LECTURE NOTES

PLANT DESIGN

Engr NILO T. ALDON, ChE

College of Engineering
COLEGIO SAN AGUSTIN-BACOLOD

1 Introduction

1.1 Definition:
Project Feasibility Study is a thorough and systematic analysis of all factors that affect the possibility of
success of a proposed undertaking. The data, facts, and other findings presented in the study then become the basis for
deciding whether the project is to be pursued, abandoned or revised.
The project feasibility study is really a synthesis of separate studies usually dealing with market, technical,
financial, socio-economic, and management aspects of the project. Add to that the environmental impacts of the project
which will affect the whole spectrum of the different stake holders of the project.

1.2 Importance:
The role which Project Feasibility Study plays in the development of nations cannot be over emphasized.
With repercussions on the social, economic, cultural, and business sectors of society, a project feasibility study is an
essential medium of progress both as a means to initiate profitable projects for sectoral enhancement and expansion and
to evaluate actual projects.
As a consequence, feasibility studies pervade the entire life of projects, from the time the projects are
conceived by the proponent as an idea to the time they are actually implemented and accomplished.
While it is true that several undertakings in the past have become successful without the aid of a study, this
cannot be used as a basis for the occasional belief that project feasibility studies are next to useless; nor is the failure of
some carefully-studied projects a valid reason. The project feasibility study, in the first place, does not claim to be
antidote to failure, Its primary purpose is to enhance the probability of success of a specific undertaking. It is the result
of a belief that a carefully planned activity has better chances to succeed than an activity without a previous plan.

1.3 Stages of a Project :

i. Conceptualization
The project may be conceived as a result of a national government program or as an idea of an individual
given the chance to see business opportunity in a given particular situation.

ii. Initial Evaluation Of the Applicability of the Project

Preliminary evaluation of economics and market. Using informal tools, the viability of the project is
validated. This may be in the form of macro-economic indicators or government programs related to the project. The
examination could lead to research, leading to a generalized pre-feasibility study, It is evaluated for its practicality or
potential for growth.

iii. Project Feasibility Study

Development of data necessary for final design and final economic evaluation. A formal feasibility study is
prepared using a systematic presentation of facts and figures and evaluated from the point of view of it optimality,
practicality, potential, and growth as well as its viability for presentation to and negotiation with the financing sources
or institutions. During the evaluation of a project, possible recommendation on revision or non-feasibility are brought
out. At this point, the project experiences the “go” or “no-go” phase of existence. If it is concluded that it is too risky to
be feasible, the project eventually dies

iv. Implementation
Detailed engineering design, procurement, erection, start-up, trial runs, production. As the project is being
implemented, the implementing group pinpoint the variances between actual project results and the data standards
provided for the project feasibility study. Taking into account the changing conditions and deviations from expected
outcome, the project is then reappraised in terms of performance, scheduling, and costs. Adjustments are made along
the way as results of the continuing appraisal and evaluation are available.

v. Completion and Final evaluation of the Project

Comparisons are made between the projected and actual results. These data will be important on further
decisions to be made on future studies of the same or similar projects.

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1.4 PROJECT MANAGEMENT

1.4.1 What is a Project?

A project is any task which has a definable beginning and a definable end and requires the expenditure of
one or more resources in each of the separate but inter-related and inter-dependent activities which must be completed
to achieve the objectives for which the task ( or project) was instituted.

1.4.2 Elements of a Project

There are three overall categories for the elements of a project.
1. Operations, or the things that we do.
2. Resources, or the things we use
3. Conditions, or restraints under which we must work. These are things outside our control.

For operations to be performed, the method of operation and the required sequence of activities must
be established. Associated with this will be the TIME and COST of performance.

The resources are five in number:

 Men
 Material
 Machines
 Money
 Time

Predetermined and necessary completion date is a restraint of greatest concern. Capital restriction
could also be another kind. Delivery of outside agencies such as design, materials, machines and the like
could also be considered as restraints. Approvals, inspection, and just about anything else that can be thought
of, like weather, may likewise be called outside restrictions.

1.4.3 Project Management

Essentially, project management can be defined as:
1. Selecting the objectives of the project
2. Determining the requirements to meet these objectives
3. Allocating the resources judiciously at our disposal to achieve these objectives according to plan and schedule
4. Controlling the entire process from point of decision or commitment to completion (achievement of objectives)

The effectiveness of project management is measured by the results it achieves and, more especially by
the response time of manager and method when things go wrong.
Planning is a vital function of management. The more specific component of planing are scheduling and
supervising the various individual projects which are integral parts of the overall plan. Efficient planning of
these constituent projects means the difference between ON TIME and LATE and it can mean the difference
between success and failure.

1.4.4 PERT / CPM

PERT stands for Program Evaluation and Review Technique. It was originally devised in 1958 for the
Polaris Program by the Program Evaluation Branch of the Special Projects Office of the U.S. Navy with help of
Lockheed engineers and consultants from the Booz-Allen And Hamilton.
CPM stands for Critical Path Method. Was developed in 1957 for an individual firm, the E.I. du Pont de
Nemours and Co. by engineers from du Pont and Sperry Rand.

At their inception and in their earlier applications, PERT and CPM had major differences that set them apart.
 PERT was more probabilistic. CPM, more deterministic.
PERT used three time estimates; an optimistic, most likely and pessimistic estimates. A formula based on beta
distribution was used to come up with the expected time for an activity. Moreover, PERT concerned itself then with
time only.
CPM on the other hand, used only one time estimate for activities and related time to costs
Both, however, used the network and critical path analysis as their starting point.
Later on, however, the changes were introduced on both systems that its quite hard to distinguish one from
the other so that they now are referred to as PERT/CPM.

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 WHY PERT/CPM ?
Just how and why are PERT/CPM applied to a project? Decisions often commit a company to a major outlay
of capital. Actions must be coordinated in a form of a plan where all the interrelated activities are set in schedule.
Moreover, whenever changes to the plan is made, effects of the changes are immediately known. PERT/CPM is a
dynamic planning and scheduling system which will not only produce the best possible initial plan and schedule but
will be sufficiently dynamic to react instantaneously to changed conditions and still produce the best plan and schedule.

PERT/CPM
Initially, PERT was designed as a reporting technique to evaluate and monitor the phase-by-phase progress of
the various projects (encompassing numerous contractors and subcontractors) in the POLARIS missile program.
CPM, on the other hand, was originally conceived as a computer oriented planning technique designed to
control construction, engineering, and plant maintenance projects.
Both techniques are equally applicable to planning, monitoring and control, and both are equally applicable
to any kind of project, R&D, construction, engineering, new product introduction, advertising campaigns, corporate
planning, military tactical operations, and so on provided the following concepts are continually borne in mind:

1. Planning must be geared to the operation to be performed; that is, the plan must be activity oriented.
2. Reporting can be geared to the completion (whole or part) of activities, or it can be geared to the arrival at, or
expected date of arrival at, a milestone in the project. In short, it is an activity-oriented plan.

THE NETWORK MODEL

Project planning begins with determination of the project jobs, operations or activities and their precedential
relationships. This is simplified by using a graphic technique, the arrow diagram of the project network model.

Rules for Establishing the Network:

1. One and only one arrow represents each defined activity
Activity
2. Arrow length is governed only by convenience and need for clarity; it does not indicate the importance or duration
of an activity.
Activity Activity

3. Arrow direction has no vectorial significance; it merely indicates the general progression of time. The arrow head
signifies the point in time of activity completion; the tail of the arrow represents the start of the activity.

4. The start or termination of an activity is called an EVENT and is represented by a circle. All activity arrows must
begin and end in events.
event Activity
event

5. Only the relative positions of arrows with common junctions have significance. Arrows originating at a junction
or events indicate activities that can begin only after all activities (arrows) terminating at that event have been
completed.
Activity C
Activity A

even Activity D
Activity B
t

6. If one event takes precedence over another, but there is no activity or activities relating them, a dummy activity
(represented by a broken arrow) MAY BE USED. Dummy activities have, in general, no duration or cost and,
thus, require no time or cost data. Dummy arrows may also be used to establish unique identification of activities.

Activity C eve Dummy

Activity A nt Activity D
event event
Activity B 3 ntaldon 1/8/2018
7. For clarity, heavier arrows or different color are used to designate critical path activities, once they are identified
by network analysis.

8. Events are differentiated by numbers within the event circles. Each event must have higher number than the
immediately preceding event and no two events may have the same number.

Activity C 2 Dummy
Activity A Activity D
1 3

Activity B

Three Questions That Will Help To Plot Activities and That Should Be Asked For Each Activity:
1. What can be done at the same time this activity is being performed?
2. What must be done before this activity can be started?
3. What can't be started until this activity is completed?

CRITICAL PATH
Critical path is the path represented by arrows or activities which requires higher duration than the sum along
all the remaining paths. The largest sum indicates the required duration for the entire project and the activities along
the corresponding path are CRITICAL ACTIVITIES.
While the non-critical path has leeway or "slack" (the available time is longer than the required time), in the
CRITICAL PATH, any delay in the implementation will add-up to the total project duration and cause a corresponding
delay in project completion.

FLOAT
Non-critical activities may experience limited amounts of delay or acceleration in start and completion time
without affecting the project completion. The amount of time latitude permissible is referred to as float. If float time
times are exceeded, some non-critical activities can immediately become critical.

DETERMINING THE CRITICAL PATH

Once the earliest occurrence and the latest occurrence are found, activities lying in the critical path can be
determined by two simple tests:

1. If the earliest occurrence time equals the latest occurrence time at the head of the arrow and earliest occurrence
equals the latest occurrence at the tail of the arrow, the activity possibly lies in the critical path. This is a necessary
condition for a critical activity.

2. If the above condition is met, and the difference between the time at the head of the arrow and the time at the tail
of the arrow equals the activity duration, then the activity is critical and lies in the critical path. This is a sufficient
condition for a critical activity.

Activity B
1 2
10 20
10
10 20

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1.5 PROJECT FEASIBILITY STUDY FORMAT
i. Executive Summary
I. Project Summary
A. Name of Firm
B. Location and Address of Firm
C. Brief Description of the Project
D. Highlights of Major Assumptions
(Market projection, Market share, Pricing, Investment Costs,
Method of Financing)
E. Summary of Findings and Conclusions
1. Market Feasibility
2. Technical Feasibility
3. Financial Feasibility
4. Management of the Project (pre-Operation, Operation)
5. Socio-Economic Impact
6. Environmental Impact
II. General Information
A. Management of the Project
1. Management during pre-operating period
a. Functions and Qualifications of personnel
b. Organizational Chart
c. Compensation
2. Management During Operating Period
a. Functions and Qualifications of personnel
b. Organizational Chart
c. Compensation
B. Labor
1. Skills required for each job
2. Recruitment and training program
3. Compensation, fringe benefits, and facilities
4. Professional firms, or consultant to be hired
C. Project Time Table
1. Gantt Chart
2. PERT-CPM
3. S-Curve
III. Economic Aspects
A. Statement of Market Study
B. Demand and Supply
1. Demand
a. Export Demand _ (past 10 years)
b. Domestic Demand _ (past 10 years)
c. Projected Export Demand _ (next 10 years)
d. Projected Domestic Demand _ (next 10 years)
2. Supply
a. Export Supply _ (past 10 years)
c. Domestic Supply_ (past 10 years)
c. Projected Export Supply_ (next 10 years)
d. Projected Domestic Supply (Imported & Local)_ (next 10 years)
3. Competitiveness and demand of Product
e. Domestic Market
f. Export Market
C. Other Major Producers/Competitors and their Market Share
D. Projected Sales Volume (unit and peso) _(next 10 years)
E. Marketing Program
1. Description of the present marketing practices of competitors
2. Proposed marketing program of the company
a. Sales organization, channels of distribution, sales outlets
b. Transport, warehousing arrangements
c. Advertising, promotion
d. Packaging, pricing, terms of sales

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IV. Technical Feasibility
A. Statement of Technical Study
B. Plant Size and Production Schedule
C. Plant Location
1. Factors considered in the selection of plant site
2. Location map
3. Site development plan/ Plant layout
D. Product
1. Description (physical, chemical properties, composition
2. General and alternative Application and Use
E. Raw Materials
1. Description (physical, chemical properties, composition)
2. Requirements, costing
3. Availability, sourcing
F. Manufacturing Process
1. Description of the Process
2. Process Flow Chart
3. Material and Energy Balances
4. Licensing Agreement, if any
5. Alternative Process considered
6. Processes used in existing plants in the Phil and abroad
G. Utilities
1. Electricity
2. Steam
3. Water
4. Fuel
5. Air
H. Machinery and Equipment
1. List of machinery and equipment, equipment specifications, costs
2. Machinery and Equipment Lay-out
3. Quotations from suppliers, agreements and terms of payments
I. Buildings, Structures and Land Improvements (List, specifications and costs)
J. Environmental Impact Statement
1. Environmental Impact Assessment
a. Summary of Matrix of Environmental Impacts
b. Brief discussion of significant impacts on the physical and biological environment
c. Brief discussion of significant impacts on socio-economic environment
2. Environmental Management Plan
a. Summary of Matrix of Environmental Impacts
b. Brief discussion of mitigating/enhancement measures for impacts on the physical and biological
environment
c. Brief discussion of mitigating/enhancement measures for impacts on socio-economic
environment
3. Environmental Monitoring Program
4. Description and quantity of waste generated
5. Waste Abatement System (water, air pollution, etc)
6. Cost of Waste Abatement System
7. Clearances and Permits
V. Financial Feasibility
A. Statement of Financial Study
B. Major Assumptions
C. Total project cost and initial capital requirements
D. Financing of the project
E. Fixed Capital Investment
1. Direct Costs
a. Purchased equipment
b. Installation of Purchased Equipment
c. Instrumentation and controls
d. Piping
e. Electrical Equipment and materials
f. Buildings
g. Yard Improvements
h. Service facilities
i. Land
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 2. Indirect Costs
a. Engineering and supervision
b. Construction Expenses
c. Contractors’ fee
d. Contingency
F. Manufacturing Costs
1. Direct production costs
a. Raw materials
b. Operating labor
c. Operating Supervision
d. Power and Utilities
e. Maintenance and repairs
f. Operating supplies
g. Laboratory charges
h. Royalties, etc
2. Fixed Charges
a. Depreciation
b. Taxes (property)
c. Insurance
d. Rent
3. Plant Overhead costs
a. Medical
b. Safety and protection
c. General Plant Overhead
d. Payroll Overhead
e. Packaging
f. Restaurant
g. Recreation
h. Control laboratories
i. Storage facilities
G. General Expense
1. Administrative Expenses
b. Executive salaries
c. Clerical Wages
d. Engineering and legal Costs
e. Office maintenance
f. Communications
2. Distribution and marketing expenses
a. Sales office
b. Salesmen Expense
c. Shipping
d. Advertising
e. Technical Sales Service
3. Research and development
4. Financing
5. Gross Earnings expense
H. Tests of Project Profitability
1. Return on Investment
2. Break-Even-Point
3. Pay-Out Period
I. Financial Statement
1. Income Statement
2. Cash Flow
3. Balance Sheet
VI. Conclusions and Recommendations
VII. Appendices
A. Pertaining to Market Study
B. Pertaining to Technical Study
C. Pertaining to Financial Study
Bibliography
IX. All About the Authors

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2 How to Prepare a Project Feasibility Study

2.1 Project Summary

The project summary presents the highlights, descriptive definition, long-range objectives, feasibility criteria,
history, and basic conclusions of the project under study. It gives the analyst and the financier a “capsule view” of the
whole project.
Normally, this portion contains the name of the firm, and the location and size of its head office, plant site, factory.
It also presents a comprehensive description of the business and its operations and briefly defines the product lines of
the business.
Major findings on the market, technical, financial, socio-economic, environmental impact, and management
feasibility of the project are discussed under this section. The status and timetable of the project must also be stated.

A. Name of Firm
Briefly explain the reason for such choice

B. Location and Address of Firm

Pinpoint the location of the head office and the plant site and give the main reasons for choosing them. The
factors which affect the choice of location are the sources of raw materials, labor, and utilities; proximity to the
market; nature of available transportation; and the cost of land and buildings. The project must choose a location
where maximum efficiency can be attained at the lowest possible cost.

C. Brief Description of the Project

Explain what the project is all about (type, capacity/size, completion, etc.) and how it did come about
Describe the nature of the industry, history, growth patterns, problems and potentials and role in economy.
Discuss briefly the need, the project’s potential and the persons behind it; the project’s long range objectives
in 10 years in terms of size , capacity, volume, worth,.

D. Highlights of Major Assumptions

(Market projection, Market share, Pricing, Investment Costs,
Method of Financing)

E. Summary of Findings and Conclusions

1. Market Feasibility
Discuss the nature of the unsatisfied demand which the project seeks to meet, its growth and the manner in
which it is to be met. Here, the supply-demand situation is examined, the target market analyzed, and the
marketing program formulated.
2. Technical Study
Discuss the nature of the product line, the technology necessary for production, its availability, the proper
mix of production resources, and the optimum production volume.
3. Financial Study
Present the over-all financial picture in terms of operating cash requirements, profitability, and cash flow.
4. Management of the Project (pre-Operation, Operation)
Discuss the management structure, the salary scale, and its compatibility with industry standards.
5. Socio-Economic Impact
Discuss the effects of the project on society and the economy as a whole. Evaluate its benefits to the people
and the surrounding communities as well as its impact on the economic program of the government.
6. Environmental Impact
Discuss the impact of the project to the environment and stakeholders during the construction, operation,
and abandonment phase.

2.2 General Information

A. Statement of the Study:

After setting the objectives and means of attaining them, the over-all implementation plan is discussed in this
study. The following are described in this chapter:
1. Basic consideration in forming the organization
2. Form of ownership
3. Organizational Chart
4. Officers and key personnel
5. Project Schedule

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B. Organization and Management
Basic Considerations in Forming the Organization
The organizations mentioned in the market, technical and financial studies are incorporated with that of the
administration. From these, it will be possible to ascertain the important functions the project would require to
operate properly. These functions may then be described in detail and serve as the foundation of the project’s
organizational chart. Finally, the general qualifications for the various functions must be defined and
compensations set. Two types of organizations may be formed; during the construction period, and during the
operating period.
Form of Ownership
Define the form of ownership under which the project will materialize. The choice is limited to the following:
1. Single proprietorship
2. Partnership (general or limited)
3. Cooperative organization (consumers, producers, marketing, or financing)
Organizational Chart
All personnel, from the management staff down to the rank-and-file employees are situated in a diagram which
shows their relationships and flow of authority.
Officers and Key Personnel
The recommendation of specific individuals from certain key positions is made in this portion. The educational
background, work experience and training, and net worth of each recommendee must be described.

C. Project Schedule
Enumerate the different activities involved in the preparatory stage of the project and present them in the
Gantt Chart to exhibit the duration of each activity and PERT/CPM to establish the sequence the different
activities. Prepare also an S-Curve as a tool to properly monitor the progress of works.

2.3 Economic Aspects

A. Statement of Market Study
The market study is the lifeblood of virtually every project feasibility study. While profitability is generally the
focal point of a project study, the question of demand is the most basic issue. Obviously, there can be no
discussion of profitability if there is no demand. It is, therefore, imperative that the market study be given the first
consideration.
The market study seeks to determine the following”
1. The size, nature and growth of total demand for the product
2. The description and size of the product to be sold
3. The supply situation and nature of competition
4. The different factors affecting the market of the product
5. The appropriate marketing program for the product

B. Product Description
In describing the product to be marketed, the following are taken into consideration:
1. Name of the product _ popular and scientific name (if any) and the reason for choosing it.
2. Properties of the product _ physical, chemical, and/or agronomic
3. Uses of the product _ as a finished commodity, as an input to other production activities.
4. Major uses of the product _ individuals and/or firms
5. Geographical areas of dispersion _ where the product is mostly found

C. Demand
An analysis of demand is part of the important task of identifying the needs of the consumers and
determining whether they are willing and have the capability to pay for the products a business man is
contemplating or producing. In forecasting demand, one takes into consideration not only production and
importation figures of the past, but also such figures as credit availability, income distribution, population growth,
price variations, age composition, the degree of urbanization, tastes and preferences, money supply, GNP, and so
on.
Thus, demand analysis involves both macroeconomic variables, i.e., economic data that ad up the activity of
consumers, firms, government, and other import-export sectors; and micro-economic variables, i.e., data on the
level of the individual firm or at least on the level of an industry grouping (an industry being defined as the
conglomeration of all firms producing more or less homogeneous output.
An example of macro analysis would be to study the Gross national Product and its components. If GNP is
expected to rise rapidly, businessmen could ordinarily expect good times for the business. Or if one is planning on

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 selling a product for mass consumption, he might give more attention to the growth of the GNP component. An
exporter would of course, be interested in the export of goods and services items.
On the micro level, the demand for a firm’s product is a function of many variables such as the price of the
product, the price of a substitute product, income, population, etc. An analysis of income distribution could give
us an idea on what types of products consumers can afford.
Price elasticity, which measures the response of quantity demanded of a particular product to variations in its
price and;
Income elasticity, which measures the response of quantity demanded of a particular product to variations in
income, are also important concepts in demand analysis. For example, income elasticity figures can reflect
priorities of consumers by showing which products and services they spend more on as their income improves.
The size, nature, and growth of total demand for the product must be determined in the following manner:
1. Who and where is the market? Segment the market according to type, manner of use, income classification,
location, age, etc. The manner of segmenting the market would depend on the type of product being
considered. For instance, the market for automobiles could best be segmented by using income yardstick. On
the other hand, the market for heavy equipment could be better understood by pinpointing industry
classification.
2. What is the total domestic demand from the historical point of view?
3. Is their a foreign market? If so, determine the historical demand.
4. Evaluate demand growth patterns in the past and project future demand by applying appropriate projection
methods.

D. Supply
The supply situation may be determined as follows:
1. Who and where are the direct competitors. Classify them according to size, product quality, location,
performance, and market segment performance. It is important to determine the type of competition existing.
Are there only a few big firms producing the product being considered? Are there many small firms with no
single firm controlling the market? Or is it an industry of big and small firms? The type of competition in
existence would influence the decisions on production capacity and marketing strategies.
2. Determine historical domestic supply as comprised by local production and importations.
3. If there is a foreign market, determine the historical supply patterns in the targeted countries as comprised by
their local production and importations.
4. Evaluate supply growth patterns and project future supply by applying projection methods.

