Economic Estimation of an Industrial Project

1.- Economic Estimation

Traditional Estimation Scheme.

Changing Consideration of the Economic Environment.
Appropriate procedure for updating the Cost Estimate.

Manufacturing a product is a problem that involves a technical procedure and some

economic conditions that will make the necessary investment profitable or not
installation and operation of the plant.
Knowing the costs and revenues of an investment that will occur in the future is some
one of the most difficult problems faced by a professional in the development of a
project, due to the fact that at the time of execution there is no
sufficient information to request a formal quote from a contractor or
supplier. Therefore, it is necessary to resort to the estimation of these costs for
to conduct the corresponding economic analyses. There is no single way
to make this estimate, historical data from the company can be used,
coming from other similar projects or not, consult opinions of specialists
in the branch and publications with price lists. In any case this does not
ensures the updated exact cost of the goods and services required by the
project. Therefore, it will be advisable to adjust these values to real-time in
that the investment will take effect, using the appropriate procedures for its
update.

The engineer must have sufficient knowledge to be able to estimate costs and
determine if these economic conditions make a project feasible, in which
a certain amount of money is invested to set up a plant and manufacture a
determined product.

The cost and revenue estimation of an industrial project includes the

determination of the following items:

Capital investment.
The manufacturing costs.
The general expenses.
Sales and profits.
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2.- Economic Estimation of an Industrial Project.

2.1 Definition
2.2 Accounting elements that define the investment (Real-time effects)

2.2.1 CAPITAL INVESTMENT.

Capital investment is the amount of economic resources needed to
build the production facilities, start-up and operation of the plant.
The total capital of an industrial project is made up of: Fixed capital, working capital.
of labor plus the cost of the land and other non-depreciable costs.
TOTAL CAPITAL = FIXED CAPITAL + WORKING CAPITAL + LAND COSTS

THE FIXED CAPITAL

Fixed capital represents the investment in production facilities and services.
auxiliaries. In most cases, it constitutes a high percentage of the total capital
(between 80 to 90%). Fixed capital depreciates and consists of the following
lines:

FIXED CAPITAL:

Land conditioning: _____________________________________

Construction of the buildings: ___________________________________

Industrial services:_____________________________________________

Equipment costs:____________________________________________

Equipment installation:_________________________________________

Pipes:______________________________________________________

Controls and instrumentation:_______________________________________

Thermal insulation: ______________________________________________

Substation:

Fire prevention system:_________________________________________

Waste treatment plants: ___________________________________

Facilities for air pollution control: ______________

1) SUBTOTAL PHYSICAL COST OF THE PLANT Bs.__________________________

Engineering project_____________________

2) SUBTOTAL DIRECT PLANT COST Bs.___________________________

Contractors' Profit__________________________

Unforeseen events
 Total Fixed Capital Bs.

Land conditioning

It should be preferred in flat terrain, but with good drainage facilities.

urbanized lands with all services, in order to make it less expensive
its conditioning.

The cost of land preparation includes the topographic survey.

the design of the modified topography and the earthworks
necessary, in addition to the accesses, external roads. Railways, docks, etc.

The cost of this item varies greatly from one site to another and from one land to another.
The most approximate way to estimate it is based on the unit price of Bs. /m.2of
conditioning.

Construction of the buildings

The best way to estimate the cost of buildings for industries is to base it on
in the unit price of the m2covered.

Industrial services

Industrial services refer to the facilities for clean water, wastewater

black, electricity, natural gas, steam, compressed air, etc.

For the estimation of installations, one must have an idea of the consumption of each one.
for example, the liters/seconds of water, the kW installed in electricity,
the m3/ Gas HR or the Foot3/ min. of compressed air. As a first
an approximation can use average unit costs of these services, but
For a closer estimation of the real cost, a preliminary design must be carried out.
determine the components of each system and estimate the value of each one
them.

