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Flashcards in Mike Bird Deck (72):
1

What does accuracy of capital cost estimation depend on?

- the accuracy of raw cost data
- design detail; to what extent is the design complete?
- time spent making the cost estimation

2

Types of cost estimate

- order of magnitude: based on data of similar projects; 30% error
- study estimate: based on knowledge of major items of equipment needed; 30% error
- preliminary estimate: based on sufficient data to allow the estimate to be budgeted; 20% error
- definitive estimate: based on almost complete data but before the completion of all drawings and specifications; 10% error
- detailed estimate: estimate based on complete engineering drawings, specifications and site survey; 5% error

3

What is fixed capital?

The cost of a plant, so that it is ready for start-up (the cost paid to contractors). This includes cost of:
- design and construction - all items of equipment, including their installation - piping, instrumentation and control - buildings on site - additional facilities such as utilities
Except for scrap value, capital costs cannot be recovered at the end of a plant's life

4

What does fixed capital cost consist of?
- Direct costs

1. Purchased equip
2. Installation of equip
3. I&C
4. Piping
5. Electrical equip and materials
6. Buildings (including services)
7. Yard improvements
8. Service facilities
9. Land

5

What does fixed capital cost consist of?
- Indirect costs

1. Engineering & supervision
2. Construction expenses
3. Contractors fees
4. Contingency

6

What is working capital?

The additional investment needed to start the plant up and operate it so that income can be earned e.g:
- cost of start up - raw & intermediate materials and catalysts - inventories - money for outstanding customer accounts
This is important as growing businesses have a surplus of orders but may not receive money from fulfilled orders on time and do not have sufficient capital to buy material to fulfil outstanding orders.
Most of the working capital can be recovered at the end of the project, usually makes up 5 - 30 % of the fixed capital.

7

What is inflation?

cost in year A = cost in year B x (cost index year A/const index year B)

8

Rapid capital cost estimation
- Historical costs

An approximate estimate bases on the cost of earlier projects using the same manufacturing process.
C2 = C1(S2/S2)^n where n typically = 0.6 -> 6/10 rule
This follows that if we double the capacity of a project, costs will only increase by 50%. Means it is cheaper to have a bigger plant, but don't want to flood the market with product and reduce prices.

9

Rapid capital cost estimation
- Main plant item basis step counting method

Typically used when making a quick order of magnitude estimate. A model is developed which relates process parameters such as throughput, temp and pressure and the materials of construction to the total expected cost. This takes into account either the no. of main plant items or the number of functional units likely to be involved.

10

Wilson's correlation

Predicts the capital cost of the plant based upon investment factors, the average cost, and number of plant items involved.
(accuracy +/- 30%)

11

What are functional units?

Normally a unit of operation, piping and heat exchangers are ignored as they are part of existing functional units.

12

What does Bridgewater correlation take into account?

The reactor conversion, in addition to the plant capacity.

13

What are factorial methods of cost estimation?

Based on the purchase cost of the major equipment items. Other costs are then estimated as factors of the equipment cost. Accuracy of this method depends on the stage of design that has been reacted, and the reliability of the base data.

14

Lang factor values, and when is it most accurate?

3.1 for solid processing
3.6 for solid/fluid
4.7 for fluid
most accurate when preliminary flow sheets have been completed and main equip has been sized.

15

Detailed factorial estimate steps

To improve the accuracy of the estimate, the cost factors compounded into the Lang factor can be considered separately. Most commonly used shortcut method for process plant capital cost estimation
1. Prepare mass and energy balances
2. Draw preliminary flowsheets
3. Size major items of equip and select desired construction materials
4. Estimate the purchase cost of main items of equip (PCE)
5. Calculate the total physical plant cost (PPC)
PPC = PCE(1 + f1 + f2 + ... + fn)

16

Why is estimation of purchase cost of equip important?

As the cost of purchased equip is central to the factorial costing method, it must be determined as accurately as possible. (relationship between equipment size and cost is usually shown on a log-log plot).