E. Demand-Supply Analysis
It is now essential to combine the findings on the demand and supply situations. The analysis may be
conducted in the following manner:
1. Compare the demand and supply trends
2. Determine the amount of demand unsatisfied, especially in the projections. If demand appears to be fairly
satisfied by supply, it is important to consider either or both of the following:
a. Whether the factors affecting the market may disrupt the equilibrium so as to cause demand to grow faster
than supply
b. Whether the quality of the product is such that it may create additional demand or redirect part of existing
demand in its favor.
3. Determine the share of the market by establishing the proposed production volume (determined in the
technical study) as against the total market size.

F. Price Study
In economic theory, price is determined by the demand- supply situation. An increase in demand with supply
constant will hike prices. The reverse would result in the lowering of prices.
There are, however, other factors which exert some influence on the price. Without any change in demand or
supply, prices may go up if raw material costs rise; or prices may decline if the government decides to subsidize
production.
Prices may also be determined by the simple cost-plus method of accountants. Keeping all these in mind,
the price study may best be conducted as follows:
1. Determine the selling prices of all similar substitute products
2. Look into the history of these prices (including the range of fluctuations) and establish the factors that
mostly influence their fluctuations over time.
3. Determine the responsiveness of demand to price changes. Will there be tremendous, slight, or
negligible increase or decrease in demand if prices are lowered or raised?
4. Establish the product’s selling price, taking into consideration all of the above, the market segment
targeted, and the operating costs and expenses (determined in the technical and financial studies).
Likewise, estimate the increase foreseen in subsequent years.

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G. Factors Affecting the Market
There are certain factors affecting the market that may or may not be difficult to quantify and/or predict. This
section takes into consideration and discusses the following:
Demand may be significantly affected by population growth, income changes, tastes, rural/urban
developments, prices of substitute and complimentary products, and such marketing tools as advertising,
promotions, credit policies, etc.
1. Supply may be influenced by the development of substitute products, the entry or exit of forms, sources
and cost of production factors, government policies, improved technology, etc.
2. Prices may be affected by the production costs, price controls, inflation, etc.

H. Marketing Program
The marketing program should be the end product of a market study. After defining market and price targets,
the marketing program comes in as the implementing arm. It consists of the following procedures:
1. Determine the marketing program prevalent in the industry and gauge their respective effectiveness.
2. Draw up a marketing plan that identifies and defines the following;
target market, selling price, packaging of the product, distribution network, sales , management
mechanism, advertising and promotions program
The important components of the marketing program may best be summarized by the four P’s ; product,
price, place, promotions
3. Design the marketing organization which will implement the plan and determine the costs involved. The
organization would again depend greatly on the type of product being marketed. In general, a consumer
product would require a sizeable organization that concentrates on distribution channels promotions. Non-
consumer items would probably require either a distribution network or a small-sized sales force. In any
case, the most ideal organization is one that allows maximum efficiency at the lowest manpower level
possible.
The sales promotion plan and the channels of distribution should be appropriate to the product and the
market. Consumer buying habits in the particular field should be considered in the selection of outlets. Potential
distributors may include retailers, wholesalers, jobbers, industrial leaders, industrial distributors, and
manufacture’s agents.
A plan for consumer credit and financing and for sales allowances can be formulated on the basis of
marketing channels selected.

2.4 Technical Feasibility

A. Statement of Technical Study

The objectives of the technical study are:
1. Selecting the: manufacturing process, machinery capacity and design, machinery supplies, plant
location, plant layout, structure specification, raw materials and their sources.
2. Determining the : quantity and quality of the products to be produced, labor needed, both skilled and
unskilled, utilities required, environmental impact, mitigating measures required, transportation
necessary.
3. Providing estimates of the total project cost and enumerating the major items of capital cost.
4. Listing down in detail estimated production and overhead costs that will go into operating the proposed
plant
5. Taking into consideration any major technological development in the industry which may affect the
commercial or technical soundness of the project.
The technical study is presented by describing and making the necessary calculations for the following.

B. Plant Size and Production Schedule

State the minimum and maximum rated capacity of the plant. The minimum capacity is that level of
production where the resources are not fully used, but are employed at a minimum economical level. In general, the
minimum economical level is the level of production where the firm’s production costs are at least covered by the
resulting revenue. The production costs are determined by the financial study. The maximum capacity is that level
of production where resources are fully used.
From there, the actual capacity utilization, the number of shifts per day and the number of operating days per
year may be defined.
Finally, the factors taken into consideration in determining the plant size must be identified and described.
Here, the findings in the market study are of major importance.
The production schedule describes the projected scale of operation for the next 10 years. It describes the
degree of increase in time. The factors, which will provide the answers, are the expected growth in market share,
11 ntaldon 1/8/2018
 the availability of financing for possible expansion, the availability of more raw materials, and the level of
utilization of plant capacity.
C. Plant Location
A thorough and comparative analysis for each potential location should be made to determine the most ideal
plant site. The geographical location of a plant can have a strong influence on the success of the industrial venture.
Much care must be exercised in choosing the plant site, and many different factors must be considered.
Primarily, the plant should be located where the minimum cost of production and distribution can be obtained, but
other factors, such as room for expansion and general living conditions, are also important.
An appropriate idea as to the plant location should be obtained before a design project reaches the detailed-
estimate stage, and a firm location should be established upon completion of the detailed-estimate design. The
choice of the final site should first be based on a complete survey of the advantages and the disadvantages of
available real estate.
Maps and charts of the proposed plant location must be included, like vicinity map and site development
plan/plant layout.
The plant layout should be clearly depicted through diagrams and descriptions. A good plant layout is
characterized by minimum material handling, effective space utilization, smooth work flow through the plant, safe
and conducive working area for workers, safety and sanitation facilities and flexibility arrangements
The following factors should be considered in choosing a plant site.
1. Raw materials
2. Markets
3. Power and fuel
4. Climate
5. Transportation facilities
6. Water supply
7. Environmental and Waste disposal factors
8. Labor supply
9. Taxation and legal restrictions
10. Site characteristics
11. Flood and fire protection
12. Community factors
D. The product(s)
This portion describes the product’s physical and chemical properties and identifies their various uses, both as
finished goods and industrial inputs.
E. Raw Materials
The required raw materials and supplies should be listed down and the basis for their selection must be
presented. Description and specifications on their physical, mechanical, and chemical properties must also be given.
Current and prospective costs of raw materials, the availability and continuity of supply, and the current prospective
sources should also be included. The volume required at various phases of operations must be clearly presented.
E. Manufacturing Process
The selected manufacturing process must be described simply and clearly, preferably with the aid of flow
charts and diagrams as well as material and energy balances. The alternative processes and the way they compare
with the chosen process must be mentioned. The analysis should further touch on the manufacturing processes
used in existing plants with same or similar activity, both domestic and foreign. A review of the licensing
agreements and patents would also be helpful.
F. Utilities
This portion describes the amount, cost sources of electricity, steam, water, fuel, air required. This must be
determined in relation to the production schedule and capacity utilization defined. Alternative sources of these
utilities and the feasibility of their use must also be described.
E. Machinery and Equipment
Machinery and equipment required must be identified and individually listed according to the type and use.
Specifications, capacities, and costs must be described in detail. Likewise, the origin of the machinery, whether
local or imported, as well as the manner of and cost of transporting them must be indicated.
A balancing of capacities must be presented to show that the machinery and equipment are capable of
producing the desired maximum output.

F. Buildings, structures and Land Improvements

The site, type, and costs of the building and land, as envisioned in the project, should be accurately presented.
The construction cost of building and facilities should be presented as adapted to the machinery and equipment
that will be used in the project. Land improvements such as roads, drainage facilities, etc. and their respective
costs should be computed and included.
G. Environmental Impact
12 ntaldon 1/8/2018
 List the different activities required in the construction, operation and abandonment of the project, their
respective aspects and impacts (physical, chemical and biological) as well as the corresponding mitigating
measures required/to be adopted/costs.
Describe and determine the quantity of waste generated and the waste abatement system (water, air
pollution, etc) necessary.
Determine the equipment/facilities required and cost of Waste Abatement System. List the environmental
clearances and permits required for the implementation of the project.

GENERAL DESIGN CONSIDERATIONS

A. Plant Location
The following factors should be considered in choosing a plant site.
1. Raw materials
2. Markets
3. Power and fuel
4. Climate
5. Transportation facilities
6. Water supply
7. Environmental and Waste disposal factors
8. Labor
9. Taxation and legal restrictions
10. Site characteristics
11. Flood and fire protection
12. Community factors

1. Raw materials _ The source of raw materials is one of the most important factors influencing the selection of
a plant site. This is particularly true if large volumes of raw materials are consumed, because location near the
raw-materials source permits considerable reduction in transportation and raw materials storage charges.
Attention should be given to the purchased price of the raw materials, distance from source of supply, freight
or transportation expenses, reliability of supply, purity of the available raw materials, and storage
requirements.
2. Markets _ The location of markets or intermediate distribution center affects the cost of product distribution
and the time required for shipping. Proximity to the major markets is an important consideration in the
selection of a plant site, because the buyer usually finds it advantageous to purchase from nearby sources. It
should be noted that markets are needed for byproducts as well as for the major final products.
3. Power and Fuel _ Power and steam requirements are high in most industrial plants, and fuel is ordinarily
required to supply these utilities. Consequently, power and fuel can be combined as one major factor in the
choice of the plant site. Electrolytic processes require a cheap source of electricity, and plants using
electrolytic processes are often located near large hydroelectric installations. If the plant requires large
quantities of coal or oil, location near a source of fuel supply may be essential for economic operation. The
local cost of power can help determine whether power should be purchased or self-generated.
4. Climate _ If the plant is located in a cold climate, costs may be increased by the necessity for construction of
protective shelters around the process equipment, and special cooling towers or air-conditioning equipment
may be required if the prevailing temperatures are high. Excessive humidity or extremes of hot or cold weather
can have serious effect on the economic operation of the plant, and these factors should be examined when
picking a plant site.
5. Transportation facilities _ Water, railroads, and highways are the common means of transportation used by
industrial concerns. The kind and amount of products and raw materials determine the most suitable type of
transportation facilities. In any case, careful attention should be given to local freight rates and existing
railroad lines, if any.
The proximity to railroad centers and the possibility of canal, river, lake, or ocean transport must be
considered. Motor trucking facilities are widely used and can serve as a useful supplement to rail and water
facilities. If possible, the plant site should have access to all three types of transportation, and certainly, at
least two types should be available. There is usually need for convenient air and rail transportation between
the plant and the main company headquarters, and effective transportation facilities fro the plant workers are
necessary.
6. Water supply _ The process industries use large quantities of water for cooling, washing, steam generation,
and as a raw material. The plant, therefore, must be located where a dependable supply of water is available. A
large river or lake is preferable, although deep wells or artesian wells may be satisfactory if the amount of
water required is not too great. The level of the existing water table can be checked by consulting the place’s
geological survey, and information on the constancy of the water table and the year-round capacity of local
rivers or lakes should be obtained. If the water supply shows seasonal fluctuations, it may be desirable to
construct a reservoir or to drill several standby wells. The temperature, mineral content, silt or sand content,

13 ntaldon 1/8/2018
 bacteriological content, and cost for supply and purification treatment must also be considered when choosing
a water supply.
7. Environmental and Waste disposal _ The site must not be situated in an environmentally critical area such as
parks or declared historical sites as this will subject the project to a lot of restrictions during its construction
and operation periods. Even before the preparation of EIS, a preliminary study must be done in order to assess
this factor. Waste disposal can be accomplished by water, land or air dispersal. In choosing the plant site, the
permissible tolerance levels for the various methods of waste disposal should be considered, and attention
should be given to potential requirements for the type of waste treatment facilities.
The higher is the level of water usage in the area, the stricter would be the quality standards for the
stream (receiving body of water) and effluents (treated wastewater).
8. Labor supply _ The type and supply of labor available in the vicinity of a proposed plant site must be
examined. Consideration should be given to prevailing pay rates, restrictions on number of hours worked per
week, competing industries that can cause dissatisfaction or high turnover rates among workers, racial
problems, and variations in the skill and intelligence of the workers.
9. Taxation and legal restrictions _ National, provincial and local tax rates on property, income, unemployment
insurance, and similar items vary from one location to another. Similarly, local regulations on zoning, building
codes, nuisance aspects, and transportation facilities can have major influence on the final choice of the plant
site. In fact, zoning difficulties can often be much more important in terms of cost and time delays than many
of the factors discussed in the preceding sections.
10. Site characteristics _ The characteristics of the land at a proposed plant site should be examined carefully.
Topography of the tract of land and the soil structure must be considered, since they may have a pronounced
effect on construction costs. The cost of land is important, as well as local building costs and living conditions.
Future changes may make it desirable or necessary to expand the plant facilities. Therefore, even though no
immediate expansion is planned, a new plant should be constructed at a location where additional space is
available.
11. Flood, earthquake, and fire protection _ Many industrial plants are located along rivers or near large bodies
of water, and there are risks of flood or typhoon damage. In order to minimize operational risks, plants must
never be located along earthquake belts. Before choosing a plant site, the regional history of natural calamities
of this type must be examined and consequences of such occurrences considered. Protection from losses by
fire is another important factor I picking a plant location. In case of a major fire, assistance from outside fire
departments should be available. Fire hazards in the immediate area surrounding the plant site must not be
overlooked.
12. Community factors_ The character and facilities of a community can have quite an effect on the location of
the plant. If a certain minimum number of facilities for satisfactory living of plant personnel do not exist, it
often becomes a burden for the plant to subsidize such facilities. Cultural facilities of the community are
important to sound growth. Church, libraries, schools, civic theaters, concert associations, and other similar
groups, if active and dynamic do much to make a community progressive. The problem of recreation deserves
special consideration.

B. PLANT LAYOUT
After the process flow diagrams are completed and before detailed piping, structural, and electrical design can
begin, the layout of process units in a plant and the equipment within these process units must be planned. This
layout can play a important part in determining construction and manufacturing costs, and thus must be planned
carefully with attention being given to future problems that may arise. Since each plant differs in many ways and
no two plant sites are exactly alike, there is no one ideal plant lay-out.
However, proper layout in each case will include arrangement of processing areas, storage areas, and
handling areas in efficient coordination and with regard to such factors as:
1. New site development or addition to previously developed site
2. Type and quantity of products to be produced
3. Possible future expansion
4. Operational convenience and accessibility
5. Type of process and product control
6. Economic distribution of utilities and services
7. Type of buildings and building code requirements
8. Health and safety considerations
9. Waste disposal
10. Auxiliary equipment
11. Space available and space required
12. Roads and railroads

Preparation of the layout:

Scale drawings, complete with elevation indications, can be used for determining the best location for
equipment and facilities. Elementary layouts are developed first. These show the fundamental relationships
between storage space and operating equipment. The next step requires the consideration of the operational
14 ntaldon 1/8/2018
 sequence and gives a primary layout based on flow of raw materials, unit operations, storage, and future
expansion. Finally, by analyzing all the factors that are involved in plant layout, a detailed recommendation can be
presented, and drawings and elevations, including isometric drawings of the piping system, can be prepared.
Teamplates, or small cutouts constructed to a selected scale, are useful for making rapid and accurate layouts,
and three-dimensional models are often made. The use of computer-aide design (CAD) could hasten the process.

C. INSTRUMENTATION:
Instruments are used in the chemical industry to measure process variables, such as temperature, pressure,
density, viscosity, specific heat, conductivity, pH, humidity, dew point, liquid level, flow rate, chemical
composition, and moisture content. By the use of instruments having varying degrees of complexity, the values of
these variables can be recorded continuously and controlled within narrow limits.
Automatic control has been accepted generally throughout the chemical industry, and the resultant savings in labor
combined with improved ease and efficiency of operation has more than offset the added expense for
instrumentation. High-speed computers are applied for this purpose. Effective utilization of the many instruments
employed in a chemical process is achieved through centralized control, whereby one centrally located control
room is used for indication, recording, and regulation of the process variables.

D. MAINTENANCE:
Many of the problems involved in maintenance are caused by the original design and layout of plant
equipment. Sufficient space for maintenance work on equipment and facilities must be provided in the plant
layout, and the engineer should consider maintenance requirements when he is making his decisions on
equipment.
Too often, the design engineer is conscious only of first costs and fails to recognize that maintenance costs
can easily nullify the advantages of a cheap initial installation. For example, a close-coupled motor pump utilizing
a high-speed motor may require less space and lower initial cost than a standard motor with a coupled pump.
However, if replacement of the impeller and shaft becomes necessary, the repair cost with a close-coupled motor
pump is much greater than with a regular coupled pump.
The use of high-speed motor reduces the life of the impeller and shaft, particularly if corrosive liquids are
involved. If the engineer fails to consider the excessive maintenance costs that may result, he can make error of
recommending the cheaper and smaller unit. Similarly, a compact piping system of piping, valves, and equipment
may be cheap and convenient for operators’ use, but maintenance of the system may require costly and time-
consuming dismantling operations.

D. UTILITIES:
The primary sources of raw energy for the supply of power are found in the heat of combustion of fuels and
in elevated water supplies. Fuel-burning plants are of greater industrial significance than hydroelectric
installations because the physical location of fuel-burning plant is not restricted. At present time, the most
common fuels are coal, oil and gas. However, other sources of power, like nuclear, wind or fuel cells may
ultimately be developed and replace many of our fossil- based fuels. Likewise, methane gas can be produced as
fuel from the anaerobic biodigestion of organic wastes.
In the chemical industries, power is supplied primarily in the form of electrical energy. Agitators, pumps,
hoists, blowers, compressors, and similar equipment are usually operated by electric motors, although other prime
movers, such as steam engines, Internal-combustion engines, and hydraulic turbines are sometimes employed.
When a design engineer is setting up specifications for a new plant, he must decide whether to use purchased
power or have the plant set up its own power unit. It may be possible to obtain steam for processing and heating
as a by-product from the self generation of electricity, and this factor may influence the final decision. In some
cases, it may be justified to provide power to the plant from two independent sources to permit continued
operation of the plant facilities if one of the power sources fails.
Power can be transmitted in various forms, such as mechanical energy, electrical energy, heat energy, and
pressure energy. The engineer should recognize the different methods for transmitting power and must choose the
ones best suited to his particular process.
Steam is generated from whatever fuel is cheapest, usually at pressures of 450 psig or more, expanded
through turbines or other prime movers to generate the necessary plant power, and the exhaust steam is used in the
process as heat. The quantity of steam used in a process depends upon the thermal requirements, plus the
mechanical power needs, if such power is generated in the plant.
Water for industrial purposes can be obtained from one or two general sources; the plant’s own source or a
municipal supply. If the demands for water are large, it is more economical for the industry to provide its own
water source. Such a supply may be obtained from drilled wells, rivers, lakes, dammed streams, or other
impounded supplies. Before a company agrees to go ahead with any new project, it must ensue itself of a sufficient
supply of water for all industrial, sanitary, and safety demands,, both present and future.
The value of an abundance of good water supplies is reflected in the selling price of plant locations that have
such supplies. Any engineering techniques which are required to procure, conserve, and treat water significantly
increases the operational cost for a plant or process. Increased cost of water processing have made maximum use
15 ntaldon 1/8/2018
 of the processed water essential. I fact, the high costs of constructing and operating a waste treatment plant have
led to concentration of industrial wastes \with the smallest amount of water.
Compressed air, is another utility that is used in the process specially as motive power for pneumatic drives
of final control elements or signal medium in instrumentation.