Equipment Costs
In the cost estimation of industrial plants, one of the components of
the most important factor is the cost of the equipment. One does not always have
recent quote on a part of the necessary equipment or it is available
a quote for a similar equipment but with a different capacity of the
necessary, or the offer is for used machinery.

The factor method provides a fairly accurate approximation.

It is established that if the cost of a given equipment is known at a capacity,

the cost of a similar unit x times greater will be approximately xnsometimes the
cost of the original equipment.

n
Where: Cost B = Cost A * Capacity B
 Capacity A
North American texts refer to this factor as 'six tenths' (0.6) due to
that in a large number of cases, n=0.6, although it can vary considerably.

The validity of this rule has been verified (for North American teams,
especially). However, discretion should be exercised in its use when there is
very large differences in the capacity ranges. If the estimator has
two or more prices of different unit sizes can be established
exactly the value of a particular exponent of the logarithmic curve of a
cost-capacity curve.

Indexes: One of the first difficulties in estimation is the fact that the
known data is generally obsolete due to the continuous changes of the
economic conditions. The new quotations of all the components of the
installations can only be obtained once the final designs are ready
approved.

To have outdated data "up to date", the use of indices is resorted to. These are a
tabulation of the annual price variation taking one year as the base.

To estimate the cost at the desired time, the following equation is used:

Where: Costyear xCostyear and * Index year X

Index year Y

There are numerous tabulated indices, varying little among them and having different.
years as a base.

The most commonly used indices in North America are:

Marshall & Stevens: Indices for 'all industries', and indices for 'industry of
process”, periodically publishing in the journal Chemical
Engineering.

Nelson: Refinery cost indices, published periodically in the

The Oil and Gas Journal.

CE Index: Plant Cost Index, published by Chemical Magazine

Engineering.

Equipment cost chart

There are a series of graphs, compiled by various authors, which indicate the
cost of various equipment for different capacities in a given year.
This type of graphs is published in various technical magazines and for the industry.
Chemicals have been collected in various books, among others: Aries & Newton.
Chemical Engineering Cost Estimation; Zimerman, Chemical Engineering Costs;
Chilton, Cost Engineering in the Process Industries.
In the cost estimation of the equipment, the index must also be taken into account.
of internal inflation, as well as the exchange rate with the currency of the country of origin
from the team, in order to determine the factor to correct the estimated cost. Furthermore,
the costs related to transportation, insurance and customs duties must be added.
customs.

Installation of the equipment

To convert the various teams of a plant into 'Productive', it is necessary

install them and connect other components: pipes, instrumentation energy, etc.

The installation cost of the equipment can be subdivided into three components.
main: Foundations, Platforms and Supports, and Erection.

Foundations: The cost of the foundations comes from the excavations.

necessary and the concrete that constitutes the foundation.

Platforms and Supports: In many plants, due to the characteristics of the equipment,
It is necessary to plan stairs, walkways, handrails, and metal supports.
corresponding.

Pipes

In a match that in some areas turns out to be of great importance, such as

in chemical industries. In these cases, due to the magnitude, it is required in its
estimation, to have a considerable accuracy. Regarding prices of different
materials and diameters of pipes and fittings, there are abundant graphs in the
previously mentioned works and their assembly and installation can be estimated as a
percentage of its cost price. It is relatively easy to obtain prices of this type.
of work with contractors established in the country.

North American authors make three for chemical process plants.

clasificaciones: a) Sólido b) Sólido-fluido y c) Fluido, de acuerdo con el estado físico
of the predominant materials in the process.

For the three cases, they make the following pipe cost estimate, referring to
the percentage that this line represents, over the purchase price of the equipment:

PROCESS MATERIALS % Labor % TOTAL %

Solid 8 6 14

Solid-fluid 21 15 36
Fluid 49 37 86

The percentage related to materials is perfectly maintained in Venezuela, but

the reference for labor for installation must be increased by at least one
third part.

Controls and instrumentation

The calculation of the cost of the instrumentation can be done using lists.
published in the aforementioned works, adding between 25 and 30% for the concept of
installation.