17

Importance of estimating operating costs and what are the two types? (with examples)

Helps to determine profitability of a process. The trade off between capital and running costs is also a key and recurring theme. In addition, running cost estimation is required to enable choices to be made between alternative processing routes.
1. Fixed: don't vary with the production rate, must be paid no matter the quantity of the product produced
e.g
- maintenance - operating labour - lab costs - supervision - plant overheads - capital charges - rent (land, equip, buildings) - rates and taxes - insurance - licensing fees and royalties
2. Variable: vary with the production rate
e.g
- raw materials - utilities (plant services) - shipping and packaging
Each plant is expected to carry its share of the company's general operating costs, these may be:
- cost of renting offices - R&D - marketing and sales - reserves
These could be 20-30% of additional production costs.

18

How are raw material costs predicted?

The flow rate values obtained from flow sheets are multiplied by the operating hours or years the plant is expected to run. Operating quotations from suppliers gives the most accurate estimate, but these can be difficult to come by.

19

What % of total maintenance costs are plant supplies expected to be?

10%
(e.g safety clothing, pipe gaskets, cleaning materials)

20

How much of installed capital costs are maintenance costs expected to be?

10 - 15%

21

Operating labour

plant technicians/operators are needed to keep the plant running. Cost of this labour can be estimated by knowing the number of shifts and the time each day that the personnel are required. For 3 shifts, 5 crews are needed. Continental shift pattern typically works from 6 am -2 pm, 2pm - 10 pm and 10 pm - 6 am. Expected to be 15% of total operating costs.

22

Categories of labour costs

Supervision of operations: variable cost dependant on size of plant, type of process etc
Lab costs: labs needed to monitor product quality, approx. 2-4% of production costs
Plant overheads: such as general management, security, medical centres, canteens, safety or clerical staff

23

What does sole proprietorship mean?

Business is owned and run by one person. Few if any employees. Easy to create but unlimited personal liability and limited to the life of the owner.

24

Partnership

Similar to sole proprietorship but with more than one owner, each of whom is personally liable for the firm's debt. A lender can require any partner to repay all of the firm's outstanding debt. The partnership ends with the death or withdrawl of any single partner.

25

Limited liability company

All owners have limited liability to their investment and cannon be held personally responsible for debts

26

What is a corporation?

A legally formed entity separate from its owners and many of the legal powers of individuals such as:
- enter into contracts
- own assets
- borrow money
Its owners are not liable for any obligation the corporation enters into. Ownership in the company is represented by shares of stocks:
- sum of all ownership value is called equity
- owner of stock is called a shareholder, stockholder or equity-holder
- ^ they are entitled to dividend payments

27

What is the management team?

In a corporation, ownership and direct control are separate. Shareholders are the owners but have no say in daily operations. The board of directors are elected by shareholders and have ultimate decision-making authority. The CEO runs the corporation and the board typically delegates day-to-day decision making to them.

28

What are financial managers?

The CFO is the most senior financial manager in the firm and reports directly to the CEO. Three main tasks:
- Investment decisions
- Financing decisions
- Cash management

29

What are agency problems?

Goal of the firm is to maximise shareholder value. Separation of ownership and control can lead to a conflict of interest known as an agency problem: when managers act in their own interests rather than the best interests of the shareholders, the potential solution is to tie management's compensation to firm performance

30

What can happen if a CEO performs badly?

- Shareholders can express their dissatisfaction by selling their shares. This selling pressure will drive the stock price down.
- Hostile takeover: low stock prices may entice a corporate raider to buy enough stock so they have enough control to replace management.

31

What are primary and secondary stock markets?

Public company shares are traded on organised exchanges called stock markets. They provide liquidity to shareholders. Primary: when a corporation issues new shares of stock and sells them to investors, they do so on the primary marker

- Secondary markets: after the initial transaction in the primary market, the shares continue to trade in the secondary market between investors.

32

What is corporate taxation?

Corporations are a separate legal entity so they are taxed separately from its owners tax obligations.

33

Sources of capital investment

- obtaining a stock market listing if currently private
- launching a rights issue: a dividend of subscription rights to buy additional securities in a company made to the company's existing shareholders. When the rights are for equity securities such as shares, in a public company it is a non-dilutive way to raise capital.
- issuing a corporate bond
- borrowing (from a bank or possibly govt.)
- selling assets
- seeking to merge with/be taken over by another company

34

What are shares?

Company quoted on the stock exchange offers shares of its ownership. If you buy one you are a part owner, or shareholder, in the company with the right to share in its profits. Can attend board meeting and vote on key issues and appointments. Prices of shares constantly changing. May bear little relation to the value of the company if you were to sell its assets. Things that can affect prices: company analyses, political change, natural disasters, wars, economic fluctuations or the behaviours of the people who buy them.