UTILITIES, COMMON SPECIFICATIONS

1. Electricity: ½ hp-2 hp _ may use 110 volts; for 1-100 hp, use 220-550 volts; 200-2,500 hp, 2,300-4,000
volts.

2. Electric motor starters: Less than 10 hp _ direct on line; 10 hp and above_ reduced voltage ; 1/6 hp-10
hp _ may use single phase; 10 hp and above _ use three-phase ;

3. Motor efficiencies: 1-2 hp 76-81% ; 3-5hp_82-85% ; 10-25hp_ 85-87%; 25-50hp_ 86-89%; 75-
100hp_89-91% ; 150-200 hp_ 89-92%; above 200 hp_91-93%

4. Fuel for Diesel Driven Generator: 1 liter per hr / 3.5 kw rated capacity

5. Diesel Engine Drive : 1.48 HP/kw rated generator capacity

4. Full-Load Motor Current_ Amperes(Induction Type, Squirrel Cage Wound Motor)

Three-Phase Motors Single-Phase Motors

HP 110V 220V 440V 550V 2300V 115V 230V 440V HP
½ 4 2 1 8 … 3.2 1.6 … 1/6
¾ 5.6 2.8 1.4 1.1 … 4.6 2.3 … ¼
1 7 3.5 1.8 1.4 … 7.4 3.7 … ½
1.5 7 5 2.5 2 … 10.2 5.1 … ¾
2 10 6.5 3.3 2.6 … 13 6.5 … 1
3 13 9 4.5 4 … 18.4 9.2 … 1.5
5 … 15 7.5 6 … 24 12 … 2
7.5 … 22 11 9 … 34 17 … 3
10 … 27 14 11 … 56 28 … 5
15 … 40 20 16 … 80 40 21 7.5
20 … 52 26 21 … 100 50 26 10
Three-Phase Motors Single-Phase Motors
HP 110V 220V 440V 550V 2300V 115V 230V 440V HP
25 … 64 32 26 7 … … … …
30 … 78 39 31 8.5 … … … …
40 … 104 52 41 10.5 … … … …
50 … 125 63 50 13 … … … …
75 … 185 93 74 19 … … … …
100 … 246 123 98 25 … … … …
125 … 310 155 124 31 … … … …
150 … 360 180 144 37 … … … …
200 … 480 240 192 49

6. Steam: 15-30 psig, at 250-275 oF; 150 psig, at 366 oF; 400 psig, at 448 oF; 600 psig, at 488 oF, or with 100-
150 oF superheat.
5. Excess air for boiler firing, 25-26%
6. Boiler feed pump discharge pressure must be at least 25% higher than the boiler drum pressure.
7. Boiler feed pump capacity must be around 200 to 300% of boiler rating.
8. Forced Draft Fan: 17 lb air/lb bunker; 1 hp/300-350 lbs steam/hr or 1 hp/650 lb air/hr

9. Heat liberation for small boilers is approximately 15,000 Btu/hr per cubic foot of furnace volume.
10. Heat liberation for big boilers is approximately 30,000 Btu/hr per cubic foot of furnace volume.
11. Heat Emission from surface to ambient:

 T 
4
 T 
4

Tbtu
s,Ta=R
 Q  0.296 Ts  Ta 
1.25
 0.174 e   s    a  
e 
 h  ft
= 2
emissivity, ratio to black body  100 
  100   

16 ntaldon 1/8/2018
12. Cooling water: Supply from cooling tower is at 28-32 oC; return is at 46-50 oC; return seawater at 44oC,
return tempered water or steam condensate above 46 oC. (BAC-Prichard pump discharge pressure=70-75
psig)
13. Cooling air supply at 28-35 oC; temperature approach to process, at 22 oC.
14. Cooling tower drift loss is about 0.15% of recirculating water capacity
15. Cooling tower evaporation loss is equivalent to 1% of recirculating capacity per 10 oF drop in inlet and
outlet temperature.
16. Induced draft fan speed of cooling tower ranges from 250 to 280 rpm
17. Cooling tower water/air weight ratio ranges from 0.6 to 0.8
18. IDF motor requirement is 1Hp/150 m3 air /hr
19. Air to heat ratio; 1 m3/ 6-7 cal
20. For bottle type cooling tower, filler height is 1.2 m - 2.0 meters
21. Cooling tower approach temperature (outlet temperature-wet bulb temperature) must be at least 2 0C.
22. Compressed air supply from compressor at 45, 150, 300 or 450 psig.
23. Instrument air at 45 psig, 0 oF dew point.
24. Fuels: Gas of 1,000 BTU/scf at 5-10 psig, or up to 25 psig for some types of burners; liquid at 6 million
BTU/gal.
25. Heat transfer fluids: Use petroleum oils below 600 oF, Doetherms below 750 oF, fused salts below 1,100
o
F, direct fire or electricity above 450 oF.
26. Fuel for Bunker fired Boilers, 32-37 liters per hr/1000 lb steam/hr rated capacity
27. Flue gas escape velocity at plume:10-20 m/s
28. Flue gas volume 3.8 - 4.5 m3/kg steam (bunker-coal-wood)
29. Steam/bunker ratio:13-15 (85-88% eff) = 18,600 btu/lb, SG= 0.9655
30. Steam/coal ratio: 5.5-6.5 (80-83% eff) =7,5000-10,000 btu/ lb
31. Steam/wood ratio: 2.2-3 kg steam/kg wood (60-65% eff)
32. Steam/kw ratio: extraction=25.0-30.0 lb steam/hr.kw; condensing=12.0-13.0 lb steam/hr.kw
33. Steam/kw ratio: Turbine feed pump=30 lb steam/hr.kw; (600/60 psi)
34. Biogas equivalent: 1m3 biogas(5,000-6000 kcal) = 1.3-1.6 kg wood = 0.4-0.6 liter bunker
35. Diesel = 19,600 btu/lb, Sp.gr = 0.8434
 C H O S  Analysis = % wt
36. Theoretical Air: std ft3/lb fuel  17.10      HHV = BTU/lb
 12 4 32 32  C = lb
 C H O S 
37. Theoretical Air: lb air/lb fuel  1.38       0.00075 HHV
 12 4 32 32 
11CO 2  8O 2  7 CO  N 2  
38. Weight of dry flue gas, lb: Gd =  C
 3 CO 2  CO  
Weight of wet flue gas, lb: Gw = 0.09H + Gd
39. HHV(btu/lb)=146.58 C + 568.78 H + 29.4 S – 6.58A – 51.53 (N+O) ; LHV=HHV-(K)(W)
C=Carbon; H= hydrogen; S=sulfur; A=ash; N= nitrogen; o=oxygen %wt ; K=1030-1080 ;
W=lb water/lb fuel
40. Pneumatic signal: 3/15 psig ≈ 0/100%
41. Current signal: 4/20 mA≈0/100%
 CR  1
42. M   Where: M=Make-up; CR=Recirculation ratio
 CR 
XB = blowdown solid concentration
XB
43. CR  XM= make-up solid concentration
XM
44. Anion/Cation Resin Volume = 2 (raw water for silica >100 mg/l)
45. Cation Parameters:
Service = 15-40 bv/h (20 h) ; backwash = 18 bv/h ( 5-20 min) ;
Regeneration = 2-8 bv/h (20-40 min), HCl = 60-85 g/l @ 5%
Rinsing 4-6 bv/h (10-30 min)
Design cap = 1 eq/l

Anion: Parameters:
Service = 7-20 bv/h (20 h) ; backwash = 4-6 bv/h ( 5-20 min) ;
17 ntaldon 1/8/2018
 Regeneration = 2-8 bv/h (30-40 min) ; NaOH = 60-100g/l @ 4%
Rinsing 8-10 bv/h (10-30 min)
Design capacity = 0.6 eq/l
Ideal Demiwater to Anion Resin Volume Ratio = 300 – 400
46. Boilerwater: (max)
PA = 100-150; MO = 150-200; NaCl = 50; TH = 0; Fe+2 = 1; Cond = 1500μS; SO3- = 10-20;
PO4= = 20-40; pH = 10.5 = 11.5;
47. Critical Point of Water: (turns into steam without boiling) = 705.4 oF / 3206.2 psia
48. Present upper limit of steam table = 1600oF / 5500 psia

FANS, BLOWERS and COMPRESSORS

1. Fans and Blowers
a. Fans are used to raise the pressure about 3% (12 inch H2O) ;
b. Blowers are used for differentials of about 40 psig ; and Compressors for higher differentials.
2. Vacuum pumps;
a. The reciprocating-piston types are used down to 1 torr;
b. Rotary piston down to 0.001 torr,
c. Two-lobe rotary down to 0.0001 torr
d. Steam-jet ejectors, one-stage down to 100 torr
e. Steam-jet ejectors, three-satge down to 1torr
f. Steam-jet ejectors, five-stage down to 0.0001 torr;
3. A three-stage ejector needs 100 lb steam/lb air at a vacuum of 1 torr
4. In-leakage of air to evacuated equipment depends on the absolute pressure, torr, and the volume
of the equipment, according to:
W= kV2/3
Where:
W = in-leakage, lb/hr
k = constant, = 0.2 when P>90 torr, = 0.08 when 3<P<20 torr = 0.025 at P<1 torr
V = volume, ft3
5. Theoretical adiabatic horsepower:
a. Ideal Gas
P 
HP  436.32 x10  5  P1 Q1  Ln  2 
 P1 
b. For isentropic compression
436.32 x10  5  P1 Q1   P 
a

HP   2   1
a  P1  
Where : HP = horse power
Q1 = flow rate at inlet , scfm
T1 = inlet temperature, R
T2 = outlet temperature, R
P1 = inlet pressure, psia
P1 = outlet pressure, psia
a = (k-1)/k
k = ratio of specific heats

 1.2 kg 
v  8.314  T2 
mRT   p2 
0.283
  m3    p 2  0.283 
Pw   1   1  kw
 29.7  n  e  p1 

 29.7   0.283  0.7   p1 
: air flowrate, ν = m3/s
air density,σ = 1.2 kg/m3
air mass flow rate, m = kg/s
Oxygen/air ratio = 0.232 kg/kg
Blower eff, e = usually 70%
Design factor, f = 2 (usual)
Pressure, p = absolute pressure, atm (usually less than 2.5 atm)
T1 = inlet temperature, K
T2 = outlet temperature, K

18 ntaldon 1/8/2018
 6. Compressor Rated Power Drive @ 7 bars discharge pressure
1HP per 4 cfm
7. Outlet Temperature
a
P 
T2  T1  2 
 P1 
8. To compress air at 100oF; k = 1.4, compression ratio= 3,
62 x10 6
HP 
 ft 3  T2 = 306oF
 
 day 
9. In general, exit temperature should not exceed 350-400 oF; for diatomic gases (k = 1.4), this
corresponds to a compression ratio of about 4

10. The compression ratio should be about the same in each stage of a multi-stage unit. With n stages, and
an inlet pressure of Po, the compression ratio per stage, CR, is:
CR = (Pn/Po)1/n
11. Efficiencies of reciprocating compressors:
65% at a compression ratio of 1.5
75% at a compression ratio of 2
80-85% at a compression ration of 3-6
12. Efficiencies of large centrifugal compressors:
76-78% for units of 6,000-100,000 cfm actual ft3/min, at suction
13. Rotary compressors have efficiencies of 70%, except liquid-liner types (e.g. liquid ring), which are 50%.
Ex. Joy Compressor: 440 cfm, 125 psi, 75hp
14. Pneumatic drive air requirements: 80-120 psi (up to 45oC)
15. Energy consumption increase/Increase in Air temperature = 1%/4 oC rise

E. COOLING TOWERS
1. Water in contact with air under adiabatic conditions eventually cools to wet-bulb temperature.
2. In commercial units, 90% saturation is feasible.
3. Relative cooling tower size is sensitive to the difference between the exit and wet-
bulb temperatures (see table)
T, oF 5 15 25
Relative Volume 2.4 1.0 0.55

4. Tower fill has a highly open structure to minimize pressure drop, which typically, is a maximum of 2 in
H2O.
5. Water circulation rate is 1- 4 gpm/ft2 ; air rate = 1,3000-1,800 lb/(h)(ft2) ≈300-400 ft/min.
6. Ratio of water flowrate/air flowrate (L/G) = 1.0 -1.5 (wt/wt)
7. Density of standard air = 1.2 kg/m3
8. Theoretical power requirement for fans = 4.1 hp/1000 m3/minute
9. Design power requirement for fans = 6.0-7.0 hp /1000m3/minute
10. Fan HP to Cooling Duty ratio= 0.75-1.5 HP/(M BTU/h)
11. Fan dia = 14-28 ft (6-8 blades/fan)
12. Fan speed = 260-280 rpm
13. Chimney assisted natural-draft towers are hyperboloidal-shaped because they have greater strength for a
given thickness; a tower 250 ft high has concrete walls 5-6 in thick. The enlarged cross-section at the top
aids in dispersing humid air to the atmosphere.
14. Countercurrent induced-draft towers are the most common in the chemical process industries. These
towers are able to cool water within 2oF of the wet bulb temperature.
15. Evaporation losses are 1% of circulation for every 10 oF of cooling range. Windage, drift losses of
mechanical-draft towers are 0.1-0.3%. Blowdown of 2.5-3.0% of the circulation is necessary to prevent
excessive salt buildup.
16. Basin Volume : 15-20 minutes holding time based on circulation capacity
17. Cooling Tower Load, Ton = gpm (T2-T1)/30 where T = oF
Miscellaneous data: BacPrichard Cooling Tower: 12,000 gpm (3,000 gpm x 75 psi x 200 hp)
4 x 50 hp IDF; basin:1000m3 , 14m x 44m x 2m
4cells (W =12.8 m, L=9.14m, H= 14m)
LiangChi Cooling Tower: 1,500 gpm x150 ft x 60HP ; inlet = 19psig/31oC,
outlet =33 psig/29oC
19 ntaldon 1/8/2018
F. STRUCTURAL DESIGN
One of the most important aspects in structural design for process industries is a correct foundation design
with allowances for heavy equipment and vibrating machinery used. The purpose of the foundation is to distribute
the load so that excessive or damaging settling will not occur. The type of foundation depends on the load
involved and the material on which the foundation acts. It is necessary, therefore, to know, the characteristics of
the soil at a given plant site before the structural design can be started.
Corrosive effects of the process, cost of construction, and climatic effects must be considered when choosing
structural materials. Steel and concrete are the materials of construction most commonly used, although, wood,
aluminum, glass blocks, glazed tile, bricks, and other materials are also of importance.
In any type of structural design fro the process industries, the function of the structure is more important than
the form. Although cost is important, the engineer preparing the design should never forget the fact that the quality
of a structure remains apparent long after the initial cost is forgotten.

G. STORAGE
Adequate storage facilities for raw materials, intermediate products, final products, recycle materials, off-
grade materials, and fuels are essential to the operation of the process plant. A supply of raw materials permits
operation of the process plant regardless of temporary procurement or delivery facilities. Storage of intermediate
products may be necessary during plant shutdown from emergency repairs while storage of final products makes it
possible to supply the customer even during a plant difficulty or unforeseen shutdown. An additional need for
adequate storage is often encountered when it is necessary to meet seasonal demands from steady production.
Bulk storage of liquids is generally handled by closed spherical or cylindrical tanks to prevent the escape of
volatiles and minimize contamination. Floating roof tanks are used to conserve valuable products with vapor
pressures which are below atmospheric pressure at the storage temperature. Liquids with vapor pressures above
atmospheric pressure must be stored in vapor tight tanks capable of withstanding internal pressure.
If flammable liquids are stored in vented tanks, flame arresters must be installed in all openings except
connections made below the liquid level.
Gases are stored at atmospheric pressure in wet or dry-seal gas holders. The wet-gas holder maintains a liquid
seal or water or oil between the top movable inside tank and the stationary outside tank. In the dry-seal holder, the
seal between the two tanks is made by means of a flexible rubber or plastic curtain. High-pressure gas is stored in
spherical or horizontal cylindrical pressure vessels.
Solid products and raw materials are either stored in weather-tight tanks with sloping floors or in outdoor bins and
mounds. Solid products are often packed directly in bags, sacks or drums.

H. MATERIALS HANDLING
Materials-handling equipment is logically divided into continuous and batch types, and into classes for the
handling of liquids, solids, and gases. Liquids and gases are handled by means of umps and blowers; in pipes
flumes, and ducts; and in containers such as drums, cylinders, and tank cars. Solids may be handled by conveyors,
bucket elevators, chutes, lift trucks, and pneumatic systems. The selection of materials-handling equipment
depends upon the cost and the work to be done. Factors that must be considered in choosing such equipment
include:
1. Chemical and physical nature of material being handled
2. Type and distance of movement of material
3. Quantity of material moved per unit time
4. Nature of feed and discharge from materials-handling equipment
5. Continuous or intermittent nature of materials handling

The major movement of liquid and gaseous raw materials and products within a plant to and from the point
of shipment is done by pipeline. Many petroleum plant transport raw materials and products by pipeline. When
this done, local and national regulations must be strictly followed in the design and specification of the pipeline.
Movement of raw materials and products outside of the plant is usually handled either by rail, ship, truck, or
air transportation. Some type of receiving or shipping facilities, depending upon the nature of the raw materials
and products, must be provided in the design of the plant. Information for the preparation of such specifications
can usually be obtained from the transportation companies serving the area.
In general, the materials-handling problems in the chemical engineering industries do not differ widely from
those in other industries except that the existence of special hazards, including corrosion, fire, heat damage,
explosion, pollution, and poison, together with special service requirements, will frequently influence the design.
The most difficult of these hazards often is corrosion. This is generally overcome by the use of a high-first-cost,
corrosion-resistant material in the best type of handling equipment.

20 ntaldon 1/8/2018
I. ENVIRONMENTAL IMPACT ASSESSMENT (EIA)
EIA is the process of predicting the likely environmental consequences of implementing a project or
undertaking, and designing appropriate preventive, mitigating and enhancement measures. EIA is needed to
prepare an Environmental Impact Statement.
EIA is a planning and management tool that will help government decision makers, the project proponent and
affected communities or groups decide whether the positive consequences or benefits of a project outweigh the
negative consequences or risks. These consequences can be classified as biophysical and ecological, geophysical,
socio-economic , cultural, and human health impact.
EIA will also identify alternative measures which can prevent, minimize, or alleviate the adverse
consequences of the project in its stages—from construction, operation, closing, to rehabilitation after the project
is ended. It will also provide sufficient options the project to be continued with assurance that the quality of the
environment and well-being of the people will be safeguarded.
Progress must be sustainable. As such, industrialization, particularly the construction and operation of a plant
must exert the barest minimum level of stress to the environment and the people. Utilization of natural resources
either as utilities or raw materials must be optimized. Focus of the design must be on waste minimization rather
than on treatment.
It is safer and more economical to prevent pollution than treat it. This could be achieved by the following:
1. Source reduction _ any practice that reduces or eliminates the quantity, pollution load or toxicity of waste
at a point of generation.
a. Input material _ Choose the material that could introduce minimum hazardous compounds to the
production process.
b. Technology _ adopt technologies that generate less wastes
c. Good operating and housekeeping _ adopt administrative, procedural and institutional measures that
a company can use to minimize waste.
d. Product _ if there is a choice to the type of product, chose one which will introduce less hazardous
or toxic materials to the environment.
2. Recycling _ the use or re-use of waste as an effective substitute for a commercial product or as an
ingredient or feedstock in an industrial process. It can occur on or off-site and includes the reclamation of
useful constituent fractions within a waste material, removal of contaminants from a waste to allow it to
be re-used, or the use of waste as a fuel substitute. Recycling could be classified as on-site recycling, off-
site recycling, reclamation or waste exchange.
If none of the preceding methods is capable of solving a given pollution problem, waste treatment must be
used. This treatment could either be physical or chemical in nature, depending on the type of waste involved and
the degree of removal necessary. The treatment necessary for the waste is governed by the standards established by
DENR. These are the effluent/stack standard and the stream/ambient standard. The stream standard specifies the
limit of pollutants that could be present I the waste being discharged from the plant; the stream standard specifies
the quality of air or water that must be maintained upon the point of discharge.

AIR and LAND POLLUTION

Air pollutants could either be classified as particulates or gaseous. It could also be classified as organic or
inorganic. Extensive efforts have been directed toward controlling the many types of materials that contribute to
air pollution. Electrostatic precipitators, venturi scrubbers, cyclones, sonic agglomerators, scrubbers, washers, and
many other kinds of equipment and treating methods have been used to remove atmospheric contaminants from
waste gases.

WATER POLLUTION
Water pollutants could take the following forms; Solids, acids and alkalis, oxygen consuming materials,
toxic materials, tainting substances, and high temperature wastes. Wastewater treatment could be classified as
either be physical or chemical; primary, secondary or tertiary; aerobic or anaerobic. The type of treatment will
always be dictated by the type of pollutant present in wastewater and its concentration. Organic wastes usually
undergo either aerobic or anaerobic treatment depending on the BOD load (Biochemical Oxygen Demand). As a
rule of thumb, if BOD is less than 2,000 mg/l, use aerobic, greater than that use anaerobic. The consideration is
based on the power requirements needed for aeration versus the possible fuel (methane) that can be produced
through the anaerobic biodigestion of organic wastewater. The comparison would boil down to the comparison of
the operating costs and initial investment required.
Inorganic wastes usually require physical and chemical treatment. Physical treatment includes screening,
sedimentation, filtration, flotation, centrifugation, , evaporation, drying and incineration, among others. Example
of chemical treatment are, neutralization, oxidation, reduction, precipitation, coagulation, flocculation, ion-
exchange, reverse osmosis, electro dialysis

21 ntaldon 1/8/2018
 Environmental Impact Statement System
The entire process of organization, administration and procedure institutionalized for the purpose of
assessing the significance of the effects of physical developments on the quality of 4the environment.
The basic policy in the implementation of the EIS System is:
“to attain and maintain a rational and orderly balance between socio-economic growth and environmental
protection”

EIA__ is the process of predicting the likely environmental consequences of implementing a project undertaking and
designing appropriate preventive, mitigating and enhancement measures. EIA is needed to prepare an EIS.
EIA is a planning and management tool that will help government decision makers, the project proponent, and
affected communities or groups decide whether the positive consequences or benefits of a project will outweigh
the negative consequences or risks.
These consequences (impacts) can be classified as biophysical/ecological, geophysical, socio-economic,
cultural and human health impact. (physical, biological, social environment)
EIA will also identify alternatives and measures which can prevent or minimize, or alleviate the adverse
consequences of the project in its stages_ from construction, operation, closing, rehabilitation after the project
is ended. It will also provide sufficient options for the project to be continued with assurance that the quality
of the environment and well-being of people will be safeguarded.

Basic Questions EIA Aims to Answer

1. What will happen as a result of the project?
2. What will be the extent of the changes?
3. Do the changes matter?
4. What can be done about them?
5. How can the decision makers and the public be informed of what needs to be done?

Common Questions Need To Be Asked Before Project Implementation

1. Can it operate safely, without serious risk of dangerous accidents or long term effects?
2. Can the local environment cope with the additional waste and pollution it will produce?
3. Will its proposed location conflict with nearby land uses or preclude later developments in the surrounding
area?
4. How will it affect the potable water resource, local fisheries, farms or other industries?
5. Is there sufficient infrastructure, such as roads, railway, and sewers to support it?
6. How much energy, water, and other resources will it consume, and are these in adequate supply?
7. What human resources will it require, and what social effects may this have on the community?
8. What damages may it inadvertently cause to national assets such as beaches or other tourism areas, or
historical or cultural sites?