The use of instruments and controls varies greatly from one industry to another.
the mechanical process industry requires moderate instrumentation, some
chemical processes, on the contrary, require a large amount of instruments and
automatic controls.

Calculating the instrumentation as a percentage of the cost price of the

teams, the following figures can be used for estimation according to the
importance of this item in the type of industry, considering:

MATERIALS % Labor % TOTAL %

Few controls 4 1 51
Some controls
special 12 3 15
Many controls 24 6 30

The percentages applied to labor, in the case of Venezuela, must be

increased by a third.

Using instrumentation of North American origin, it can be established for a

a determined process, the cost of the instrumentation which will vary
approximately with the power of 0.3 of the plant's capacity.

Thermal insulation

Many industrial processes develop or use heat or cold and require that certain
devices and pipes should be technically insulated.

The selection of the appropriate insulation material for each case will depend on a series
of factors, such as temperature, mechanical resistance of the material, whether it will be at the
exposure, etc. The cost of materials and the labor for installation will vary.
I greatly agree with the selection.
For the purpose of cost estimation, this line can be taken as between 8 and
10% of the purchase price of the equipment, with 3% corresponding to material cost
insulation and the rest for labor installation.

Electrical Substation.
For estimation purposes, it can be assumed that the cost of the complete installation
of substations, wiring, etc., represents between 15 and 20% of the price of
purchase of the equipment.

An estimate of the cost per installed KVA can also be made.

Fire protection system

This concept includes the facilities to prevent and combat fires.

It is composed of the following elements:

. Detection and alarm system.

. Fixed and portable extinguishing system.
. Emergency lighting and escape routes.

The magnitude of the cost of such facilities will depend on the risk of the plant.
function of the process, the materials and products that are handled and stored. In
In general terms, according to the cost of the installations, the following can be estimated
percentages of the cost of buildings:

. Low risk.... 5%
. Moderate risk.... 10%
. High risk.... 15%

Waste treatment plants

Industries obtain water from public aqueducts (INOS) or from

self-supply through deep wells, dikes, intakes in rivers, lakes or
the sea. After using the water for sanitary use, process, produce steam
cooling water is recirculated or disposed of in a final receptor. The quality of the
water both in the intake and in the internal processes and in the final disposal is
they are of great importance and are regulated by state laws.

The most common treatment plants in industries are the following:

Water treatment plants for drinking water.

Wastewater treatment plants for process.
Wastewater treatment plants.
Wastewater treatment plants.
The cost of these facilities can be estimated based on the liters/seconds at
to treat.

Facilities for air pollution control

Most industrial processes generate gases, vapors during their operation,

smokes or powders that must be treated before being discharged into the atmosphere by
washers or filters collectors. These installations currently have a cost
very high due to the demands of health authorities, reaching in
some cases of highly polluting industries reaching the sum of 20%
total cost of the investment in equipment.

Profit of the contractors

This refers to the case where cost analyses of works are conducted in detail.
in which different accounts only analyze the materials used and
direct labor. Contractors will receive a profit for their work, which
it can be estimated between 4 and 5% on fixed capital or between 10 and 15% on
the amount of the work carried out by them.

Unforeseen events

It is a portion of fixed capital intended to cover certain expenses that were not
foreseen in the calculation of equipment acquisition, construction of buildings and
installation.

It is calculated as a minimum of 5% of the physical cost of the plant.

WORKING CAPITAL

The working capital of an industry or business is an amount of money that in

theory can be fully recovered at any time. It is an investment that
it does not depreciate like the land occupied by the plant.

Working capital ranges from a small fraction of total capital to almost the
capital wholly inverted, depending on the type of industry or business. For example, in
a jewelry store's fixed capital is very small compared to the working capital,
On the other hand, in a steel plant, the working capital is about 20% of
total capital.

The working capital of an industry can be estimated based on the following

three methods:

Calculate the working capital as 30% of annual sales.

 Assume that it is 15% of the total capital.

3) Determine the working capital by calculating the amount of each of the

next matches:

Raw material inventory.