35

How do shareholders make profits?

By either selling their shares at a higher price than they paid for them, or by receiving dividends which are a distribution of profits that the company has made.

36

Comparison of quality of shares

Best-established and soundest companies are known as 'blue-chips'. Next are 'secondary issues', shares in companies which received slightly less confidence that the blue chips. 'Growth' stocks are shares in newer companies which are expected to do well in the future but which may not do so. 'Penny' - companies with low value which may increase for some reason.

37

What are the types of shares a company can issue?

Each class has different rules, market prices and dividends. Most are 'ordinary' shares -> shareholders at the back of queue of creditors if company goes bust. Equal voting rights and dividends to all other holders of ordinary shares.
'Preference' shares give the holder a better chance of recovering money in the event of liquidation, often pay a fixed dividend and don't usually give voting rights.
'Convertible' preference shares give the holder the option to change them to fixed ordinary shares at a fixed future price and date.

38

Assessing the health of a company:
- price/earnings ratio

(main measure analysts use) Relates a company's market value to its post-tax profits. Calculated by dividing the market capitalisation (market value) by the after tax profits or the share price by earnings per share (EPS). The lower a p/e the cheaper a stock, but this might not signal good value. May have lowish p/e due to limited growth prospects, while a high-tech company could be on a high p/e but still be good value if it is growing quickly.

39

Assessing the health of a company:
- price/earnings to growth ratio

Indicates whether a firm's earnings growth justifies its price. This is the forward p/e ratio divided by the forecast earnings growth rate expected this year. E.g a firm with p/e = 100 and an earnings growth rate of 50% has a PEG of 2. PEG of less than 1 is generally considered cheap.

40

Assessing the health of a company:
- price/sales ratio

Applied when companies are not making a profit. Is the marker capitalisation divided by trailing sales, or the revenue over the past year. Value of one deemed cheap, but it works best when comparing industries that have similar profit margins; firms with low margins usually have low PSRs as sales cannot be converted into profits so easily.

41

Assessing the health of a company:
- price/book value ratio

Book value can be found on a balance sheet under the heading shareholders equity or net tangible assets - the value of the net assets attribute to shareholders. A PB of one or below is considered cheap but it only really works over comparing capital-intensive businesses. As book value ignores intangible assets such as brand value, it means little for service based firms with few tangible assets.

42

Assessing the health of a company:
- Dividend yield

Expresses the total value of the earnings a firm pays out in cash to investors in a certain year per share, as a percentage of the share price. Prospective yield: current share price/estimated dividend per share for next financial year
Trailing yield: current price/dividend per share based on the latest completed financial year. Higher yield -> cheaper share. Usually, high yield can mean share has been marked down in anticipation of a dividend cut.

43

What is a bond?
Gov? Company?

An IOU issued by a government, local authority or a company in return got the loan of cash. In most cases, a fixed rate of interest is payable to the bond holder and the bond issuer promises to pay back the amount borrowed at a certain time in the future.
Most are registered so if a bond is sold by one holder to another, legal title is only transferred when the bond is re-registered.
Government raising money through a bond: gilt
Company: corporate bond
Rate of interest a company has to pay is dependant on the quality of business.
Thus, the rating that a company has reflects its business strength and affects the costs that it must pay in order to raise money. A rating downgrade is very serious for a company.

44

What is a new issue?

Private companies seeks to offer their shares through the stock market either to raise extra money cheaply, or so that the owners can get a lot of money out; or for a combination. Doing this costs the company a lot of money in fees to city professionals which new investors pay for. The process is called a 'new issue'
- The intro: where there are already many shareholders, additional money is not sought and the company's shares become officially part of the stock market.
- Private placing: where shares are sold to big institutions without the investors getting a look in.
- Offer for sale: shares are offered to anyone who wants to buy them.

45

What is a rights issue?

When a company whose shares are already listed on the stock exchange wants to raise more money, it can issue a rights issue, offering new shares to the shareholders it already has, usually with a discount. If not enough shareholders want to take up their rights, the company will often arrange for the issue to be underwritten by stockbrokers and banks who promise to buy shares in exchange for a commission. Underwriters will sell more of the shares they are stuck with whenever the share price rises, bringing prices down again.
Shareholders will receive an 'offer document' explaining why the company wants to raise money and giving its accounts so they can make a good judgement. If shareholders don't want to exercise their rights they can still make a profit by selling the rights themselves. Old shares will come down a little and new shares will go up. Profit if sell rights for more than amount original shares drop to.