Three Types of Impacts

1. Direct Impacts _ Direct results of a specific action or events at the same time and place in which the action
occurs.
2. Indirect Impacts_ They occur after the project has been implemented or in a place distant from the location.
3. Cumulative_ It represents the total results from the incremental impacts of the projects when added to the
past, present, reasonably foreseeable future.
(time crowding_ repetitive, space crowding_ high density, compounding effect_ synergistic multiple sources)

IMPACT IDENTIFICATION/ASSESSMENT TOOLS

1. Qualitative
2. Quantitative
3. Economic
4. Time scale (long-term or short-term)
5. Geographical (area disturbed)
6. Reversibility (permanent, temporary)
7. Magnitude ( significant/severe, moderate, insignificant)

Three (3) Interconnected Primary Components of Environment

1. Physical Environment _ This component includes; Geology, Topography, Soil, Water Resources, and air
Quality.
2. Biological Environment_ It includes species population (flora and fauna), Communities and its relation to the
ecosystem
3. Social Environment_ This includes; Culture, Religion, Ethnic Values and the concern of the minority people.
22 ntaldon 1/8/2018
What is covered by EIS System?
The EIS System covers projects and undertakings categorized as Environmentally Critical Projects (ECP) and
projects located in Environmentally Critical Areas (ECA).
An Environmentally Critical Project is one that has a high potential for negative environmental impacts. This is
listed under Presidential Proclamation 2146, Series of 1981 and Presidential Proclamation 803, Series of 1996. It also
includes other projects which the President may proclaim as environmentally critical in accordance with Section 4 of PD
1586. Under the DAO 96-37, the following projects and undertakings are defined as ECPs:
Environmentally Critical Projects

a) Heavy Industries
1. non-ferrous metal industries
2. iron and steel mills
3. smelting plants
4. petroleum and petri-chemical industries, including oil and gas
b) Resource Extractive Industries
1. major mining and quarrying projects
2. forestry projects
• logging • major wood processing projects
• forest occupancy • forest occupancy
• extraction of mangrove products • grazing
• introduction of fauna (exotic animals) in public/private forests
3. fishery projects
• dikes for/and fishpond development projects
c) Infrastructure Projects
1. major dams 2. major roads and bridges
3. major power plants (fossil-fueled, 4. major reclamation projects
nuclear, coal-fired, hydroelectric,
geothermal)
d) Golf Course projects
An Environmentally Critical Area is an area that is considered ecologically sensitive. It is also listed under Proclamation
Nos. 2146, 803 and other areas which the President may proclaim as environmentally critical in accordance with Section 4
of PD 1586.
An area is environmentally critical if it exhibits any of the following characteristics:
Environmentally Critical Areas

a) All areas declared by law as national parks, watershed reserves, wildlife preserves and sanctuaries
b) Areas set aside as aesthetic potential tourist spots
c) Areas which constitute the habitat for any endangered or threatened species of indigenous Philippine wildlife
(flora and fauna)
d) Areas of unique historic archaeological or scientific interest
e) Areas which are traditionally occupied by cultural communities or tribes (indigenous cultural communities)
f) Areas frequently visited and/or hard-hit by natural calamities (geologic hazards, floods, typhoons, volcanic
activity, etc.)
g) Areas with critical slopes
h) Areas classified as prime agricultural lands
I) Recharged areas of aquifers
j) Water bodies characterized by one or any combination of the following conditions:
1. tapped for domestic purposes
2. within the controlled and/or protected areas declared by appropriate authorities
3. which support wildlife and fishery activities
k) Mangrove areas characterized by one or any combination of the following conditions:
1. with primary pristine and dense young growth
2. adjoining mouth of major river systems
3. near or adjacent to traditional productive fry or fishing grounds
4. which act as natural buffers against shore erosion, strong winds and storm floods
5. on which people are dependent for their livelihood
l) Coral reefs characterized by one or any of the combination of the following conditions:
1. with fifty percent (50%) and above live coralline cover
2. spawning and nursery grounds for fish

23 ntaldon 1/8/2018
 3. which act as natural breakwater of coastlines
 All projects or undertakings falling within the category of ECP and ECAs are required to first secure an Environmental
Compliance Certificate (ECC) prior to construction and operation. The ECC certifies, under certain conditions, that the
proponent has complied with requirements of the EIS System.

What is an Environmental Compliance Certificate “ECC”?

An ECC is a document issued by the DENR Secretary or the Regional Executive Director certifying that
based on the representations of the proponent and the preparers, as reviewed and validated by the EIARC, the proposed
project or undertaking will not cause significant negative environmental impacts, and that the proponent has complied
with the requirements of the EIS system.

How do you apply for an ECC for an ECP?

Proponents who wish to undertake a project that is within the definition of environmentally critical projects,
regardless of their location, must prepare an environmental impact statement (EIS). This document will be submitted to
the Environmental Management Bureau (EMB) of DENR as the basis for the review and eventual issuance or denial of an
ECC by the DENR Secretary.

For ECPs, it is the Environmental Management Bureau (EMB) that is responsible for implementing the EIS system.

How do you apply for an ECC for a project located in an ECA?

Proponents whose projects are located within ECAs will be required to submit an initial environmental
examination (IEE) to the concerned DENR Regional Office, without prejudice to the decision of the RED to further
require the proponent to submit an EIS.
In accordance with Section 30 of Article III of DAO 96-37, however, the proponent of a project within an ECA may
immediately opt to prepare and submit an EIS to the DENR Regional Office in place of an IEE. This is advisable in cases
when the nature of the project will cause significant environmental impacts or has a scale and magnitude that already
requires an EIA, but is not listed as an ECP. A more detailed discussion of this is contained in Chapter 5.
The IEE or EIS will be the basis for the review and issuance or denial of ECC by the Regional Executive Director.

Non-Coverage

What projects are not covered by the EIS system?

Under Sec. 2, Article I of DAO 96-37, the following projects and undertakings are not covered by the EIS system:
 Projects which are not considered as environmentally critical or located within an ECA;
 ECPs and projects or structures within ECAs which have been operational or in existence prior to 1982, except in
cases where their operations are expanded in terms of daily production capacity or area, or the process is modified; and
 Countryside business and barangay entities (CBBEs) covered by RA 6810, otherwise known as the Magna Carta
for Countryside and Barangay Business Enterprises (Kalakalan 20) and registered with the Local Government Unit
(LGU) between 1991 to 1994, inclusive. Provided that, unless otherwise amended by law, non-coverage of such
CBBEs shall only subsist for a 5-year period beginning from its date of registration.

The contents of an EIS

I. 1. Table of Contents
2. Executive Summary
A. Brief Project Description
B. Brief Description of Methodology - scope and duration
C. Brief Description of Project Setting
D. Summary Scoping Report
E. Summary Matrix of Major Impacts, Mitigation Measures and Environmental Management Plan
(Annex 4-C)
F. Summary Matrix of Environmental Monitoring Plan (Annex 4-D)
G. Summary Presentation of the EIA Process/Process Documentation
3. Project Description
A. Basic Project Information
B. Project Location
C. Project Rationale
D. Alternatives
E. Description of Project Phases
 Pre-Construction/Operational Phase
 Construction Phase

24 ntaldon 1/8/2018
  Operational Phase
 Abandonment Phase

4. Baseline Environmental Conditions
A. Land
B. Water
C. Air
D. People
5. Impact Assessment
A. Impact Identification
B. Impact Prediction and Evaluation
C. Future Environmental Conditions without the Project
D. Future Environmental Conditions with the Project
E. Unavoidable and Residual Impacts
6. Environmental Management Plan
A. Mitigation/Enhancement Measures/Plan (impacts/risks)
 Construction Contractor’s Environmental Program
 Social Development Program (resettlement/relocation/livelihood)
 Contingency Response Plan
 Abandonment Plan
B. Environmental Monitoring Action Plan
C. Institutional Plan
D. Information Education Communication Plan
E. Cost Estimate/Viability
7. Proposal for an Environmental Monitoring and Guarantee Fund, if required

VIII. Attachments or Annexes

 List of EIS Preparers with specified field of expertise
 Original Sworn Accountability Statement of Key EIS Consultants (Annex 4-E)
 Original Sworn Accountability Statement of Proponent (Annex 4-F)
 Bibliography/References
 Photos or plates of proposed project site, impact areas and affected areas and communities
 Process Documentation Report
 Summary of Proof of Social Acceptability
 Maps of the following scale, among many other maps:
 national - 1:250,000
 regional - 1:100,000
 provincial - 1:50,000
 land use map - 1:50,000
 vicinity/location map - 1:10,000 showing project location and political boundaries, delineation of
primary and secondary impact area
site development map - 1:10,000

25 ntaldon 1/8/2018
The Contents of the IEE Report
A. Communication of Results
1. Table of Contents
2. Executive Summary (brief description of substantive content)
3. List of IEE Preparers and their respective expertise area in the IEE
4. Sworn Accountability Statements of key IEE Preparers (Annex 5-D)
5. Sworn Accountability Statement of Project Proponent (Annex 5-E)
6. Process Documentation (an Annex to the IEE Report)
7. Proof of Social Acceptability
8. Certificate of locational viability/locational clearance or zoning certificate for areas that have
already been zoned
7. References/Bibliography

B. Substantive Content
1. Project Description to include:
 description and map of project location
 project purpose/rationale
 general description of project design/plan
 project components and activities
 description of components and activities by development phase
 pre-construction/construction phase (facilities development)
 operation phase (technology, raw materials and process)
 abandonment phase (abandonment plan)
2. Methodology for Data Gathering to include process and content description of:
 secondary data gathered and sources
 primary/baseline data
 public consultations
 process documentation of consultative activities (an annex to the IEE Report)
3. Description of Environmental Setting and Receiving Environment:
 delineation/mapping of primary and secondary impact areas
 description of existing biophysical environment
 description of existing socio-cultural-economic environment
 discussion of future environmental conditions without the project
4. Impact Identification and Assessment
 summary matrix of predicted environmental issues/impacts and their level of significance at
various stages of development
 brief discussion of specific significant impacts on the physical and biological resources
 brief discussion of significant socioeconomic effects/impacts of the project including:
 discussion of indigenous people’s concerns and possible socioeconomic, political
and cultural impacts of a project or undertaking in ancestral lands or domains, as
defined under DAO 2 series of 1993, or subsequently by law, of indigenous
communities.
 discussion of gender issues if projects will have significant impacts on women.
 discussion of relationship among population, development and environment for
projects with significant impact on population.

5. Environmental Management Plan

 summary matrix of proposed mitigation and enhancement measures, estimated cost and
responsibilities
 brief discussion of mitigation and enhancement measures
 monitoring plan
 contingency plan (if applicable)
 institutional responsibilities and agreements

6. Recommendations
 list of resolved issues
 list of partially resolved issues
 new issues arising from the IEE that have been resolved

26 ntaldon 1/8/2018
Example of Matrix Presentation for Environmental Impact Assessment:
SUMMARY OF MATRIX OF ENVIRONMENTAL IMPACTS DUE TO THE PROPOSED PROJECT
Sources of potential Potential Impacts Impact Probable Reversibility Time Scale Magnitude of
Impacts (+/-) frequency of Impact of Impact Impact
A. Pre-Operation
1. Mobilization 1.1Increase in SPM - Low Reversible Short term Insignificant
concentration Short term
1.2 Nose generation Moderate Reversible Low
2.ConstructionWorks 2.1Erosion/siltation at the - Low Reversible Short term Insignificant
construction site
2.2 Increase in SPM - Low Reversible Short term Low

2.3Generation of solid waste, - High Reversible Short term Low

2.4Emission from vehicles and - Moderate Reversible Short term Insignificant
engines
2.5 Noise generation - Moderate Reversible Short term Low

2.6Generation of health - Short term

hazards to workers and Moderate Reversible Low
public
2.7Increase in employment and + High Short term Significant
community income
2.8Generation of wastewater - Low Reversible Short term Insignificant

B. Operation
1. Fabrication of 1.1 Generation of noise - Low Reversible Short term Insignificant
iron cages 1.2 Emission of particulates to - Low Reversible Short term Significant
the air
1.3 Generation of solid waste - Low Reversible Short term Low

2. Galvanizing of 2.1 Generation of fumes - Low Reversible Short term Insignificant

iron cages 2.2Generation sludge and Low Reversible Long term Significant
wastewater

3..Storage/Handling 3.1 Generation of fumes - Low Reversible Short term Insignificant

of Toxic Materials 3.2 Contamination of soil - Low Reversible Long term Significant

C.Abandonment
1.1Eliminate risks/ hazards + Low Reversible Long term Significant
1.2 Unemployment - High Reversible Long term Significant

27 ntaldon 1/8/2018
 SUMMARY OF MATRIX OF THE PROPOSED MITIGATING/ENHANCEMENT MEASURES

Environmental Impacts by Development Mitigation if (-) Enhancement if Cost of Responsibilities Schedule

Phase (+) Mitigation
1.PRE-OPERATIONAL PHASE

1.1 Physical Environment

 Air pollution  Use only equipment in good  Proponent/ Construction
running condition contractor
 Cover hauling trucks with  Proponent/
tarpaulin or similar materials contractor Delivery
 Spray dusty ground and Negligible
stockpiles with water when  Proponent/
necessary contractor Construction

 Noise  Provide equipment with  Proponent Construction

mufflers
 Schedule noise producing Negligible  Proponent Construction
equipment and activities at
day time (7am-6pm)
 Generation of solid materials  Implement reuse/recycling of  Proponent Construction
solid wastes
 Provide garbage receptacles at  Proponent
the workplace P500 Construction
 Use excavated soil as back-
filling materials  Proponent
Construction

1.2 Biological Environment

 Destruction of vegetation Plant trees on adjacent vacant P1000  Proponent Construction

area
1.3 Socio-Economic Environment
 Occupational risks to workers  Strict implementation of  Proponent Construction
standard and safe operating
procedures
 Provide toilet facilities near P2000  Proponent
the work place Construction
 Post safety reminders on  Proponent
strategic places Construction

 Health impacts  Implement measures  Proponent Construction

addressing impact on
physical environment
 Suspend pertinent activities Negligible  Proponent
when nuisance to the Construction
community exists

 Generate revenue for the LGU  Pay taxes promptly and Negligible  Proponent Construction
honestly
 Patronize local suppliers

 Employment  Hire qualified local labor Negligible  Proponent Construction

 Pay standard salaries

28 ntaldon 1/8/2018
2. OPERATIONAL PHASE
2.1 Physical Environment
 Threat to water quality_  Follow strictly standard  Proponent Operation
pollution operating procedure System
 Implement strictly zero-waste already in  Proponent Operation
program place
2.2 Biological Environment
 Threat to agriculture  Implement strictly zero-waste System  Proponent Operation
program already in
place
2.3 Socio-Economic Environment
 Poses risks/hazards to the  Strict implementation of  Proponent Operation
surrounding community safety measures in order to P5,000
 Pose health risk to employees reduce or eliminate hazards.
 Provide free clinic to the
baranggay
 Good housekeeping and System
sound preventive already in  Proponent Operation
maintenance program place
 Annual health check-up to
employees
 Generation of revenue for the LGU  Pay taxes promptly and Operation/
honestly Negligible tax period
 Patronize local supplier
 More stable plant operation  Proper coordination with  Proponent Operation
customers for with regard to Negligible /customers
delivery/shipment schedule

3. ABANDONMENT PHASE

2.1 Physical Environment

 Eliminate air/water/solid
noise pollution
2.2 Biological Environment
 Eliminate threat to agriculture
2.3 Socio-Economic Environment
 Unemployment
and  Treat sludge remaining in  P10,000  Proponent  Before
the tanks before disposal disposal of
 Proper disposal of remaining sludge
toxic materials remaining
after operation is ceased.
 Payment of separation fees
 Transfer/absorb if possible
of the terminated workers to
the poultry operation

29 ntaldon 1/8/2018
ENVIRONMENTAL MONITORING PROGRAM

Project Phase Parameter Location Frequency Responsibility

Pre-Operational 1. Equipment Emission & airborne 1. Project Site 1.Before 1. Proponent
Phase dust (visual) Construction

2. Noise
2.
2.Project Site 2. Daily 2. Proponent/
3. Implementation of EMP & Contractor
compliance to ECC conditions
3.Project site & 3. Case to case 3. Proponent/
other basis Contractor
applicable
locations

Operational Phase 1. Emission 1.Project Site 1. Quarterly 1.Proponent/DENR

2. Ambient air
2. Project site 2. Quarterly 2.Proponent/ DENR
3. Implementation of EMP &
compliance to ECC conditions. 3.Project Site 3. Daily 3.Proponent/ DENR
4. Health

4.Project Site 4. Annual 4.Proponent/ workers

30 ntaldon 1/8/2018
2.5 Financial Feasibility

Statement of Financial Study

All projects are considered viable only when they are expected to be profitable to meet short-term
obligations. It must likewise, be liquid and remains to be liquid even in adversities. It must sustain growth through
net-worth sources rather than borrowings and be able to service financing charges religiously. This makes the
financial study the most critical and the most important part of the project feasibility study.
As such, this portion should show in specified terms whether the project will be profitable even with existing
competition and unfavorable economic conditions, and present detailed figures to show the improvement of the
project’s financial conditions over time.
These may be shown by the preparation of statements and schedules on the profits expected to be realized,
the modes of financing needed to optimize the project’s performance, the manner and period of repaying creditors,
and other financial obligations which are vital to the success of the venture.
The financial study of the project may be broken down into the following major portions.
 Major assumptions
 Total project costs
 Initial working capital requirements
 Alternative source of financing considered, if any
 Sources of financing the project
 Beginning and pro-forma financial statements
 Financial analyses

A. Major Assumptions
In the formulation of financial projection, assumptions play a major role because they serve as the foundation
for estimating the future expenditures, expenses, and revenues of the project as accurately as possible. These
assumptions, therefore, must be based on well-considered, realistic, and workable facts.
In formulating assumptions, one must consider the following guidelines:

1. Existing business practices in the industry where the project belongs may provide some valuable information
and insights on:
2. Previously made feasibility studies directly related to the project may contribute additional factors to be
considered, which either confirm or contradict findings in the industry standards, specifically those items
involved in the computations for Selling price, Sales forecast, Unforeseen costs, Production volume, Product
mix
3. Government regulations and incentives directly or indirectly affect the project, such as: Import policies, Export
policies, Tax rates, Tax exemptions, Price ceilings, Relevant administrative orders
4. Other pertinent data which can justify the assumptions of the study, such as industry profiles, pre-feasibility
studies, symposiums and conferences, and material outputs of industry associations.

In general, assumptions in the preparation of the financial study should be minimized as much as possible and
formulated only when necessary.

The list of assumptions incorporated in the study, however, should remain intact and consistent throughout
the analysis and must have the following characteristics: Factual, Justifiable, Realistic, Workable.

B. Total Project Cost

The second step in the preparation of the financial aspect of a project feasibility study is an estimation of the
project’s total cost or initial asset requirements.
Based on the materials, supplies, equipment, physical plant, and manpower needs of the project specified in
the technical portion, the total project cost is composed of planned fixed-asset acquisitions and current-asset levels.

1. Fixed assets _ In projecting the project’s fixed-asset requirements, the most approximate acquisition cost of the
following accounts should be taken into consideration
a. Land and land improvements
b. Buildings, including electric and water utilities, furniture and fixtures
c. Machinery and Equipment, plus installation costs
d. Trial-run associated with electric utilities, equipment and machinery

Land and land improvements consist of the cost of land, the corresponding notary’s fees associated with
land acquisition, registration duties, and other related costs.
Building costs imply expenditures incurred in constructing the building and its foundations, water pipes,
electrical connections, gas supply, telephone system, reservoir and tanks, wastewater lagoons/disposal,
fencing, roads and paths, employee housing, and fire protection.

31 ntaldon 1/8/2018
 Likewise, the various components of the machinery, equipment, and supply costs are purchase taxes,
freight, handling and insurance expenses, custom duties, etc., in addition to the cost of acquiring these assets,
together with expenditures realized in foundation set-ups, tests and start-up, prime movers, electricity and
telephone lines, electrical equipment, internal transport equipment, vehicles, office equipment and supplies,
furniture and fixtures for employee’s houses maintenance and cleaning equipment, and spare parts.

2. Current Assets _ The initial current assets could be divided into inventory investments, inventory-related costs
and cash credits.
a. Inventory investments include purchases of materials and supplies, and the corresponding freight
expenses
b. Classified under inventory-related costs are such accounts as direct and indirect labor with
corresponding fringe benefits; heat, light, and power; maintenance; and warehousing expenses related to
raw materials, materials in process, and finished goods.
c. Cash credits are itemized into pre-paid expenses, intangible assets, operating salaries, wages, and fringe
benefits, engineering costs, operating taxes, office supplies, communication facilities, office utilities,
billing costs, transportation costs, expenses for advertising, borrowing costs, and provision for
unforeseen costs.

Intangible assets are itemized as follows: patents, licenses, goodwill, reproduction rights, and
organization and pre-operating expenses, if the latter are amortized for a period extending more than one
year.
Organizational expenses include costs of initial investigations, pre-feasibility studies, economic and
marketing studies, financial and profitability studies, design studies, and consulting-engineering fees.
The total current-asset costs are then multiplied by the assumed current ratio which is ideally 2;1 to
arrive at the total cost of working capital.
By adding the latter and the total costs of fixed assets, the total project cost is estimated. In general,
the computation for project-cost estimation should be as detailed as possible without disregard for any
minor account. Five percent of these itemized projections is usually allocated to unforeseen costs.
C. COST ESTIMATION

1. Capital Investments
Before an industrial plant can be put into operation, a large amount of money must be supplied to
purchase and install the necessary machinery and equipment. Land and service facilities must be obtained,
and the plant must be erected complete with all piping, controls and services. In addition, it is necessary to
have money available for the payment of expenses involved in the plant operation.
The capital needed to supply the necessary manufacturing and plant facilities is called the fixed-capital
investment, while that necessary for the operation of the plant is termed the working capital. The sum of the
fixed-capital investment and the working capital is known as the total capital investment. The fixed-capital
portion may be further subdivided into manufacturing fixed-capital investment and non-manufacturing fixed-
capital investment.

a. Fixed-Capital Investment
Manufacturing fixed-capital investment represents the capital necessary for the installed process
equipment with all auxiliaries that are needed for complete process operation. Expenses for piping,
instruments, insulation, foundations, and site preparation are typical examples of costs included in the
manufacturing fixed-capital investment.
Fixed capital required for construction overhead and for all plant components that are not directly
related to the process operation is designated as the non-manufacturing fixed-capital investment. These
plant components include the land, processing buildings, administrative and other offices, warehouse,
laboratories, transportation, shipping and receiving facilities, utility and waste-disposal facilities, shops,
and other permanent part of the plant. The construction overhead cost consists of field-office and
supervision expenses, home-office expenses, engineering expenses, miscellaneous construction costs,
contractor’s fees, and contingencies. In some cases, construction overhead is proportioned between
manufacturing and non-manufacturing fixed-capital investment.

2. Working Capital
The working capital for an industrial plant consists of the total amount of money invested in (1)
raw materials and supplies carried in stocks, (2) finished products in stock and semi-finished products in the
process of being manufactured, (3) accounts receivable, (4) cash kept on hand for monthly payment of
operating expenses, such as salaries, wages, and raw-materials purchases, (5) accounts payable, and (6) taxes
payable.
The raw-materials inventory included in working capital usually amounts to a 1-month supply of
the raw materials valued at delivered prices. Finished products in stock and semi-finished products have a
value approximately equal to the total manufacturing cost for 1 month’s production. Because credit terms
32 ntaldon 1/8/2018
 extended to customers are usually based on an allowable 30-day payment period, the working capital
required for account receivable ordinarily amounts to the production cost for 1 month of operation.
The ratio of working capital to total capital investment varies with different companies, but most
chemical plants use an initial working capital amounting to 10 to 20 percent of the total capital
investment. This percentage may increase to as much as 50 percent or more for companies producing
products of seasonal demands because of the large inventories that must be maintained for appreciable
periods of time.