Inventory of materials in process.
Inventory of finished products.
Inventory of spare parts, credits, and accounts payable.
Cash on hand.

Raw materials inventories.

The inventories of raw materials required for manufacturing are determined

due to the consumption rate, its value, availability, distance, and conditions of the
sources, and storage requirements.

The value can be estimated at the needs of two months of production for the
national raw materials that are easy and safe to acquire and the needs of 4 to 5
production months for imported items. In any case, the
cost price.

Inventory of materials in process

It varies greatly across different types of industries and will depend on the complexity of the
production cycle. It can be estimated as half of all expenses
manufacturing that occurs during an equivalent total time period required
through the process.

Finished goods inventory

The quantities of finished products that must be kept in inventory vary.

considerably with the products. Some products are manufactured at a rate
production continues, but its sale is seasonal; others are dispatched to
same production rhythm. If precise data is not available, the inventories of
products can be estimated from 1 to 3 months of production, valued at cost of
manufacture.

Inventory of spare parts and materials

In highly industrialized countries, at least 95% of the equipment and

machinery used in industrial plants is locally manufactured, which
allows you to easily and quickly obtain any spare part. This is not the case
from Venezuela, where practically all the equipment is manufactured in the
outdoors. To keep the plants functioning well, it is necessary to maintain
a minimum of spare parts stored to be used when an occurs
breakdown.
Experience has shown that it is necessary to have in inventory
permanently a quantity of spare parts that represents in money between 10 and
15% of the cost of the equipment.

Credits and accounts payable

Sufficient capital must be available to cover product accounts.

shipped to important clients. This amount should be estimated at least as
the equivalent of one month of production valued at the selling price. And subtract the
estimated amount of accounts payable.

Cash on hand

It is necessary to have a certain amount to cover the payroll payments and

salaries, services, and materials. This availability must be at least the equivalent
the amount spent during one to two months as manufacturing expenses
for products already known in the market, or at least 5 to 6 months for products
new.

COST OF THE LAND

The cost of the land is a line item that varies greatly from one place to another. The cost itself
The land will vary with the existing facilities, being classified as rural,
semi-industrialized areas and urbanized zones. The latter will show greater
number of existing services and naturally they will be more expensive.

To avoid making mistakes, it is relatively easy to find out in each case the
cost of the desired lands in each area and compare the land alternatives
urbanized, against rural land, plus the connection to services.

2.2.2 MANUFACTURING COSTS

Manufacturing cost refers to the sum of all direct, indirect, and fixed costs that
result from manufacturing a product. It can be tabulated as follows:

DIRECT MANUFACTURING COST

These are the costs incurred specifically to manufacture a

product.

Raw Materials

Labor

Supervision
 Labor

Maintenance

Material and Consumption _____________________________________

Royalties and Patents

Services _____________________________________

TOTAL DIRECT MANUFACTURING COST

INDIRECT MANUFACTURING COST

They are the expenses that occur indirectly in the production of a good or
service.

Social benefits for workers _________________________

Laboratories

Plant expenses___________________________________________

Packed

Dispatch of products

TOTAL INDIRECT MANUFACTURING COST________________

FIXED MANUFACTURING COST

They are those costs that do not depend on the level of production.

Depreciation

Property taxes__________________________

Insurance___________________________________________

TOTAL FIXED MANUFACTURING COST

TOTAL MANUFACTURING COST____________________

Many industries, in their processes, produce more than one product. It is advisable to make
certain considerations regarding the distribution of production costs. In
Initially, processes can be grouped into one or several classifications.
following:

1.- When a single product is manufactured, the manufacturing costs are

They will charge him in full.

2.- When two or more primary products are manufactured at the same time
time, by the same process, the manufacturing cost to be divided among the products
based on the amount produced or based on their relative values.

3.- If in the manufacturing of a primary product, a by-product results, the

value of it, minus the expenses caused by the additional process, must be credited
the cost of raw material.

DIRECT MANUFACTURING COST.