46

What does economies and businesses being cyclical mean?

Some businesses are very closely linked to the economic cycle whilst others are very poorly correlated. This means that several years of above average growth is often followed by a couple years of recession. During the growth phase, the stock markets rise and economic growth is kept in check by gently rising interest rates. This makes the cost of borrowing money more expensive and tends to reduce inflation as more money is spent in servicing debt instead of goods and services.

47

What happens when countries raise their interest rates?

Its currency strengthens and tends to reduce inflation as more money is spent in servicing debt instead of goods and services.

48

What happens when recessions come?

Companies stop investing to protect capital and profits and the amount of business conducted falls. Many companies go bust, and stock markets usually fall into bear territory (falls of 20% or more). Central banks often cut interest rates as this stimulates the economy as businesses spend less money servicing debt and can invest so the economy grows once more.
High inflation and low interest rates inflate away debt.

49

Hazard definition

A physical situation with potential for human injury, damage to the environment, or some combination

50

Risk definition

The likelihood of a specified undesired event occurring within a specified period or in specified circumstances
Risk is a combination of Likelihood and Consequence. The dimensions of risk are loss over time. Loss severity may be assessed in a variety of units e.g. qualitatively as high/ medium/ low or quantitatively in terms of lost dollars/year or mortality (annual expectation of death).

51

What is outrage a factor of?

A function of whether people feel the authorities can be trusted, whether control over risk management is being shared with affected communities, etc.

52

Outrage factors/risk characteristics

Voluntary or involuntary - rock climbing vs living next door to a smoke stack

Natural or industrial - accept the floods or the gales, but man-made always invites suspicion

Fair or unfair - who benefits from the reward - if we share the risk surely we should share the rewards

Familiar or strange - if it’s exotic we are suspicious - but familiarity can breed contempt and sometimes people stop obeying the safety rules.

Unmemorable or memorable - we remember the big things, and they can build up to be worse than they should be

Not dread or dread - some things inspire more dread in people than others e.g. cancer, even though heart disease kills twice as many people

Knowable or unknowable - do we understand it / do the experts agree? How can the risk be demystified?

Moral or immoral - more people killed by cars than murdered, but murder is still less acceptable to society

53

What is business risk?

Business Risk
• All risks facing a business, e.g. Political, Financial, Competitive, Technological, including threats to the Environment, or to the Health & Safety of both workers and general public.
• Risk management is owned by the business team and typically involves:
– Identification of high level risks
– Use of Risk Matrix to capture severity and manageability
– Management action to provide demonstrable assurance

54

Workplace risk

Workplace Risk
• Risks to workers due to Health & Safety hazards in their normal working activities
• Project risk assessment should consider both the risks to workers during the manufacturing process and those to the eventual end-users
• Often managed directly by individuals or front-line teams through:
– structured hazard potential assessment
– formal task assessment for routine & non-routine jobs
– control by standing procedures or permits to work
– informal assessment by individuals during the task
– self-regulation checks and audits to assess system

55

Technical risk

Technical Risk
• Risk due to failure in performance of process equipment, i.e.
– failure to deliver business performance in quality, quantity or reliability, including EHS requirements; or
– failure of final product leading to possible catastrophic consequences of injury or death to users and/or general public, or environmental contamination
• Includes human interfaces
• Typically assessed by technical specialists / teams
• Structured processes such as FMEA, HAZOP, QRA etc

56

What is process safety management (PSM)?

Process Safety Management (PSM) is a commonly used term in the process industries for the overall system by which the technical risks from high hazard substances are managed. The major aim of PSM is to develop plant systems and procedures that prevent unwanted releases, which may ignite and cause toxic impacts, local fires, or explosions in plants – affecting the workforce and people in nearby communities as well as inflicting major costs on the organisation involved. It is a vital topic for all Chemical Engineers.

57

What does a good PSM system cover?