3. Estimation of Capital Investment

Of the many factors that contribute to poor estimates of capital investments, the most significant one is
usually traceable to sizable omissions of equipment, services, or auxiliary facilities rather than to gross errors
in costing. A checklist of items covering a new facility is an invaluable aid in making a complete estimation
of the fixed-capital investment.

Types of capital cost estimates

An estimate of the capital investment for a process may vary from a pre-design estimate based on little
information except the size of the proposed project to a detailed estimate prepared from complete drawing
specifications. Between these two extremes of capital-investment estimates, there can be numerous other
estimates which vary in accuracy depending upon the stage of development of the project. These estimates
are called by a variety of names (The American Association of cost Engineers)
a. Order of magnitude estimate (ratio estimate) based on similar previous cost data; probable accuracy of
estimate over +30%.
b. Study estimate (factored estimate) based on knowledge of major items of equipment; probable accuracy
of estimate up to +30%.
c. Preliminary estimate (budget authorization estimate; scope estimate) based on sufficient data to permit
estimate to be budgeted; probable accuracy of estimate within +20%.
d. Definitive estimate (project control estimate) based on almost complete data but before completion of
drawing s and specifications; probable accuracy of estimate within +10%.
e. Detailed estimate (contractor’s estimate) based on complete engineering drawings, specifications, and site
surveys; probable accuracy of estimate within + 5%.

I. Fixed-Capital Investment;

A.Direct Costs (70-85% FCI)

1. Purchased equipment (20-40% FCI)

All equipment listed on a complete flow sheet
Spare parts and non installed equipment spares
Surplus equipment, supplies, and equipment allowance
Inflation cost allowance
Freight charges
Taxes, insurance, duties
Allowance for modification during start-up

2. Purchased-equipment installation (35-45% Equip Cost)

Installation of all equipment listed on complete flow sheet
Structural supports, insulation, paint

3. Instrumentation and controls (6-30% EC)

Purchase, installation, calibration

4. Piping (10-80% EC)

Process piping-carbon steel, alloy, cast iron, lead lined, aluminum, copper, asbestos-cement, ceramic,
plastic, rubber, reinforced concrete
Pipe hangers, fittings, valves, Insulation-piping, equipment

5. Electrical equipment and materials (8-20% EC)

Electrical equipment_ switches, motors, conduit, wire, fittings, feeders, grounding, instrument and
control wiring, lighting, panels
Electrical materials and labor

33 ntaldon 1/8/2018
 6. Buildings (including services) (10-70% EC)
Process buildings_ substructures, superstructures, platforms, supports, stairways, ladders, access ways,
cranes, monorails, hoists, elevators
Auxiliary buildings_ administration and office, medical and dispensary, cafeteria, garage, product
warehouse, guard and safety, fire station, change house, personnel building, shipping office and
platform, research laboratory, control laboratory
Maintenance shops _ electric, piping, sheet metal, machine, welding, carpentry, instrument
Building services_ plumbing, ventilation, heating, duct collection, air conditioning, building
lighting, elevators, telephones, intercommunication systems, painting, sprinkler systems, fire alarm

7. Yard Improvements (20-45% EC)

Site development_ site clearing, grading roads, walkways, railroads, fences, parking areas,
wharves, piers, recreational facilities, landscaping

8. Service facilities (20-45% EC)

Utilities_ steam, power, refrigeration, compressed air, fuel, waste disposal

Facilities_ boiler plant incinerator, wells, river intake, water treatment, cooling towers, water storage,
electric sub-station, refrigeration plant, air plant, fuel storage, waste disposal plant, fire protection
Non-process equipment_ office furniture and equipment, cafeteria equipment, safety and medical
equipment, shop equipment, yard material-handling equipment, laboratory equipment, locker-room
equipment, garage equipment, shelves, bins, pallets, hand trucks, housekeeping equipment, fire
extinguishers, hoses, fire engines, loading stations
Distribution and packaging_ raw material and product storage and handling equipment, product
packaging equipment, blending facilities, loading stations

9. Land (1-22% FCI or 4-8% EC)

Surveys and fees

Property cost

B. Indirect Costs (15-30% Direct Cost)

1. Engineering and supervision (5-15% DC)

Engineering costs_ administrative, process, design and general engineering, drafting, cost engineering,
procuring, expediting, reproduction, communications, scale models, consultant fees, travel
Engineering supervision and inspection

2. Construction expenses (7-20% DC)

Construction, operation and maintenance of temporary facilities, offices, roads, parking lots, rail roads,
electrical piping, communications, fencing
Construction tools equipment
Construction supervision, accounting, time keeping, purchasing, expediting,
Warehouse personnel and expense, guards
Safety, medical, fringe benefits
Permits, field tests, special licenses
Taxes, insurance, interests

3. Contractor’s fee (1.5-5% FCI)

4. Contingency (6-18% FCI)

II. Working capital (10-20% of total capital investment)

III. Total capital investment = fixed-capital investment + working capital

34 ntaldon 1/8/2018
4. Estimation of Total Product Cost

Methods for estimating the total capital investment required for a given plant is presented in the first part of this
chapter. Determination of the necessary capital investment is only one part of a complete cost estimate. Another equally
important part is the estimation of cost for operating the plant and selling the products. This cost can be grouped under
the general heading of total product cost. The latter, in turn, is generally divided into the categories of manufacturing
costs and general expenses. Manufacturing cost is also known operating or production cost. Further subdivision of the
manufacturing cost is somewhat dependent upon the interpretation of direct and indirect costs.
Accuracy is as important in estimating total product cost as it is in estimating capital investment costs. The largest
sources of errors in total-product-cost estimation are overlooking elements of cost. A tabular form is very useful for
estimating total product cost and constitutes a valuable checklist to preclude omissions.
Total product costs are commonly calculated on one of three bases: namely, daily basis, unit-of-product basis, or
annual basis. The annual cost basis is probably the best choice for estimation of total product cost because (1) the effect
of seasonal variations is smoothed out, (2) plant-on-stream time or equipment operating factor is considered, (3) it
permits more-rapid calculation of operating costs at less than full capacity, and (4) it provides a convenient way of
considering infrequently occurring but large expenses such as annual turn-around costs in a refinery.
The best source of information for use in total-product-cost estimates is data from similar or identical projects.
Most companies have extensive records of their operations, so theta quick, reliable estimates of manufacturing costs
and general expenses can be obtained from existing records. Adjustments for increased cost as a result of inflation must
be made, and differences in plant size and geographical location must be considered.

Estimation of total product cost (showing individual components)

The percentages indicated in the following summary of the various costs involved in the complete operation
of manufacturing plants are approximations applicable to ordinary chemical processing plants. It should be realized that
the values given can vary depending on many factors, such as plant location, type of process, and company policies.
Percentages are expressed on a yearly basis.

I. Manufacturing cost = direct production costs + fixed charges + plant overhead costs.

A. Direct production costs (about 60% of total product cost)

1. Raw materials costs (10-50% of total product cost)
2. Operating labor (10-20% of total product cost)
3. Direct supervisory and clerical labor (10-25% of operating labor)
4. Utilities (10-20% of total product cost)
5. Maintenance and repairs (2-10% of fixed-capital investment)
6. Operating supplies (10-20 of cost for maintenance and repairs, or 0.5-1% of fixed-capital investment.
7. Laboratory charges (10-20% of operating labor)
8. Patents and royalties (0-6% of total product cost)

B. Fixed charges (10-20% of total product cost)

1. Depreciation (depends on life period, salvage value, and method of calculation – about 10% of fixed-
capital investment for machinery and equipment and 2-3% of building value for buildings)
2. Local taxes (1-4% of fixed-capital investment)
3. Insurance (0.4-1% of fixed-capital investment)
4. Rent (8-10% of value of rented land and buildings)
C. Plant-overhead costs (50-70% of cost of operating labor, supervision, and maintenance, or 5-15% of total
product cost); includes costs for the following: general plant upkeep and overhead, payroll overhead,
packaging, medical services, safety and protection, restaurants, recreation, salvage, laboratories, and
storage facilities.

II. General expenses = administrative costs + distribution and selling costs + research and development costs.
A. Administrative costs (about 15% of costs for operating labor, supervision, and maintenance, or 2-5% of
total product cost); includes costs for executive, salaries, clerical wages, legal fees, office supplies, and
communications.
B. Distribution and selling costs (2-20% of total product cost); includes costs for sales offices, salesmen,
shipping, and advertising)
C. Research and development costs (2-5% of every sales dollar or a about %5 of total product cost)
D. Financing (interest) (0-7% of total capital investment)
III. Total product cost = manufacturing cost + general expenses
IV. Gross-earning cost (gross earnings = total income - total product cost; amount of gross-earnings cost
depends on amount of gross earnings for entire company and income-tax regulations; a general range for
gross-earnings cost is 30-60% of gross earnings)

35 ntaldon 1/8/2018
I. Manufacturing costs
All expenses directly connected with the manufacturing operation or the physical equipment of a process
plant itself are included in the manufacturing costs. These expenses, as considered here, are divided into three
classifications as follows: (1) direct production costs, (2) fixed charges, and (3) plant-overhead costs.

A. Direct production costs _ include expenses directly connected with the manufacturing operation. This type of
cost involves expenditures for raw materials (including transportation, unloading, etc.); direct operating labor;
supervisory and clerical labor directly connected with the manufacturing operation; plant maintenance and
repair; operating supplies; power; utilities; royalties; and catalysts.
It should be recognized that some of the variable costs listed here as part of the direct production costs have
an element of fixed cost in them. for instance, maintenance and repair decreases, but not directly, with
production level because a maintenance and repair cost still occur when the process plant is shut down.
1. Raw Materials
In the chemical industry, one of the major cost in a production operation is for the raw materials
involved in the process. The amount of the raw materials which must be supplied per unit of time or per unit
of product can be determined from process material balances. In many cases, certain materials act only as an
agent of production and may be recoverable to some extent. Therefore, the cost should be based only on the
amount of the raw materials actually consumed as determined from the overall material balances.
Direct price quotations from prospective suppliers are preferable to published market prices. For
preliminary cost analyzes, market prices are often used for estimating raw-material costs. These values are
published regularly in journals such as the oil, paint, and drug reporter or quarterly in Chemical Engineering
news.
Freight or transportation charges should be included in the raw-material cost. And these charges should
be based on the form in which the raw materials are to be purchased for use in the final plant. Although bulk
shipments are cheaper than smaller-container shipments, they require greater storage facilities and inventory.
Consequently, the demands to be met in the final plant should be considered when deciding on the cost of raw
materials.
The ratio of the cost of raw materials to total plant cost obviously will vary considerably for different
types of plants. In chemical plants, raw-material costs are usually in the range of 10 to 50 percent of the total
product cost.

2. Operating labor
In general, operating labor may be divided into the two classes of skilled and unskilled labor. Hourly
wage rates for operating labor in different industries at various locations can be obtained from the U.S.
Bureau of labor Monthly Labor Review. For chemical processes, operating labor usually amounts to about 15
percent of the total product cost.
In preliminary cost analyses, the quantity of operating labor can often be estimated either from company
experience with similar processes or from literature information on similar processes. Because the
relationship between labor requirements and production rate is not always a direct one, O’Connell has
suggested the use of a 0.2 to 0.25 power of the capacity ratio when plant capacities are scaled up or down.
If a flow sheet and drawings of the process are available, the operating labor may be estimated from an
analysis of the work to be done. Consideration must be given to such items as the type and arrangement of
equipment, multiplicity of units, amount of instrumentation and control for the process, and company policy
in establishing labor requirements.

3. Utilities
The cost for utilities, such as stream, electricity, process and cooling water, compressed air, natural gas,
and fuel oil, varies widely dependent on the amount of consumption, plant location, and source. If such
information is unavailable, the utilities must be estimated from a preliminary design. The utility may be
purchased at predetermined rates from an outside source, or the service may be produced by the company’s
own facilities. If the company supplied its own service and this is utilized for just one process, the entire cost
of the service installation is usually charged to the manufacturing process. If the service is utilized for the
production of several different products, the service cost is divided among the different products at a rate
based on the amount of individual consumption.
Steam requirements include the amount consumed in the manufacturing process plus that necessary for
building heat. An allowance for radiation and line losses must also be made.
Electrical power must be supplied for lightning motors, and various process-equipment demands. These
direct-power requirements should be increased by a factor of 1.1 to 1.25 to allow for line losses and
contingencies. As a rough approximation, utility costs for ordinary chemical processes amount to 10 to 20
percent of the total product cost.

36 ntaldon 1/8/2018
4. Maintenance and Repairs
A considerable amount of expense is necessary for maintenance and repairs if a plant is to be kept in
efficient operating condition. These expenses include the cost for labor, materials, and supervision.
Annual costs for equipment maintenance and repairs may range from as low as 2 percent of the
equipment cost if service demands are light to 20 percent for cases in which there are severe operating
demands. Charges of this type for building average 3 to 4 percent of the building cost. In the process
industries, the total plant cost per year for maintenance and repairs is roughly equal to an average of 6 percent
of the fixed-capital investment.
For operating rates less than capacity, the maintenance and repair cost is generally estimated as 85
percent of that at 100 percent capacity for a 75 percent operating rate, and 75 percent of that at 100 percent
capacity for a 50 percent operating rate.

5. Operating Supplies
In any manufacturing operation, many miscellaneous supplies are needed to keep the process
functioning efficiently. Item such as charts, lubricants, janitor supplies, test chemicals, and similar supplies
cannot be considered as raw materials or maintenance and repair materials, and are classified as operating
supplies. The annual cost fir this type of supplies is about 15 percent of the total cost for maintenance and
repairs.

6. Laboratory Charges
The cost for laboratory tests for control of operations and for product-quality control is covered in this
manufacturing cost. This expense is generally calculated by estimating the man-hours involved and
multiplying this by the appropriate rate. For quick estimates, this cost may be taken as 10 to 20 percent of the
operating labor.
7. Patents and Royalties
Many manufacturing processes are covered by patents, and it may be necessary to pay a set amount for patent
rights or a royalty based on the amount of material produced. Even though the company involved in the
operation obtained the original patent, a certain amount of the total expense involved in the development and
procurement of the patent rights should be borne by the plant as an operating expense. In cases of this type,
these costs are usually amortized over the legally protected life of the patent. Although a rough
approximation of patent and royalty costs for patented processes is 2 to 6 percent of the total product cost, the
engineering must use judgment because royalties vary with such factors as the type of product and the
industry.

8. Catalysts and Solvents

Costs for catalysts and solvents can be significant and depend upon the specific manufacturing process
chosen.

B. Fixed charges _ are expenses that remain practically constant from year to year and do not vary widely with
charges in production rate. Depreciation, taxes, insurance, and rent require expenditure that can be classified
as fixed charges.
Certain expenses are always present in an industrial plant whether or not the manufacturing process is in
operation. Costs that are invariant with the amount of production are designated as fixed costs or fixed charges.
These include costs for depreciation, local property taxes, insurance, and rent. Expenses of this type are a
direct function of the capital investment. as a rough approximation, these charges amount to about 10 to 20
percent of the total product cost.
1. Depreciation
Equipment, buildings, and other material objects comprising a manufacturing plant require an initial
investment that must be written off as a manufacturing expense. In order to write off this cost, a decrease in
value is assumed to occur throughout the useful life of the material possessions. This decrease in value is
designated as depreciation.
Since depreciation rates are very important in determining the amount of income tax, the Bureau of
Internal Revenue has established allowable depreciation rates based on the probable useful life of various
types of equipment and other fixed items involved in manufacturing operations. While several alternative
methods may be used for determining the rate of depreciation, a straight-line method is usually assumed for
engineering projects. In applying this method, a useful-life period and salvage value at the end of the useful
life are assumed, with due consideration being given to possibilities of obsolescence and economic changes.
The difference between initial cost and the salvage value divided by the total years of useful life gives the
annual cost due to depreciation.
The annual depreciation rate for machinery and equipment ordinarily is about 10 percent of the fixed-
capital investment, while buildings are usually depreciated at an annual rate of about 3 percent of the initial
cost.

37 ntaldon 1/8/2018
 2. Local Taxes
The magnitude of local property taxes depends on the particular locality of the plant and the regional laws.
Annual property taxes for plants in highly populated areas are ordinarily in the range of 2 to 4 percent of the
fixed-capital investment. In less populated areas, local property taxes are about 1 to 2 percent of the fixed-
capital investment.
3. Insurance
Insurance rates depend on the type of process being carried out in the manufacturing operation and on the
extent of available protection facilities. On an annual basis, these rates amount to about 1 percent of the
fixed-capital investment.
4. Rent
Annual costs for rented land and buildings amount to about 8 to 10 percent of the value of the rented
property.

C. Plant-overhead costs _ are for hospital and medical services; general plant maintenance and overhead; safety
services; payroll overhead including pensions, vacation allowances, social security, and life insurance;
packaging, restaurant and recreation facilities, salvage services, control laboratories, property protection,
plant superintendence, warehouse and storage facilities, and special employee benefits. These costs are
similar to the basic fixed charges in that they do not vary widely with charges in production rate.
The costs considered in the preceding sections are directly related with the production operation. In
addition, however, any other expenses are always involved if the complete plant is to function as an efficient
unit. The expenditures required for routine plant services are included in plant-overhead costs. Non-
manufacturing machinery, equipment, and buildings are necessary for many of the general plant services, and
the fixed charges and direct costs for these items are part of the plant-overhead costs.

Expenses connected with the following comprise the bulk of the charges for plant overhead:
 Hospital and medical services
 General engineering
 Safety services
 Cafeteria and recreation facilities
 General plant and maintenance and overhead
 Payroll overhead including employee benefits
 Control laboratories
 Packaging
 Plant protection
 Janitor and similar services
 Employment offices
 Distribution of utilities
 Shops
 Lighting
 Interplant communications and transportation
 Warehouses
 Shipping and receiving facilities
These charges are closely related to the costs for all labor directly connected with the production operation.
The plant-overhead cost for chemical plants is about 50 to 70 percent of the total expense for operating labor,
supervision, and maintenance.

II. General Expenses

In addition to the manufacturing costs, other general expenses are involved in any company’s operation.
These general expenses may be classified as (1) administrative expenses, (2) distribution and marketing expenses,
(3) research and development expenses, (4) gross-earning expenses.

A. Administrative expenses _ include costs for executive and clerical wages, office supplies, engineering and
legal expenses, upkeep on office buildings, and general communications.
The expenses connected with top-management or administrative activities cannot be charged directly to
manufacturing costs; however, it is necessary to include the administrative costs if the economic analysis is to
be complete. Salaries and wages for administrators, secretaries, accountants, stenographers, typists, and
similar workers are part of the administrative expenses, along with costs for office supplies and equipment,
outside communications, administrative buildings, and other overhead items related with administrative
activities.
These costs may vary markedly from plant and depend somewhat on whether the plant under
consideration is a new one or an addition to an old plant. In the absence of more-accurate cost figures from
company records, or for quick estimate, the administrative costs may be approximated as 40 to 60 percent of
the operating labor.

38 ntaldon 1/8/2018
B. Distribution and marketing expenses _ are costs incurred in the process of selling and distributing the
various products. These costs include expenditures for material handling, containers, shipping, sales offices,
salesmen, technical sales service, and advertising.
From a practical viewpoint, no manufacturing operation can be considered a success until the
products have been sold or put to some profitable use. It is necessary, therefore, to consider the expenses
involved in selling the products. Included in this category are salaries, wages, supplies, and other expenses
for sales offices; salaries, commissions, and traveling expenses for salesmen; shipping expenses; cost of
containers; advertising expenses; and technical sales service.
Distribution and marketing costs vary widely for different types of plants depending on the
particular material being produced, other products sold by the company, plant location, and company policies.
These costs for most chemical plants are in the range of 2 to 20 percent of the total product cost. The higher
figure usually applies to a new product or to one sold in small quantities to a large number of customers. The
lower figure applies to large-volume products, such as bulk chemicals.

C. Research and development expenses _ are incurred by any progressive concern that wishes to remain in a
competitive industrial position. These costs are for salaries, wages, special equipment, research facilities, and
consultant fees related to developing new ideas or improved processes.
New method and products are constantly being developed in the chemical industries. These
accomplishments are brought about by emphasis on research and development. Research and development
costs include salaries and wages for all personnel directly connected with this type of work, fixed and
operating expenses for all machinery and equipment involved, costs for materials and supplies, direct
overhead expenses, and miscellaneous costs. In the chemical industry, these costs amount to about 2 to 5
percent of every sales dollar.

D. Financing expenses _ include the extra costs involved in procuring the money necessary for the capital
investment. Financing expense is usually limited to interest on borrowed money, and this expense is
sometimes listed as a fixed charge.
Interest is considered to be the compensation paid for the use of borrowed capital. A fixed rate of
interest is established at the time the capital is borrowed; therefore, interest is a definite cost if it is necessary
to borrow the capital used to make the investment for the plant. Although interest on borrowed capital is a
fixed charge, there are many persons who claim that interest should not be considered as a manufacturing
cost. It is preferable to separate interest from the other fixed charges and list it as a separate expense under the
general heading of management or financing cost. Annual interest rates amount to 4 to 7 percent of the total
value of the borrowed capital.
When the capital investment is supplied directly from the existing funds of a company, it is a
debatable point whether interest should be charged as a cost. For income-tax calculations, however, interest
or owned money cannot be charged as a cost. In designed calculations, however, interest can be included as a
cost unless there is assurance that the total capital investment will be supplied from the company’s funds and
the company policies permit exclusion of interest as a cost.

