference point, a similar project already completed, but not necessarily of the same size.

The following data must therefore be determined 1st :

  • Total Capital Investment of past project A, done in year Y1
  • Capacity of project A
  • Capacity of new project B to be done in year Y2

2. STEP 2 : Validate the assumptions

The method presented below is valid only if :

  • Project A and project B are similar in terms of process technology (unit operations, type of feedstock and product)
  • The Engineer looks for a rough estimate of the cost (typically +/- 30%). This method is NOT accurate, it is only an order of magnitude.
  • The capacities are not too far from each other
  • The dates of each project is not too far away which means that the same dollar rate can be used. If there is a long time in between projects, the cost estimated would be in dollar of year Y1 and would then have to be corrected with inflation to get the cost in dollars of year Y2.

3. STEP 2 : Calculate the estimated Capital investment

It is important to understand that multiplying the capacity by 2 for example, will not lead to doubling the CAPEX of the project. The scaling factor method is indeed using an exponent < 1.

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The Capital Investment for a new project can then be estimated with the following formula :

TCIB = TCIA*(CB/CA)E

With :

TCIA = total cost of investment of project A ($)
TCIB = total cost of investment of project B - estimated ($)
CA = capacity of project A (t/y)
CB = capacity of project V (t/y)
E = scaling exponent = 0.7 (this exponent may change depending on the type of project, industry, 0.7 is given in [Chopey])

4. Example of capital cost estimation via scaling factor method

A company wants to build a new factory on the West Coast of US. It has completed 3 years earlier a factory on the East Coast. The old factory has a capacity of 8000 t/y and the total CAPEX of the project was 12 MUSD. The company wants to estimate what would be the cost to build a similar factory with a capacity of 11000 t/y.

STEP 1 : Gather the data

  • Total Capital Investment of past project A, done in year Y1 = 12 M$
  • Capacity of project A = 8000 t/y
  • Capacity of new project B to be done in year Y2 = 11000 t/y

STEP 2 : Check the assumptions

  • Project A and project B are similar in terms of process technology (unit operations, type of feedstock and product) : Yes
  • The Engineer looks for a rough estimate of the cost (typically +/- 30%). This method is NOT accurate, it is only an order of magnitude : Yes
  • The capacities are not too far from each other : 11000 t/y vs 8000 t/y is a reasonable increase
  • The dates of each project is not too far away which means that the same dollar rate can be used. If there is a long time in between projects, the cost estimated would be in dollar of year Y1 and would then have to be corrected with inflation to get the cost in dollars of year Y2 : the projects are only 3 years apart

The Engineer validates the method for his/her estimation.

STEP 3 : Calculate the estimated Capital investment

TCIB = TCIA*(CB/CA)E = 12*(11000/8000)0.7 = 15 M$

The Engineer estimates the order of magnitude of the project to be ~15 M$.


Sources

[Chopey] Handbook of Chemical Engineering calculations, Chopey et al, McGraw Hill, 2004