A good PSM system covers the entire lifecycle of a process plant, including:
• all design aspects, conceptual to detail
• operational & maintenance systems & controls
• emergency management
• the human interface, including training and safety culture
• modification
• decommissioning

58

Risk management process loop

A structured 5-step process loop
1. Identify hazards or threats to delivery of business targets
2. Assess the risk to delivery of targets associated with those hazards or threats
3. Evaluate risk elimination / reduction options
4. Implement chosen measures
5. Monitor to check that the measures are having the desired effect, and repeat loop

59

Risk assessment techniques

Risk register
Risk matrix
Boston square
HAZOP
Quantified risk assessment (QRA)

60

Strategies for risk management

Risk management strategies must be cost effective; if they are not then the organisation may be safe but will certainly not be competitive.
• Start with simple risk assessment processes: detailed methods are expensive and should only be used where simpler studies indicate cause for concern.
• Work from both ends of the risk spectrum: identify and rank major risks whilst placing emphasis on assessing basic tasks in the workplace.
• Strategy should concentrate on the effective use of resources in areas where these give greatest return... and very often this will be found in the effective and consistent implementation of good procedures by competent people.

61

Why are we talking about corporate responsibility?

An important part of understanding how companies operate
No longer acceptable for them to ignore external pressure
Companies must actively seek public approval for their activities
Industrial placements link with Corporate Responsibility?
Opportunity for you to see it in action first hand
Enables you to look at prospective employers in a new light

62

Responsibilities of a company?

Survive and grow – generate wealth, employment etc.
Formal contracts with
- Shareholders
- Employees
- Suppliers & Customers
- Local & National government
Implicit contract with society
granted “licence to operate” in return, act fairly & be a good citizen

63

2008 global financial crisis

Sub-Prime Mortgages made up 22.5% of total in US in 2005
Banks sold them on as “Triple-A Securities” e.g. $1.7 trillion in one quarter of 2006
Bank bosses and regulators ignored warnings, and failed to understand and manage the evolving risks
$17 trillion household net worth lost from 2007 – 2009
4 million families lost their homes ASSETS WORTH MORE THAN LABOUR NOW, cashless economies can cut interest rates

64

How does society respond to poor corporate responsibility?

Employees
- blow the whistle
Politicians
- prosecution
- new laws
- remove licence to operate
Pressure groups
- draw attention / try to stop the activity
- try to put the company out of business
Shareholders
- move their investments, can stop top management -
getting big bonuses
Personal
- boycott products or services – reputational damage

65

5 principles of corporate responsibility?

To treat employees fairly
To operate ethically and with integrity
To respect basic human rights
To sustain the environment for future generations
To be a responsible neighbour in their communities

66

Nike three strategic goals

“Corporate responsibility challenges us to take a good, hard look at our business model, and understand our impact on the world around us.”
Three strategic goals:
To effect positive, systemic change in working conditions within the footwear, apparel and equipment industries;
To create innovative and sustainable products; and
To use sport as a tool for positive social change and campaign to turn sport and physical activity into a fundamental right for every young person.
Five core stakeholder groups: consumers, shareholders,
business partners, employees and the community.

67

Difficulties with implementing changes regarding to corporate responsibility

Must be led from the top
There needs to be dissatisfaction with status quo
Agree a solution that is right for the company
Sell it right through the organisation
Top & bottom may agree, but tough for middle managers
Put it into practice internally…and convince the stakeholders it is working

68

How to prove corporate responsibility?

Internal validation
Scrutiny by the Board – non-exec directors’ role
External verification, auditing or someone from outside
Public reporting, press releases or annual reports
Social rating agencies
Inter-company comparisons

69

Corporate responsibility measure performance and impact

Environmental Impact
- Climate change
- Waste management
- Pollution potential
Social Impact
- Occupational health & safety
- Product health & safety
- Labour rights in the supply chain - important (fairtrade?)
- Diversity in the workplace
- Community investment

70

FTSE4 Good investment criteria

To be included in the indices, companies need to demonstrate that they are:
- Working towards environmental sustainability
- Developing positive relationships with stakeholders
- Upholding universal human rights

71

What gives people confidence?

Better rules, internal & external
Better compliance monitoring by the companies themselves
Stronger Internal Auditing on behalf of the Board
More interrogation from Non-exec directors on behalf of the shareholders
External, independent validation of results

72

Risk and Responsibility

Risk reflects uncertainty
There should be a balance between the Risk taken and the Reward gained
Society expects Companies to manage their Risks responsibly
When they fail, we punish them, both formally and informally
Companies are trying harder, but our expectations are higher too