E. Gross-earning expenses _ are based on income-tax laws. These expenses are a direct function of the gross
earnings made by all the various interest held by the particular company. Because these costs depend on the
company-wide picture, they are often not included in pre-design or preliminary cost-estimation figures for a
single plant, and the probable returns are reported as the gross earnings obtainable with the given plant
design. However, when considering net profits, the expenses due to income taxes are extremely important,
and this cost must be included as a special type of general expense.
The total income minus the total production cost gives the gross earnings made by the particular
production operation, which can then be treated mathematically by any of several methods to measure the
profitability of the proposed venture or project.
Because of income-tax demands, the final net profit is often much less that the gross earnings. Income-
tax rates are based on the gross earnings received from all the company interests. Consequently, the
magnitude of these costs varies widely from one company to another.

F. CONTINGENCIES
Unforeseen events, such as strikes, storms, floods, price variations, and other contingencies, any have an
effect on the costs for a manufacturing operation. When the chemical engineering predicts total costs, he
often finds it advisable to take these factors into account. This can be accomplished by including a
contingency factor equivalent to 1 to 5 percent of the total product cost.

39 ntaldon 1/8/2018
 For purpose of simplification, TOTAL PRODUCT COST could be considered to fall into either fixed costs or
variable costs. The annual costs that vary more or less with the annual production will be called
VARIABLE COSTS, while annual costs that remain constant regardless of the production rate will be
called FIXED COSTS.
Please take note that variable costs refer to the plant costs that vary with the amount of production
but they are constant for each unit of production. Conversely, fixed costs per unit of production vary with
production.

The following are the typical distribution of TOTAL PRODUCT COSTS:

(Classified into the general categories of variable and fixed costs)

I. Variable Costs (60% - 70%)

A. Raw materials used in the making of product
B. Direct Labor (operators, helpers), add 15% for social security, pensions, vacation, etc
C. Utilities or process services (steam, power, water, fuel, air, refrigeration)
D. Maintenance (labor and materials), about 4%-6% of fixed capital investment
E. Miscellaneous supplies and others, about 0.5% of FCI
F. Direct supervision (foremen), about 10% of direct labor
G. Laboratory charges (process control)
H. Royalty (charges for using some other company’s name or process)
I. Packaging and storage charges
J. Credit for by-products
K. Spoilage and other losses
(items I to K can be estimated at 5% of total of raw materials plus labor plus services)

II. Fixed Costs (40% - 30%)

A. Indirect plant costs, or plant burden 15%
1. Investment costs, 5%
b. Depreciation, 10% of fixed capital investment
c. Taxes, 2% of FCI
d. Insurance, 1% of FCI
e. Interest on inventories, plant equipment, total capital when desired
f. Others ( assessments)
2. Overhead, 10%
a. Technical (engineering)
b. Non-technical (office force, plant protection, etc)
c. Supplies (those that are not chargeable to direct costs)
d. Rent (included where equipment, buildings, land, or a service is rented)
e. Others
B. Management expense, 5%
1. Executives
2. Legal
3. Research, (technical research and market research)
C. Selling expense, or distribution expense, 10% - 20%

Detailed Distribution of Total Product Costs

(Classified into the general categories of manufacturing and general expenses)

A. Manufacturing costs
1. Direct production Costs
a. Raw materials
b. Operating labor
c. Operating supervision
d. Power and utilities
 Steam
 Electricity
 Fuel
 Refrigeration
 water
f. Maintenance and repairs
g. Operating supplies
h. Laboratory charges
i. Royalties (if not on lump-sum basis)
j. Catalysts and solvents
40 ntaldon 1/8/2018
 2. Fixed Charges
a. Depreciation
b. Taxes (property)
c. Insurance
d. Rent
3. Plant Overhead Costs
a. Medical
b. Safety and protection
c. General plant overhead
d. Payroll overhead
e. Packaging
f. Restaurant
g. Recreation
h. Salvage
i. Control laboratories
j. Plant superintendence
k. Storage facilities

B. General expenses
1. Administrative expenses
a. Executive salaries
b. Clerical wages
c. Engineering and legal costs
d. Office maintenance
e. Communications
2. Distribution and marketing Expenses
a. Sales offices
b. Salesmen expense
c. Shipping
d. Advertising
e. Technical sales service

3. Research and development

4. Financing
5. Gross earnings expense

Estimated Life of Equipment:

Life, years
A. General Business Assets
1. Office furniture, fixtures, machine, equipment 10
2. Transportation
a. Aircraft 6
b. Automobile 3
c. Buses 9
d. General-purpose truck 4-6
e. Railroad Cars (except for railroad companies) 15
g. Tractor units 4
h. Trailers 6
i. Water transportation equipment 18
3. Land & site Improvements (not otherwise covered) 20
4. Buildings (apartments, banks, factories, hotels, stores, warehouses) 40-60

B. Non-Manufacturing Activities (excluding transportation, communications Public utilities)

1. Agriculture
a. Machinery and equipment 10
b. Animals 3-10
c. Trees and vines variable
d. Farm buildings 25
2. Contract Construction
a. General 5
b. Machines 12
3. Fishing variable
4. Logging and saw milling 6-10
41 ntaldon 1/8/2018
 5. Mining (excluding petroleum refining & smelting & refining
of minerals) 10
6. Recreation and amusement 10
7. Services to general public 10
8. Wholesale and retail trade 10

C. Manufacturing
1. Aerospace industry 8
2. Apparel and textile products 9
3. Cement (excluding cement products) 20
4. Chemicals and allied products 11
5. Electrical equipment
a. Electrical equipment in general 12
b. Electronic general 8
6. Fabricated metal products 12
7. Food products (except grains, sugar, and vegetable oil) 12
8. Glass Products 14
9. Grain and grain mill products 17
10. Knitwear and knitwear products 9
11. Leather products 11
12. Lumber, wood products, furniture 10
13. Machinery unless otherwise listed 12
14. Metalworking machinery 12
15. Motor vehicles and parts 12
16. Paper and allied products
a. Pulp and paper 16
b. Paper conversion 12

17. Petroleum and natural gas

a. Contract drilling and field service 6
b. Company exploration, drilling and production 14
c. Petroleum refining 16
d. Marketing 16
18. Plastic products 11
19. Primary metals
a. Ferrous metals 18
b. Nonferrous metals 14
20. Printing and publishing 11
21. Scientific instruments, optical and clock manufacturing 12
22. Railroad transportation equipment 12
23. Rubber products 14
24. Ship and boat building 12
25. Stone and clay products 15
26. Sugar products 18
27. Textile mill products 12-14
28. Tobacco products 15
29. Vegetable oil products 18
30. Other manufacturing in general 12

D. Transportation, Communications, and Public Utilities

1. Air transport 6
2. Central steam production and distribution 28
3. Electric utilities
c. Hydraulic
50
d. Nuclear 20
e. Transmission and distribution 28
d. Trunk pipelines and storage 30
4. Gas utilities
a. Distribution 35
b. Manufacture 30
c. Natural gas production 14
d. Trunk pipeline storage 22
5. Motor transport (freight) 8
42 ntaldon 1/8/2018
 6. Motor transport (passenger) 8
7. Pipeline transportation 22
8. Radio and television broadcasting 6
9. Railroads
a. Machinery and equipment 14
b. Structures and similar improvements 30
c. Grading and other right of way improvement variable
d. Wharves and docks 20
e. Power plant equipment see item 3
10. Telephone and telegraph communications variable
11. Water transportation 20
12. Water utilities 50

C. Sources of Financing the Project

In deciding on the financing scheme to support the project, one should take the following steps:
1. The alternative sources of financing to be considered are listed
2. The sources selected or proposed for both long-term and short-term financing determined as a function of
maximum profitability. The possible choice may range from investment banking, privileged subscription,
private placement, bonds, stocks, securities, warrants, bank credit, collaterals, insurance term loans, mortgage
loans, and leasing. In exhibit F-5, various computations for optimum financing are illustrated for the same
level of earnings before interest and taxes.
3. After determining which financing plan is optimal, the amount and terms for each source selected is finalized,
together with an indication of the currency, security, repayment period, interests, and other features. It should
be noted that the security, repayment period, and interest rates of loans differ from one lending or investing
institution to another. Bonds are also settled prior to stock dividends, and preferred stocks are issued
dividends first before common stocks.
4. The status of financing from each source is stated by relating it to actual releases already made, applications
already approved, applications pending, and applications still to be made. This is financed on credit and on
equity, so that the specifications related to the requirements of the investing or lending parties are taken into
account.
5. Further considerations involved in the financing of contingencies and fluctuations in working capital are
specified, so that the project’s liquidity and cash solvency are clarified within each operating year of the
project’s early stages.
6. The alternative sources of financing are pinpointed in order of priority, in case variances from the expected
outcome result due to conditions which influence the project but are external to it in nature.

D. Preparation of Financial Statements

Accounting Fundamentals
Accounting is often referred to as the language of business. Engineers make serious efforts to learn about a
firm’s accounting practice so that they can better communicate with top management. This section contains a brief and
simplified exposition of the elements of financial accounting inn recording and summarizing transactions affecting the
finances of the enterprise.
All accounting is based on the fundamental accounting equation, which is ;
Assets = liabilities + owner’s equity
Where assets are those things of monetary value that the firm possesses, liabilities are those things of monetary
value that the firm owes, and owner’s equity is the worth of what the firm owes to the stockholders (also referred to as
equities, net worth, etc.)
Basic Engineering Accounting Terms:
1. Revenue = total income (or total savings)
2. Net profits = Gross Profits - income tax
3. Gross profits = Net sales – Costs of Sales
4. Income tax = (Gross Profits) ( tax rate)
5. Cash flow = Net Profits + Depreciation

Typical accounts:
Assets = Liabilities + Owner’s equity
Cash Short-term debt
Receivables Payables Capital stock
Inventories Long-term debt
Equipment Retained earnings (income retained in the firm)
Buildings
Land

43 ntaldon 1/8/2018
 These following financial statements are basic for project feasibility presentation:

Income Statement
The income statement is a computation of the project’s total revenue and total costs for one period of fiscal
year, thereby arriving at the concern’s net income or deficit within the period, together with its performance in
terms of profitability and cost control. It differs from the “cash budget” in the sense that it follows the “actual
concept” in accounting, by which revenues should be associated with the costs involved in realizing the former
within the period of occurrence. A model format for income statement preparation is presented. An analysis of each
account in the presentation follows:
Profit (loss) = revenues – expenses
Gross Profit = net Sales – cost of Sales
a. Production of units _ is a function of sales forecasts and inventory policy, the latter serving as a “buffer” to
meet customer convenience in the face of fluctuations in sales. As a consequence, three forms of inventory
levels should be specified in the study – the moving inventory, the minimum inventory, and the maximum
inventory levels.
Moving inventories refer to the amount, which moves from one production process to the next. It is
arrived at by the Formula I   S   T  , where I is the moving inventory, S the rate of movement from one
state to the next per period of time, and T the transit time. This formula is usually applied in the determination
of ending raw materials and goods-in-process inventories.
On the other hand, minimum inventory levels for finished goods are determined by the Model
b. Net sales_ in pesos are arrived at by subtracting sales returns, allowances, and discounts from gross sales.
Sales returns represent goods sold should not meet customer requirements and thus have been returned.
Allowance refer to goods which cannot be sold due to spoilage, wrong specification, and similar cause; sales
discount are price reduction occasionally given in favor of customer. The latter items are to be considered as
different from sales discount favoring the project, which are entered in the ”other income” account of the
statement.

c. Cost of sales_ is a function of raw materials used, direct labor expenses, and factory overhead accounts. The
latter are itemized as follows: materials and labor expenses indirectly related with production; heat, light, and
power required for manufacturing; maintenance costs associated with productive fixed assets supplies needed
to produce fixed assets; taxes associated with the manufacturing fixed assets; and insurance expenses related to
the productive operation.

44 ntaldon 1/8/2018
45 ntaldon 1/8/2018
46 ntaldon 1/8/2018
Cash-Flow Statement
The cash-flow statement or the” cash budget” is a systematic presentation of cash receipts and
disbursements for a given operating period or fiscal year, taking for granted the” accrual concept “ in account illustrates
a cash budget model , showing the inflow and presenting a large-scale schedule for the determination of ending cash
balance sheet. The budget is used to estimate future loans or financing needs, optimize the timing of project financing,
and maximize profitability by efficient cash utilization.
a. Cash receipts are subdivided into those which flow from financing the project and those coming from sales
revenues.
Cash flow from financing may take the form of stocks issued including stock premium or discount being
closed, the net of the latter two accounts being closed to the “paid-in surplus” account; bond issues: and long-
terms loans.
In computing for cash in-flows from sales revenues; the “profit – before-income tax” account is entered
in the budget, and this is increased to the period such as depreciation and amortization.
Other account which increase the entries are increases in account payable, accrued expenses, and
deferred income.
b. Under cash disbursement, out-of-pocket expenses on intangible assets acquisition are entered. Other account
included here are decreases in account payable, notes payable, bank-drafts payable, accrued expenses,
mortgage bonds payable and long-terms notes receivable, inventories, and investment. Cash dividends issued
and income tax payments also comprise cash disbursements.
The beginning cash balance for the period is then added to the net cash flow to arrive at ending cash
balance in the balance sheet. It should be noted that all accounts entered in the cash budget should tally with
the same account in the income statement and balance sheet.

47 ntaldon 1/8/2018
Balance Sheet
48 ntaldon 1/8/2018
 The balance sheet shows the assets derived by the project from corresponding liabilities and equities (net
worth).It is an overall picture of a film’s financial condition as of a certain time. Furthermore, it shows the major
changes brought about by the project’s operation within the fiscal period. The assets are entered under the debit portion
of the balance sheet while the liability and equity claims on these assets are found under the credit portion. Exhibit F-3
present a model balance sheet.
Comprising the asset portion of the statement are current asset, fixed asset, and intangible assets.
Current assets refer to those type with are either cash account or other account expected to be converted
into cash with one year. The item listed in this division are of course cash, marketable securities, receivables,
inventories, prepaid expense, and deferred change. The latter two accounts signify cash expenditures for the
services of a creditor not yet received in full by the project in question, such as pre- paid insurance.
On the other hand, fixed assets era the tangible assets of an enterprise of an enterprise, the service life of
which usually extends to over one year. Land, building, machinery, and equipment are typical example of fixed
assets. The balance sheets or book value of these assets are derived by subtracting their accumulated depreciation
from their cost of acquisition, depreciation being the portion of cost allocated to one fiscal period.
Finally, other assets mean intangible assets whose service life, like fixed will, patents, copyrights, leases,
licenses, franchises, and organization and pre-operation expenses fall under other assets. When an intangible asset is
amortized, the accumulated amortization account is not entered in the balance sheet, which contains only the net
book value of assets in this category.
Assets = liabilities + (beginning owner’s equity + revenue - expenses)

49 ntaldon 1/8/2018
BASIC METHODS OF PROFITABILITY ANALYSIS
50 ntaldon 1/8/2018
1. Return on Investment, ROI
Profit or savings (before income tax) divided by investment required.
Whereas, interest refers to the compensation paid for the use of capital, which is usually fixed, ROI refers to
the profit obtained through the use of capital.
Profit cannot be guaranteed, unlike interest on money which must be paid to the owner of the capital whether
the business succeeds or fails.
The methods for determining rate of return, give “point values”, which are either applicable for one particular
year or for some sort of “average” year. They do not consider the time value of money, and they do not account for the
fact that profits and costs may vary significantly over the life of the project.
Profit x 100%
ROI 
Investment

a. Minimum Acceptable Rate of Return (MARR)

Also known as Minimum Attractive Rate of Return or known as hurdle rate, the interest rate used in the
valuation of profitability of a project in Present Worth, Future Worth and Annual Worth Methods. It is usually a policy
issue by the top management of an organization in view of the following considerations:
6. The amount of money available for investment,
7. Number of good projects available for investment,
8. The amount of perceived risk associated with investment opportunities available and
9. Type of organization involved.

In business and engineering, the minimum acceptable rate of return, often abbreviated MARR, or hurdle
rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project,
given its risk and the opportunity cost of forgoing other projects.
For example, suppose a manager knows that investing in a conservative project, such as a bond investment or
another project with no risk, yields a known rate of return. When analyzing a new project, the manager may use the
conservative project's rate of return as the MARR. The manager will only implement the new project if its anticipated
return exceeds the MARR by at least the risk premium of the new project.
The hurdle rate is usually determined by evaluating existing opportunities in operations expansion, rate of
return for investments, and other factors deemed relevant by management. A risk premium can also be attached to the
hurdle rate if management feels that specific opportunities inherently contain more risk than others that could be
pursued with the same resources. A common method for evaluating a hurdle rate is to apply the discounted cash flow
method to the project, which is used in net present value models. The hurdle rate determines how rapidly the value of
the dollar decreases out in time, which, parenthetically, is a significant factor in determining the payback period for the
capital project when discounting forecast savings and spending back to present-day terms. Most companies use a 12%
hurdle rate, which is based on the fact that the S&P 500 typically yields returns somewhere between 8% and 11%
(annualized). Companies operating in industries with more volatile markets might use a slightly higher rate in order to
offset risk and attract investors.
The hurdle rate is frequently used as synonym of cutoff rate, benchmark and cost of capital.

b. Internal Rate of Return (IRR)

Internal Rate of Return is the most widely used rate of return method for performing engineering economic
analyses. It is sometimes called by several names, such as the investor’s method, the discounted cash flow method, and
the profitability index. Also means that the value of this measure depends only on the cash flows from an investment
and not on any assumptions about reinvestment rates.
The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the
profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or simply the rate of
return (ROR). In the context of savings and loans the IRR is also called the effective interest rate. The term internal
refers to the fact that its calculation does not incorporate environmental factors (e.g. the interest rate).
The internal rate of return is the rate of return promised by an investment project over its useful life. It is
some time referred to simply as yield on project. The internal rate of return is computed by finding the discount rate
that equates the present value of a project's cash out flow with the present value of its cash inflow In other words, the
internal rate of return is that discount rate that will cause the net present value of a project to be equal to zero.

51 ntaldon 1/8/2018
2. Pay-out Period, N
This method determines the number of years within which the invested capital can be recovered out of the expected
cash flow. It does not consider the possible earnings of the reinvested capital during the pay-put period.
A. Without Interest
Depreciable Fixed Capital Investment
N
AverageCas hFlow / yr

Fixed Capital Investment  Salvage Value

N
AverageNet Pr ofit / yr  AverageDepreciation / yr

B. With Interest
Depreciabl e Fixed Capital Investment  Interest On Total Investment
N
Average CashFlow / yr

N
DFCI  TCI 1  i   1  n

 AverageNet Pr ofit / yr  AverageDepreciation / yr  as annuity
Note: 1. Depreciable Fixed Capital Investment = Fixed Capital Investment- Salvage Value
2. TCI=Total capital Investment = Fixed Capital Investment +Working Capital

3. Present Worth (Net Present Worth)

The difference between the present value of the annual cash flows (CF) and the total initial investment (FC).
If the present worth of the net cash flow is equal to or greater than zero, the project is justified economically.
CF1 CF2 CFn
NPW    ..   FC
1  i  1  i  2
1  i n
4. Future Worth Method
This method is comparable to the present worth method except that all cash inflows and outflows are
compounded forward to a reference point in time called the future. If the future worth of the net cash flow is equal or
greater than zero, the project is justified economically.
FW  CF1 1  i   CF2 1  i   ..  CFn  FC 1  i 
n 1 n2 n

5. Capitalized Cost, K
The total amount of money that must be available initially to purchase the equipment and simultaneously
provide funds for interest accumulation to permit perpetual replacement of the equipment.
In perpetuity, the amount required for replacement must be earned as compounded interest over a given
length of time. Let P be the amount of present principal or present worth which can accumulate to an amount F during
the interest periods at periodic interest i. Then,
F = P(1+i)n
If perpetuation is to occur, the amount F accumulated after n periods minus cost for the replacement
must equal the present worth P. If we let CR represent the replacement cost,
P = F-CR
P = P(1+i)n - CR
CR
P
1  i  n  1
K = FC + P
CR
K  FC 
1  i  n  1
6. Capital Recovery, CR
The minimum income that must be earned by the investor in order to recover the cost of depreciation of the
equipment plus the interest earned by the initial investment made.
FC  1  i   SV
L
CR   FC  A/P, i%,n   SV  A/F, i%,n 
1  i L  1
i
52 ntaldon 1/8/2018
 where: FC = First cost of the equipment
SV = salvage value at the end of service life
L = service life,
i = periodic interest

7. Break Even Analysis

0 _a means of identifying the value of a particular project variable that causes the project to exactly break
even.
Break-even point _ level of production where the total income is equal to the total expenses

Basic Production Assumptions:

0 1. That the variable costs are substantially directly proportional to production rate over the range from 0
to 100% capacity.
2. That the fixed charges are constant regardless of the annual production.
3. That there are no financial costs.
4. That there is no income other than from operations.
5. That all units produced are sold at a constant price per unit.
Gross Profit = net Sales – cost of Sales
= net Sales - (Variable costs + Fixed Costs)
Z  nS   nV  F 
At Break-even point; Z = 0
F
n
S V
where: Z = gross profit in pesos
n = number of units sold per year
S = nets sales, pesos/unit
V = variable cost, pesos/unit
F = annual fixed cost, pesos

Note: If S and V are in terms of total sales pesos and total variable cost pesos, respectively, at 100% capacity, then n is
terms of fractional capacity.

8. Test of Liquidity
These measures are used to determine a firm’s ability to meet short-term obligations, and to remain solvent in
the event of adversities.
Current Assets
A. Current Ratio=
Current Liabilities

Current Assets  Inventories

B. Quick or Acid Test Ratio 
Current Liabilities

Cost of Sales
C. Liquidity Inventories 
Average Inventory

Cash  Marketable Securities  Receivables

D. Defensive Position 
Projected Operating Expenditure/number of days

9. Tests of Debt-Service
These tests are employed to present the project’s ability to meet long-term obligations.
Total Liabilities
A. Debt  to  Net Worth Ratio 
Total Equities

Long term Liabilites

B. Total Capitalization Ratio 
Long term Liabilities and Equities

53 ntaldon 1/8/2018
 Earnings before Interest and Taxes
C. Times Interest Earned Ratio 
Interest

D. Fixed Charge Coverage Ratio

Earnings before Interest & Taxes  Lease Payments

Sinking Fund
Interest Charges  Lease Payments 
1  Tax Rate

10. Tests of Profitability

These show the operational performance and efficiency of the project

Net Income After Tax

A. Net Profit Margin 
Sales

Profit Before Interest and Taxes

B. Operating Profit Margin 
Sales
Gross Profit
C. Gross Profit Margin 
Sales

Net Income  Interest

D. Return on Financier' s Investment 
Stock Equity and Long term Liability
Net Income
E. Return on Owner' s Investment 
Stock Equity
F. Return on Common Stock Equity
Net Income  Preferred Stock Dividends

Net Worth  Par Value of Preferred Stock

Profit Before Interest and Taxes

G. Return on Operating Profit 
Total Tangible Assets

Sales
H. Asset Turnover  (N –
Tangible Assets
127)

Net Income
I. Return on Asset or Earning Power 
Total Tangible Assets
(N – 128)

N.8.4. Funds-Flow Analysis

This technique is employed to determine the major uses and sources of funds within one year in a project’s life.
 Cash-flow analysis
 Working-capital flow analysis

N.8.5. Tests of Operating Leverage

These functions indicate how the project employs assets for which it pays a fixed cost. Before these tests are applied, a
clarification should be made on what “variable” and “fixed “costs are.

54 ntaldon 1/8/2018
 Fixed Costs
A. Break  Even Volume Analysis 
Selling Price  Variable Cost/unit
(N – 129)

Cash Fixed Costs

B. Break  Even Cash Analysis 
Selling Price  Cash Variable Cost/unit
(N – 130)

Variable Costs  Fixed Costs

C. Break  Even Selling Pr ice Analysis 
Unit Volume
(N – 131)

Fixed Costs
D Break  Even Sales Analysis 
1  Variable Cost/Net Sales
(N – 132)

N.8.6. Asset Management Ratios

A set of ratios which measures how effectively a firm is managing its assets

Sales
A. Inventory Turnover Ratio  (N –
Inventories
133)

Receivables
B. Days Sales Outstanding 
Average Sales/day
(N – 134)

Sales
C. Fixed Assets Turnover  (N –
Net Fixed Assests
135)

Sales
D. Total Assets Turnover  (N –
Total Assets
136)

N.8.7. Market Value Ratios

Relates the firm’s stock price to its earnings and book value per share; an indication of what investors think of the
company’s past performance and future prospect.

Pr ice per Share

A. Price Earning Ratio 
Earnings per Share
(N – 137)

Market Pr ice per Share

B. Market Book Ratio 
Book Value per Share
(N – 138)

N.8.8. Benefit-Cost (B-C) Ratio

The primary goal of a private project is to make profit for the project owners and investors. In these projects,
a unified purpose is usually agreed on and the projects’ evaluation is only based on monetary values. On the other hand,
“public projects" do not aim to generate profit, but instead have the (social) goal of providing service and benefit to the
general public.

Difficulties:
- Quantifying service in monetary terms
- Multiple purposes and conflicting interests

55 ntaldon 1/8/2018
 Their evaluation requires different methods. One such method is called Benefit-Cost (B-C) ratio method.
B-C ratio method calculates the ratio of project’s benefits to its costs. The components are:

Benefits: Positive consequences to the public.

Costs: Monetary expenditures required for the project (financed by government often through taxation).
Disbenefits: Negative consequences to a segment of the public.

As in the private projects, time value of money is important for the public projects, so an interest rate needs to be
determined.
Several factors are considered in selecting an appropriate interest rate, such as interest rate on borrowed capital and the
opportunity cost of capital both to the taxpayers and the governmental agency.

Notation:
B = benefits of the project
FC = initial investment
O&M = operating and maintenance cost of the project
CR = capital recovery amount
D = disbenefits of the project
MV = market value of investment.

Conventional B-C ratio:

PW ( B ) B
B/C  B/C 
1  PW  O & M  or CR   O & M 

Modified B-C ratio:

PW  B   PW  O & M  AW  B   AW  O & M 
B/C  or B/C 
FC CR
(Note that CR already includes MV.)

A project is acceptable if B-C ≥ 1, otherwise not.

Conventional and modified B-C methods give identical acceptability results (not necessarily the same
numerical results!).

Example : The project is to extend the runways of an airport and it is considered by the city municipality. The
following costs have been identified:

Land: P350,000
Construction: P600,000
Annual maintenance: P22,500
Terminal construction: P250,000
Annual operating and maintenance for the terminal: P75,000
Addition of air traffic controllers per year: P100,000

The project is estimated to bring the following benefits:

Rental receipts: P325,000
Tax to passengers: P65,000
Convenience: P50,000
Tourism: P50,000.

Apply the B-C ratio method with a study period of 20 years and a MARR of 10% per year, and determine
whether this is an acceptable project or not.
Prof. SEG2440A/B (2008-2009) Chapter 11 - Public projects and benefit-cost ratio
Solution:
Annual Benefits, B=325,000+65,000+50,000+50,000 = 490,000
Capital Investment, FC =350,000+600,000+250,000=1,200,000
Annual Operating Costs & Maintenance, O&M = 22,500+75,000+100,000 = 197,500
FC 1  i  1,200,000 1.10 
n 20

CR    140,951.54
1  i  n 1 1.10 20  1
i 0.10
56 ntaldon 1/8/2018
Conventional B-C ratio:
B
B/C 
CR  O & M
B/C 
 490,000   1.448  1
140,951.54  197,500
Modified B-C ratio:
B   O & M  490,000  197,500
B/C    2.075  1 ; Recommendation: Extend
CR 140,951.54
runways!, SEG2440A/B (2008-2009) Chapter 11 - Public projects and benefit-cost ratio method
How to include disbenefits?
Suppose the increased noise level caused by the project will bring a disbenefit of $100,000/yr to the
neighborhood.

Conventional B-C ratio (with disbenefits):

BD 490,000  100,000
B/C    1.152  1
CR  O & M 140,951.54  197,500
B 490,000
B/C    1.118  1
CR  O & M  D 140,951.54  197,500  100,000

Recommendation:
Extend runways!ag,

2008-2009) Chapter 11 –c projects and benefit-cost ratio meth

N.8.9. Life-Cycle Cost
This term refers to a summation of all costs, both recurring and nonrecurring, related to a product, structure,
system, or service during its life span. The life cycle begins with identification of the economic need or want ( the
requirement) and ends with retirement and disposal activities. It is a time horizon that must be defined in the context of
the specific situation-whether it is a highway bridge, a jet engine or a cell-phone. The end of the life-cycle may be
projected on a functional or economic basis. For example, the amount of time that a structure or piece of equipment is
able to perform economically may be shorter than that permitted by its physical capability. Changes in the design
efficiency of a boiler illustrate this situation. The old boiler may be able to produce the steam required, but not
economically enough for the intended use.
The life cycle may be divided into two general periods: the acquisition phase and the operation phase. Each
of these phases is further subdivided into interrelated but different activity periods.
The acquisition phase begins with an analysis of the economic need or want-the analysis necessary to make
explicit the requirement of the product, structure, system or service. Then, with the requirement explicitly defined, the
other activities in the acquisition phase can proceed in a logical sequence. The conceptual design activities translate the
defined technical and operational requirements into a preferred preliminary design. Included in these activities are
development of the feasible alternatives and engineering and economic analyses to assist in selection of the preferred
preliminary design. Also, advanced development and prototype-testing activities to support the preliminary design
work occur during this period.
The next group of activities in the acquisition of phase involves detailed design and planning for the
production or construction. This step is followed by the activities necessary to prepare, acquire, and make ready for
operation of the facilities and other resources needed. Again, engineering economy studies are an essential part of the
design process to analyze and compare alternatives and to assist in the determining the final detailed design.
In the operation phase, the production, delivery, or construction of the end item(s) or service and their
operation or customer use occur. This phase end with retirement from active operation or use, often, disposal of the
physical assets involved. The priorities for engineering economy studies during operation phase are:
1. Achieving efficient and effective support to operations
2. Determining whether (and when) replacement of assets should occur, and
3. Projecting the timing of retirement and disposal activities
The greatest potential for achieving life-cycle cost savings is early in the acquisition phase . How much of the
life-cycle costs for a product for example can be saved is dependent on many factors. However, effective engineering
design and economic analysis during this phase are critical in maximizing potential savings.
One aspect of cost-effective engineering design is the minimizing of the impact of design changes during the
steps in the life cycle. In general, the cost of a design change increases by a multiple of 10 with each step. Thus there is
a large savings incentive to have an excellent conceptual design on which to base the detailed design and to prevent any
changes during the production or construction and operation stages of the life cycle.
Thus one purpose of the life-cycle concept is to make explicit the interrelated effects of the costs over the life
span of the product. An objective of the design process is to minimize the life-cycle cost-while meeting other
57 ntaldon 1/8/2018
 performance requirements-by making the right trade-offs between prospective costs during the acquisition phase and
during the operation phase.
The cost element of the life cycle that need to be considered will vary with the situation. Because of their
common use, however, several basic life-cycle cost categories will now be defined.
Investment cost _is the capital required the most of the activities in the acquisition phase. In simple cases,
such as acquiring specific equipment, investment cost may be incurred as a single expenditure. This cost is also called
capital investment.
Working Capital_ refers to the funds required for current assets (i.e., other than fixed assets such as
equipment, facilities, etc.) that are needed for the start-up . For example, products cannot be made or services delivered
without having materials available in inventory. Functions such as maintenance cannot be supported without spare
parts, tools, trained personnel and other resources. Also, cash must be available to pay employees, salaries and other
expenses of operation. The amount of working capital needed will vary with the project involved, and some or all of the
investment in working capital is usually recovered at the end of a project’s life.
Operation and Maintenance cost_ includes many of the recurring annual expense items associated with the
operation phase of the life cycle. The direct and indirect costs of operation associated with the five primary resource
areas-people, machines, energy, and information-are a major part of the costs in this category.

Disposal Cost_ includes those nonrecurring costs of shutting down the operation and the retirement and
disposal of assets at the end of the life cycle. Normally, costs associated with personnel, materials, transportation, and
one-time special activities can be expected. These costs will be offset in some instances by receipts from the sale of
assets with remaining market value. A classic example of a disposal cost is that associated with cleaning up a site where
a chemical processing plant had been located.

N.9. OPTIMIZATION

An optimum design is based on the best or most favorable conditions. In almost every case, these optimum conditions
can ultimately be reduced to a consideration of cost or profits. Thus, an optimum economic design could be based on
conditions giving the least cost per unit of time or the maximum profit per unit production. When one design variable is
changed, it is often found that some costs increase and others decrease. Under these conditions, the total costs may go
through a minimum at one value of the particular design variable, and this value would be considered as an optimum.
The optimum conditions could be expressed in terms of mathematical equations which could represent the theoretical
basis for the design recommendation. However, factors that cannot easily be quantified or practical considerations may
change the final recommendation, to other than the theoretically correct optimum condition.

N.9.1. Optimum Production Rates in Plant Operation

It is convenient to consider operating costs on the basis of one unit of production. When this is done, the operating costs
can be divided into two types of expenses as follows: (1) minimum expenses for raw materials, labor, power, etc., that
remain constant and must be paid for each unit of production as long as any amount of material is produced; (2) extra
expenses due to increasing the rate of production. These extra expenses are known as superproduction costs. They
become particularly important at high rates of production. Examples of superproduction costs are extra expenses caused
by overload on power facilities, additional labor requirements, or decreased efficiency of conversion. Superproduction
costs can be represented as follows:
Superprodu ction cos ts per unit of production  mP n
(N – 139)
Where: P = rate of production as total units of production per unit time
m = a constant
n = a constant

Designating h as the operating costs which remain constant per unit of production and Oc as the organization costs per
unit time, the total product cost CT per unit of production is
Oc
cT  h  mP n  (N – 140)
P
 O 
CT  cT P   h  mP n  c  P
 P
(N – 141)

58 ntaldon 1/8/2018
 Oc
r  s  cT  s  h  mP n  (N – 142)
P
 O 
R '  rP   s  h  mP n  c P (N – 143)
 P 
Where: CT = total production cost per unit of time
r = profit per unit of production
R’ = profit per unit time
s = selling price per unit of production

N.9.2. Optimum Production Rate for Minimum Cost Per Unit of Production in Plant Operation
It is often necessary to know the rate of production which will give the least cost on the basis of one unit of
material produced. This information shows the selling price at which the company would be forced to cease operation
or else operate at a loss. At this particular optimum rate, a plot of the total product cost per unit of production versus
the production rate shows a minimum product cost; therefore, the optimum production rate must occur where
dcT
 0 . An analytical solution for this case may be obtained from Equation (140) and the optimum rate P o
dP
giving the minimum cost per unit of production is found as follows:

dcT O
 0  nmPon 1  c2 (N – 144)
dP Po
1

 O   n 1
Po   c  (N – 145)
 nm 

The optimum rate shown in equation (145) would, give the maximum profit per unit of production if the selling price
remains constant.

N.9.3. Optimum Production Rate for Maximum Total Profit Per Unit of Time
In most business concerns, the amount of money earned over a given time period is much more important
than the amount of money earned for each unit of product sold. Therefore, it is necessary to recognize that the
production rate for maximum profit per unit time may differ considerably from the production rate for minimum cost per
unit production.
From equation (143), when the selling price remains constant, the optimum rate giving the maximum profit per unit
time is:
1

 s  h n
Po   
(N – 146)
  n  1 m 

N.9.4. Optimum Conditions in Cyclic Operations

Many processes are carried out by the use of cyclic operations which involve periodic shutdowns for discharging,
cleanout, or activation. This type of operation occurs when the product is produced by a batch process or when the rate
of production decreases with time, as in the operation of filtration unit. In a true batch operation, no product is obtained
unit the unit is shut down for discharging. In semi-continuous cyclic operations, product is delivered continuously while
the unit is in operation, but the rate of delivery decreases with time. Thus, in batch or semi-continuous cyclic operations,
the variable total time required per cycle must be considered when determining optimum conditions

59 ntaldon 1/8/2018
  operating and shutdown cos ts  cycles 
Total annual cos t      annual fixed cos ts
 cycle  year 
(N – 147)

 production  cycles 
Annual Pr oduction     (N – 148)
 cycle  year 

Cycles  operating  shutdown time  cycle 

   
year  year  operating  shutdown time 
(N – 149)

N.9.5. Economic Order Quantity, EOQ

The order quantity which minimizes the inventory cost unit time.

2aK
EOQ  where:
h
a= constant depletion rate (items/unit time)
K= the fixed cost per order (peso)
h= the inventory storage cost (peso/unit item)

3 Glossary

Accounting _ is the process of recording all the transactions of the company which affect any
investment of capital, so that at any time the results of the investment may be known.
Accrual-basis accounting_ when the business performs a service, makes a sale or incurs an
expense, the accountant enters the transaction into the books, whether or not cash has
been received or paid
Amortization _ method of repaying a debt, the principal and interest included, usually by a
series of equal payments at periodic interval of time.
1 Annuity _ a series of equal payments made at equal interval of time.
Annuity due _ is one where the payments are made at the start of each period, beginning from
the first period.
2 Assets _ anything of value possessed by a enterprise, classified as current, fixed and other
assets (goodwill, copyrights, franchises, etc. )
Average cost method _ all materials in the store room are mixed and no attempt is made to
determine which materials came in first or last, and therefore all materials issued are to
be priced at the average price of the all the materials in the store room at that time.

60 ntaldon 1/8/2018
 Balance sheet _ is a financial summary showing the relationship in the enterprise on a given
date. Basically, it enumerates the nature and amount of the assets, liabilities, and
ownership (equity) in the company. The most important financial statement of any
enterprise. It shows the financial position of the company at the end of the reporting
period. Also known as statement of financial position.
3 Bond _ is a certificate of indebtedness of a corporation usually for a period not less than 10
years, and guaranteed by a mortgage on certain assets of the corporation or its
subsidiaries.
Coupon bonds _ bonds which are attached coupons indicating the interest due and the
date which such interest is to be paid. The owner of the bond can collect the interest due
by surrendering the same to the officers of the corporation or the same may be cashed at
specified banks.
Collateral bonds _ the corporation pledges securities which it owns, such as stocks or
bonds of one of its subsidiaries
4 Equipment obligation bonds _ refer primarily to bonds whose guarantee is a lien
on equipment.
Registered bonds _ the owner's name is recorded in the books of the corporation, and the
interest is paid periodically to the owner without their asking for it.
5 Joint bonds _ bonds which are issued by two or more corporations
6 Par value of the bond or face value is the amount stated on the bond.
7 Bond rate _ is the rate of interest quoted on the bond.
8 Redemption or disposal price—usually equal to par value.
9 Mortgage bonds _ bonds whose security is mortgaged on certain specified
assets of the corporation.
10 Debenture bonds _ bonds without security behind them except a promise to
pay by the issuing corporation
11 Book costs_ are those that do not involve cash payments, but rather represent the recovery of
past expenditures over a fixed period of time. The most common of which is the
depreciation charge for the use of assets such as plant and equipment.
12 Book value _ also known as depreciated value, is the worth of the property as recorded in the
books of account of the enterprise and is equal to the original cost less the amounts which
have been charged to depreciation.
13 Bookkeeping _ is the systematic recording of all business transactions in financial terms.
14 Borrowed capital_ are those supplied by others on which a fixed rate of interest must be paid
and the debt must be repaid at a specified time.
15 Break-even point _ level of production where the total income is equal to the total expenses
16 Break-even analysis_ a means of identifying the value of a particular project variable that
causes the project to exactly break even.
Capacity or plant factor _ the ratio between the average load and the total available capacity.
17 Capitalized cost _ is the sum of the first cost and the additional investment necessary in
order to take care of the replacement and operating costs of the equipment etc. to
perpetually operate it. Only the interest of the additional investment will take care all the
replacement and operating expenses.
Capital_ refers to wealth in the form of money or property that can be used to produce more
wealth. Two forms of capital, debt and equity.
18 1. Equity capital_ capital owned by individuals who have invested their money or property
in a business project or venture in the hope of receiving profit.
19 2. Debt capital _ also known as borrowed capital. Capital obtained from lenders (e.g.
obtained from sale of bonds) for investment. In return, the lenders receive interest
from the borrowers.
Capital_ collective term for a body of goods and monies from which future income can be
derived. Land, buildings, equipment, inventory, and raw materials, as well as stocks,
bonds, and bank balances available are considered as capital. Generally, consumer goods
and monies spent for present needs and personal enjoyment are not included in the
definition or economic theory of capital. Homes, furnishings, cars, and other goods that
are consumed for personal enjoyment (or the money set aside for purchasing such goods)
are not considered capital in the traditional sense. Paid-in-capital_ amount of money

61 ntaldon 1/8/2018
 received from the sale of stock more than the par value of the stock. Outstanding stock is
the number of shares issued that is actually held by the public. If the corporation buys
back part of its own issued stock, it is listed as Treasury Stock on balance sheet.
20 Capital gains tax_ tax on sale of assets; a tax on profit above a fixed level made from the sale
of financial assets
21 Capital Recovery_ The minimum income that must be earned by the investor in order to
recover the cost of depreciation of the equipment plus the interest earned by the initial
investment made.
22 Cash Costs_ are those that involves payment of cash (and results in cash flow). It is
distinguished from non-cash costs or book costs like depreciation.
23 Cash Flow _ is a systematic presentation of cash receipts and disbursements for a given
operating period or fiscal year, taking for granted the accrual concept in accounting. It
details how the company generated the cash and how the company used the cash during
the reported period.
24 Collateral bonds _ the corporation pledges securities which it owns, such as stocks or bonds
of one of its subsidiaries.
Common stock _ represents the ownership of stockholders who have residual claim on the
assets of the corporation after all other claims have been settled. No return is guaranteed
on the investment of common stockholders. They have the right to call meetings, to vote,
to elect members of the board of directors, amend charter and constitution and by-laws,
inspect books of the corporation, receive dividends, share remaining assets if corporation
is dissolved.
25 Compound interest _ both the principal and the interest from the principal earn interest.
26 Consumer goods and services_ are those products or services that are directly used by
people to satisfy their wants. Food, clothing, homes, cars, television sets, haircuts, cinema,
and medical services are examples.
27 Copyright _ is an exclusive right granted by the government to protect the production and
sale of literary or artistic works for a period of 50years.
28 Corporation _ is a distinct legal entity, separate from the individuals who own it, and
which can engage in practically any business transaction which a real person could do. It
may sue, or be sued in its own name. It is separate from its owners and managers. This
separation gives the corporation four major advantages: 1) It can raise capital from large
investors by issuing stocks and bonds; 2) it permits easy transfer of ownership interest by
trading shares of stock; 3) it allows limited liability-personal liability is limited to the
amount of the individual’s investment in the business; 4) it is taxed differently than the
proprietorships and partnerships, and under certain conditions, the tax laws favor
corporations. On the negative side, it is expensive to establish a corporation. Furthermore,
a corporation is subject to numerous governmental requirements and regulations.
29
30 Cost accounting _ is the process of determining the actual cost of manufacturing a
product or of rendering a service. Methods used are, post-mortem cost accounting, method
of predicted cost, and method of standard cost. Elements of cost are materials, direct labor
and overhead.
31 Coupon bonds _ bonds which are attached coupons indicating the interest due and the
date which such interest is to be paid. The owner of the bond can collect the interest due
by surrendering the same to the officers of the corporation or the same may be cashed at
specified banks.
32 Current liabilities _ these are liabilities which mature within a short time, usually a year.
33 Current or liquid assets - include cash, accounts receivables within a short period of time
or at least within the present accounting period and inventories (Examples are, raw
materials, goods in the process of production, and finished goods ready for sale).

Types of current assets

1. Cash_ represents actual money. Cash equivalent like marketable securities and short
term investments.
2. Accounts receivable_ money which is owed to the firm but has yet to be received.

62 ntaldon 1/8/2018
 3. Inventories_ money invested in raw materials, work-in-process, finished goods
available.
Debenture bonds _ bonds without security behind them except a promise to pay by the
issuing corporation.
34 Deferred annuity _ is also and ordinary annuity but the first payment is deferred a certain
number of periods after the first period.
35 Demand _ is the quantity of a certain commodity bought at a certain price at a given
place and time.
36 Demand factor _ the ratio between the maximum power demand and the sum of the connected
loads of the system
37 Depreciation _ decrease in the value of a property such as machinery, equipment
building, etc.
Depression _ in economics, a period in an industrial nation characterized by low production
and sales and a high rate of business failures and unemployment
38 Direct Costs_ are costs that can be reasonably measured and allocated to a specific output
or work activity. The labor and material costs directly associated with a product, service,
or construction activity are direct costs.
39 Direct materials _ are materials which are used in the finished product itself.
40 Discount _ the difference between the value of a negotiable paper between now and the
future.
41 Discounted interest_ The interest for the money borrowed (discount) is deducted from
the principal in advance
42 Disposal costs_ includes those nonrecurring costs of shutting down the operation and the
retirement and disposal of assets at the end of the life cycle.
Economic life of an equipment_ is the length of time during which it will operate at a
satisfactory profit.
43 Effective interest _ is the actual rate of interest on the principal for one year.
44 Efficiency _ output/ input
45 Elastic demand _ occurs when a decrease in selling price will cause greater than
proportionate increase in sales. Usually applicable to luxury goods.
46 Engineering Economy _ study of economic theories and their applications to engineering
problems with the concept of obtaining maximum benefit at the least cost.
47 Equipment obligation bonds _ refer primarily to bonds whose guarantee is a lien on
equipment.
48 Equities _ are the claims of anyone against the asset of the enterprise. It includes the
liabilities to the creditors as well as the claims of the owners.
49 Equity capital_ or ownership funds_ are those supplied and used by the owners of an
enterprise in the expectation that a profit will be earned.
50 Exact simple interest _ is simple interest paid based on exact number of days of 365 days
per common year and 366 days for leap year.
51 Expense _ the cost of producing income or revenue, or the value of commodities and
services needed in the operation of the business. Also classified as operating and non-
operating expenses.
Extended Internal Rate of Return: The Internal rate of return calculates the rate at which the
investment made will generate cash flows. This method is convenient if the project has a
short duration, but for projects which has an outlay of many years this method is not
practical as IRR ignores the Time Value of Money. To take into consideration the Time
Value of Money Extended Internal Rate of Return was introduced where all the future cash
flows are first discounted at a discount rate and then the IRR is calculated. This method of
calculation of IRR is called Extended Internal Rate of Return or XIRR.
Fair value _ is the value which a disinterested third party, different from the buyer or the
seller, will determine in order to establish a price that is fair and acceptable to both the
buyer and the seller.
52 FIFO _ first-in, first out method. The principle behind this method is that the materials
issued at any time are taken from the oldest stock and should be priced at the cost when
they are purchased. Ex food manufacturing.

63 ntaldon 1/8/2018
 53 First cost of property _ includes original purchase price, freight and transportation,
installation, taxes, permits and all other expenses to put it into operation.
54 Fixed assets _ properties that will take time to be converted into cash or transformed into
saleable form. Examples are, buildings, land , machinery, equipment, furniture and
fixtures. With exception of land, most fixed assets have limited useful life.
55 Fixed liabilities _ liabilities which are not due for payment until sometime in the future,
usually after a period exceeding one year.
56 Fixed Costs _ are those unaffected by the changes in activity level over a feasible range of
operations for the capacity or capability available.
57 Franchise value _ is an intangible item of value arising from the exclusive right of a
company to provide a specific product or service in a stated region of the country.
Going value_ is an intangible value which an actually operating concern has due to its
operation.
Goodwill_ an intangible value_ is that element of value which a business has earned through
the favorable consideration and patronage of its customers arising from its well-known
and well conducted policies and operation.
Gross Domestic Product (GDP)_ measures the value of all goods and services produced
within a nation’s border’s regardless of the nationality of the producer. GDP measures a
country’s economic activity regardless of who owns the productive assets in that country.
For example, the output United States-owned companies based in the Philippines is
considered part of Philippine’s GDP rather than part of the U.S. .GDP may be calculated in
three ways: (1) by adding up all the value of all goods and services produced (2) by adding
up the expenditures on goods and services at the time of sale, or (3) by adding up
producers’ incomes from the sale of goods or services .
58 GDP is usually divided by its population to arrive at GDP per head. The
figure is then converted to dollars to allow for its comparison between countries. If GDP
grows at a higher rate than the population, standards of living are said to be rising. If the
population is growing higher than GDP, living of standards are said to be falling. GDP
per head does not take the cost of living into account.
59 Gross National Product (GNP)_ used to describe in monetary value the total annual flow
of goods and services in the economy of a nation. It is measured by totaling all personal
spending, all government spending, and all investment spending by a nation’s industry
both domestically and all over the world. In other words, the income earned by a U.S.-
owned business based in the Philippines would be considered part of the U.S.
60 Gross Margin_ net sales less the cost of goods sold.
Hedge funds_ risk-taking investment company: an investment company that is organized as a
limited partnership and uses high-risk techniques in the hope of making large profits
Income _ the value of personal and professional services rendered or of goods sold in the
operation of the business. Usually classified as operating and non-operating income.
Income statement _ or a profit and loss statement, is a summary of the incomes and expenses
of an individual or enterprise for a given period. The next in importance to the balance
sheet.
Incremental Costs _ are additional costs that result from increasing the output of a system by
one (or more) units.
Indirect Costs_ are costs that are difficult to attribute or allocate to a specific output or work
activity. For example, the costs of common tools, general supplies, and equipment
maintenance in plant are treated as indirect costs.
61 Indirect materials _ are materials not directly part of the product being produced
Inelastic demand _ occurs when a decrease in the selling price will cause a little a less than
proportionate increase in sales.
Inflation_ is the increase in the prices of goods and services from one year to another, thus
decreasing the purchasing power of money.
Intangible assets _ have not physical substance. Examples are, goodwill, leaseholds,
copyrights, patents, franchises, licenses, and trademarks. Accounting for an intangible
asset is rendered somewhat difficult because the lack of physical substance makes
evidence of its existence more elusive, may make its value debatable and its useful life
may be questionable.

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62 Interest _ is the amount of money paid for the use of borrowed capital.
Internal Rate of return (IRR) _ the rate of return by this method is equivalent to the
maximum interest rate (normally after taxes) at which money could be borrowed to
finance the project over its life would just be sufficient to pay all principal and interest
accumulated on the outstanding principal.
_the most widely used rate of return method for performing engineering economic
analyses. It is sometimes called by several names, such as the investor’s method, the
discounted cash flow method, and the profitability index. Also means that the value of
this measure depends only on the cash flows from an investment and not on any
assumptions about reinvestment rates.
Inventory_ stock of goods; the merchandise or stock a store or company has on hand
Investment Cost_ is the capital required for most of the activities in the acquisition phase.
This cost is often called a capital investment.
Joint bonds _ bonds which are issued by two or more corporations.
63 Journal _ is an accounting book where the original record of all transaction is ordinarily
recorded. It is the book of original entry
Kelvin's Law _ the most economical cross sectional area for a conductor is that one for
which the investment cost just equals the annual cost of lost energy.
Law of Diminishing returns _ when one of the factors of production is fixed in quantity or is
difficult to increase, increasing the other factors of production will result in a less than
proportionate increase in output.
64 Law of diminishing utility _ an increase in the quantity of any good consumed or
acquired by an individual will decrease the amount of satisfaction derived from that good.
65 Ledger _ serves as a secondary record of business transactions. The ledger sheets are
used as intermediates, between journal records, balance sheets, income statements, and
general records. Examples are, cash, equipment, accounts receivables, inventory,
accounts payable and manufacturing expense.
66 Liabilities _ are debts or claims anyone other than the owners of the property upon the
assets of the company.
67 Life-cycle cost_ refers to a summation of all costs, both recurring and non-recurring,
related to a product, structure, system, or service during its life plan.
Life cycle_ refers to the notion that a fair, holistic assessment requires the assessment of raw
material production, manufacture, distribution, use and disposal including all
intervening transportation steps necessary or caused by the product's existence. The sum
of all those steps - or phases - is the life cycle of the product. The concept also can be
used to optimize the environmental performance of a single product (ecodesign) or to
optimize the environmental performance of a company.
68 LIFO _ last-in. last out method. The materials last to obtained are the first to be issued.
Ex sand and gravel industry
69 Load factor _ the ratio between the average demand and the maximum demand.
70 Luxuries_ are those products or services that are desired by humans and will be
purchased if money is available after the required necessities have been obtained.
Marginal cost _ is the additional cost of producing one more unit.
71 Marginal revenue _ is the amount received from the sale of an additional unit of a
product.
72 Marginal utility _ is the utility of the last unit of the same commodity which is consumed
or acquired. If a man has three shirts of the same kind of brand, the marginal utility of
the 2nd unit is greater than the marginal utility of the fourth unit.
73 Market - is a place where sellers and buyers come together
74 Market value _ is the amount which a willing buyer will pay to a willing seller for the
property when neither one is under compulsion to buy or sell.
75 Minimum Attractive Rate of Return (MARR) _ also known as hurdle rate, the interest
rate used in the valuation of profitability of a project in Present Worth, Future Worth and
Annual Worth Methods. It is usually a policy issue by the top management of an
organization in view of the following considerations: The amount of money available for
investment, number of good projects available for investment, the amount of perceived

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 risk associated with investment opportunities available and type of organization
involved..
76 Monopoly _ a unique product or service is available only from a single supplier and entry
of all other possible suppliers are prevented.
77 Mortgage bonds _ bonds whose security is mortgaged on certain specified assets of the
corporation.
Mutual Fund_ form of management-investment company that combines the money of its
shareholders and invests those funds in a wide variety of stocks, bonds, and so-called
money market instruments. The latter include short-term investments such as United
States Treasury bills and other federal securities, commercial paper, and bank certificates
of deposit. Mutual funds provide the investor with professional management of funds and
diversification of investment among the securities offered by leading corporations,
federal and state governments, and other entities.
Most mutual funds are classed as open-end funds, meaning that the fund will redeem
outstanding shares immediately upon request. Thus, the number of shares of a given mutual fund is
not fixed, but fluctuates as new shares are sold to investors and outstanding shares are redeemed.
The offering price and redemption price of an open-end fund are based on the market value of the
securities in its portfolio. In addition, varying charges, called loads, may be applied. The offering
price may include a front-end load, generally to cover the commission to the broker or other sales
representative. A back-end load may be subtracted from the redemption price, often at a rate that
progressively decreases the longer the shares are held.
Closed-end funds generally have a fixed number of shares outstanding and are traded on
the over-the-counter market or, in some instances, on stock exchanges. Shares are purchased and
sold at the market price plus a commission. They may sell at a premium, that is, above the value of
their assets, or at a discount, below the value of their assets.
Classification of mutual funds based on investment objectives are:
1. Money market,_ Money-market funds, which many investors look upon as an alternative to a bank
account, seek complete safety of capital in short-term investments. Yields vary, being loosely linked with the
interest rate paid on U.S. Treasury bills. There is a rapid flow of cash into and out of money-market funds.
2. Growth funds_ seek high returns by investing in promising but speculative securities. These funds entail
greater risk than standard growth funds, which tend to invest in larger, more financially secure companies
with records of steadily increasing earnings.
3. Growth and Income Funds_ attempt to achieve a balance between money-market funds and growth funds.
Among funds that seek stability and safety, some may invest in high-quality bonds, others in blue-chip
stocks, and still others in federal securities, which are backed by the full faith and credit of the U.S.
government. Funds that aim for current income may be speculative, investing in high-yield, high-risk
securities such as junk bonds, or conservative in outlook, investing in low-risk securities with a good record
of paying dividends. Between the extremes are funds that are willing to take some risk for higher returns but
are mindful of the need to conserve capital. In general, younger investors, with most of their earning power
ahead of them, can tolerate more risk than investors who are close to retirement.
4. Other Funds (Balanced, Sector, International Stock , Bonds, Gold and Precious Metals, Municipal)
Balanced funds, seeking both growth and income, may invest in stocks, bonds, and other financial
instruments. Sector funds put all their funds in corporations in one area of business, such as the automobile
industry, or in one country or region of the world. International stock funds and bond funds, gold and
precious metals funds, and municipal bond funds are among the dozens of other categories and
subcategories. In contrast to the extreme specialization offered by some funds, there are fully managed
mutual funds, which are free by company policy to alter the composition of the portfolio according to the
management's evaluation of the current market. Another approach is offered by index funds, which do not
attempt to outguess the markets but simply structure their portfolios to duplicate one of the major stock
market indexes, such as the Standard and Poor's index of 500 leading stocks.
Necessities _ are those products or services that are required to support human life activities,
that will be purchased in somewhat the same quantity even though the price varies
considerably.
78 Net profit _ gross profit less income tax
79 Net Sales_ represent the gross sales less any sales return and allowances.
80 Nominal interest _ the rate of interest usually quoted which specifies the rate of interest
and the number of interest periods per year. Ex 12% per annum compounded annually.
81 Non-recurring costs_ are those which arte non-repetitive, even though the total
expenditure may be cumulative over a relatively short period of time.. For example, the
purchase of a real estate upon which the plant will be constructed is a non-recurring cost,
as the cost of constructing the plant itself.

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 Obsolescence - refers to the changes external to the equipment such as, decrease or
disappearance of demand, invention of more efficient equipment or style of products may
have changed considerably.
Organization cost_ an intangible value_ is the amount of money spent in organizing a
business and arranging for its financing and building.
82 Oligopoly _ occurs when there are few suppliers and any action taken by one of them will
definitely affect the course of action of the others.
83 Operation and maintenance cost_ includes many of the recurring annual expenses
associated with the operation phase of life cycle. The direct and indirect costs of
operation associated with the five primary resource areas- people, machines, materials,
energy, and information- are a major part of the costs in this category.
84 Opportunity Cost_ is incurred because of the use of limited resources, such as the
opportunity to use those resources to monetary advantage in an alternative use is
foregone.
Ordinary annuity _ is one where the equal payments are made at the end of each payment
period starting at the first period.
85 Ordinary simple interest _is simple interest paid based on a banker's year of 12 months or
120 days.
86 Overhead expenses _ consist of those expenses which cannot be readily included under direct
materials and direct labor. Also known as indirect costs or burden.
87 Ownership or proprietorship _ it represents the investment of a person or several persons
in the enterprise.
Partnership _ is an association of two or more persons for the purpose of engaging in a
business profit. Usually formed by the voluntary agreement of the partners either verbally
or in writing. The agreement among the partners usually states the relations between
partners on matters relating to the proportion in which profits or losses are to be shared,
their investments , rights and duties of each partner, and provisions for the withdrawal of
any partner or the dissolution of the partnership.
A partnership has many advantages, among which are its low cost and ease of
formation. Because more than one person makes contributions, a partnership typically
has larger amount of capital available for business use. Since the personal assets of all
partners stand behind the business, a partnership can borrow money more easily from a
bank. Each partner pays only personal income tax on his or her share of a partnership’s
taxable income.
88 Patent _ is an exclusive right granted by the government for the manufacture, use, and sale
of a specific product. When a company acquires a patent or copyright by purchase of from
the owner, the purchase price is classified as an intangible asset.
89 Payout period _ the minimum period needed to recover an investment. Depreciable fixed
capital/ net cash flow
90 Perpetual Inventory _ consists of the preparation of inventory cards, and their being kept
up-to-date for each type of equipment or materials used or issued, and for the products
completed or in the process of manufacture.
91 Perpetuity _ is an annuity where the payments periods extend or in which the periodic
payments continue indefinitely.
92 Physical inventory _ consists of the actual counting or determination of the actual of
quantity of materials on hand as of a given date.
93 Physical Life of an equipment _ is the length of time during which it is capable of performing
the function for which was designed and manufactured.
94 Power factor _ ratio of the power output in watts and the product of volts and amperes
95 Preferred stock _ also represent ownership. And it possesses the same rights as common
stock, but in addition, it enjoys certain preferences, not possessed by common stock. It
has priority over common stock in receipt of dividends, and it is usually guaranteed a
fixed annual dividend, regardless of the amount of the earnings of the corporation. In case
the corporation is dissolved, the owner of the preferred stock, has priority over the
common stockholders. They may have right to vote in meetings.
96 Prepaid expense _ assets in the form of money paid for certain materials not yet delivered or
services not yet rendered to the company.

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97 Prepaid income _ these are liabilities representing income which have been paid to the
enterprise but for which the goods have not been delivered or any service rendered to the
payer.
98 Present economy _ involves the analysis of problems for manufacturing a product or
rendering a service upon basis of present or immediate costs.
99 Present value _ is the amount which if invested now will give a value of F after n
interest periods. It is also defined as projected cash inflows and outflows expressed or
discounted to the present time.
100 Price _ is defined as the amount of money or its equivalent which is given in exchange of
the goods being sold.
101 Principal _ is the amount of money borrowed inn which interest is charged.
102 Producer goods and services_ are used to produce consumer goods and services or other
producer goods. Machine tools, factory buildings, buses, and farm machinery are
examples.
103 Profit _ is the excess of income over expenses
104 Project Risk_ the possibility that an investment project will not meet the minimum
requirements for acceptability and success.
Pyramid scheme: a fraudulent scheme in which the perpetrators recruit people to pay money
to those above them in a hierarchy on the expectation that they will get payments from
those below. When the number of newly recruited people eventually dwindles, the
payment structure collapses.
Rate of interest _ is the amount earned by one unit of principal during a unit of time.
105 Rate of return _ annual profit/capital invested
106 Registered bonds _ the owner's name is recorded in the books of the corporation, and the
interest is paid periodically to the owner without their asking for it.
107 Recurring Costs _are those that are repetitive and occur when an organization produces
similar goods or services on a continuing basis. Variable costs are also recurring costs
because they repeat with each unit of output. A fixed cost that is paid on a repeatable
basis is also a recurring cost.
108 Replacement value _ The cost necessary to replace an existing property at any given time
with one at least equally capable of rendering the same service.
109 Retained earnings_ the cumulative net income of the firm since its beginning, less the
total dividends that have been paid to stockholders. It indicate the amount of assets that
have been financed by plowing profits back into the business. Therefore, these retained
earnings belong to the stockholders.
110 Revenue_ the price of goods sold and services rendered during a given accounting period.
Salvage value _ the amount to which the equipment or machine can be sold as second hand.
It implies that the machine can still perform the function.
111 Scenario analysis_ a means of comparing a “base-case” or expected project measurement
(such as NPW) to one or more additional scenarios, such as best and worst case, to
identify the extreme and most likely project outcomes.
112 Scrap value _ the amount the equipment can be disposed off as junk.
113 Simple interest _ interest paid is directly proportional to the length of time the amount or
the principal is borrowed.
114 Sole proprietorship _ or individual ownership, is the simplest for of business
organization, wherein the business is owned entirely by one person who is responsible for
the operation, firm’s policies, and is personally liable for its debts. The proprietorship
has two major advantages. First, it can be formed easily and inexpensively. No legal and
organizational requirements are associated with setting up a proprietorship, and
organizational costs are therefore, virtually nil. Second, the earnings of a proprietorship
are taxed at the owner’s personal tax rate, which may be lower than the rate at which
corporate income is taxed. Apart from personal liability considerations, the disadvantage
of a proprietorship is that it cannot issue stocks and bonds, making it difficult to raise
capital for any business expansion.
115 Standard Costs _ are representative costs per unit of output that are established in
advance of actual production or service delivery. The are developed from anticipated

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 direct labor hours, materials, and overhead categories (with their established cost per
unit).
Stock _ in business and finance, a share of ownership in a corporation. Shares in a corporation
can be bought and sold, usually on a public stock exchange. Consequently, the owner of
shares can realize a profit or capital gain if the stock is sold at a price above what the
owner originally paid for it.
Stock Exchange_ organized market for buying and selling financial instruments known as
securities, which include stocks, bonds, options, and futures. Most stock exchanges have
specific locations where the trades are completed. For the stock of a company to be
traded at these exchanges, it must be listed, and to be listed, the company must satisfy
certain requirements. But not all stocks are bought and sold at a specific site. Such stocks
are referred to as unlisted. Many of these stocks are traded over the counter—that is, by
telephone or by computer.
Stock Holder_ share holder, owner of company stock,
Stockholder’s Equity_ the amount available to the owners after all other debts have been paid
116 Sunk cost _ money which has been spent or capital which has been invested and which
cannot be recovered due to certain reasons. They are non-refundable cash outlay, such as
earnest money on a house, capital that has been invested and cannot be retrieved or
money spent on passport.
117 Supply _ is the quantity of a certain commodity that is offered for sale at a certain price
at a given place and time.
Taxes;
118 Income taxes_ expressed as a function of gross revenues minus allowable deductions.
Property taxes_ are assessed as a function of the value of property owned, such as land,
buildings, equipment, and so on, and the applicable tax rates. They are independent of the
income or profit of the company.
Sales taxes_ are assessed on the basis of purchases of goods or services and are thus
independent of gross income or profits.
Excise Taxes_ assessed as a function of the sale of certain goods or services often considered
non-necessities (alcohol, tobacco), and are hence independent of the income or profit of a
business.
119 The Law of Demand _ the demand for a commodity varies inversely as the price of
commodity, though not proportionately.
120 The Law of Supply _ the supply of commodity varies directly as the price of the
commodity, though not proportionately.
121 The Law of Supply and Demand _ when free competition exists, the price of a product
will be that value where supply is equal to the demand.
Unitary elasticity of demand _ occurs when the mathematical product of price and volume of
sales remain constant regardless of any change in price. PV=C
122 Utility _ is the capacity of a commodity to satisfy human wants and needs.
123 Utility or use value _ is what it is worth to the owner of a property when in actual
operation.
Value_ the price that must be paid in order to obtain a particular item
Valuation_ or appraisal_ is the process of determining the value of certain property for
specific reasons.
124 Variable Costs_ are those associated with an operation that vary in total with the quantity
of output or other measures of activity level.
Working capital_ refers to the funds required for current assets (other than fixed assets) that
are needed for the start-up and support of operational activities. Also known as the
circulating capital, includes all funds which are required to make the enterprise a going
concern.

5 References ;

Plant design and Economics for Chemical Engineers, Max S. Peters and Klaus D. Timmerhaus, 4th Ed
Process Engineering Economics, Scweyer
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Engineering Economy, de Garmo
Engineering Economy, Arreola, 2nd Ed
How to Develop Project Feasibility Study, Development Academy of the Phil.
Engineering Economy, 12th Ed, Sullivan, Wicks, Luxhoj

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