Raw materials

The disbursement for raw materials consists of the cost of the materials in
Yes, more costs incurred by transportation. In case of being imported, there will be
other expenses to add. Shipping manifest, commission to shipping agent,
marine insurance, commission to importing agent, port expenses, taxes of
importation in accordance with the tariff law. In some industries, they are used and
they are considered as raw materials, special materials such as matrices of
casting or pressing, catalysts, electrodes, etc. In this case, it will be charged to the
product the depreciation cost of those materials according to their useful life.

In the acquisition of raw materials, it must be taken into account during the
negotiations, the quantity and the mode of transport. These two factors influence
Notably about their purchase price.

When making cost estimation calculations, it is always advisable to obtain prices.

from raw materials directly from suppliers to obtain the daily price, if not
If this is possible, the cited publications provide lists of prices valid at the date.
of publication.

As sources of information on raw materials, the following can be mentioned:

Commercial delegations from various countries' embassies

producers.

FAO trade yearbooks.

United Nations publications.

The magazines:

Chemical and Engineering News.

Oil, Paint and Drug Reporter.

Labor

Labor represents the amount paid to the workers involved

directly in the manufacturing processes.

The most correct method of determining personnel requirements and, therefore,

of labor or wages, it is the detailed study of the flow of materials along
of the operational processes and the equipment involved in production. No
there exists, nor would it be universally applicable to tabulate in production. It does not exist,
a standard man-hour tabulation would not be universally applicable
necessary for the manufacture of different products.

This match represents in some highly automated industries or in industries

they manage gases, for example, only between 5 and 15% of the cost of
manufacturing; on the other hand in productions that require extensive material handling and
much manual labor can represent up to 30% or more of that cost.
salaries in Venezuela vary significantly from one region to another in the country, for a
same classification of workers. Many typical industries are governed by wages.
tabulated according to collective labor agreements and still, the payments
they differ from one area to another.

Supervision

It refers to the salaries paid to all personnel responsible for supervision.

directly from production operations. These salaries vary with responsibility
assigned to each supervisor.

In the estimate, the same criteria will be applied as in the labor.

Maintenance

The maintenance cost includes the cost of materials and employee salaries.
in the reviews of routines and repairs. In addition, the major reviews of the
equipment and machinery and the vessels.

It is a very difficult game to determine and requires great experience in the use of
teams, similar to have a correct assessment.

For a preliminary estimate, maintenance costs can be estimated as

a percentage of fixed capital investment, according to the following criteria:
TYPE OF EQUIPMENT MAINTENANCE per year %

Simple, lightweight use 2 to 4

Normal 6 to 7
Complicated, severe use 8 to 12

Errors are often made when loading certain incurred costs and
related to the equipment. The disbursements made to improve the plant are
They load capital investment.

The replacement of equipment due to obsolescence or natural wear is

covered by depreciation and the materials used during normal operation
from the plant, such as gaskets, control letters, lubricants, etc., that
they are classified as consumable materials.

Consumables

As expressed in the previous paragraph, it is noted that the items used by

the plant staff for the normal operation of this such as gaskets, letters
control, lubricants, etc., closely related to maintenance
are considered as consumable materials. The expenditure of those acquisitions is
it can be estimated between 15 and 20% of the annual maintenance cost.

Royalties and Patents

The cost of patents for producing certain products must be amortized.

during the period of their legal protection.

Royalties are generally paid at a specific rate on production or

about sales.

If exact data is not available, an equivalent amount can be estimated between

3 and 5% of the total sales to meet these requirements.

Services

The amounts of steam, water, electricity, fuel, compressed air,

Cooling, etc., must be determined by the engineer through a study.
detailed requirements of the processes.

The cited works and many manuals have compiled tables that indicate quantities.
attempts at different services required in different industries.
The cost of the services should be obtained directly from those companies.
suppliers such as INOS, CADAFE, CORPOVEN and others.

It is recommended that the calculated amounts for the different services be

increased by between 25 and 50% to compensate for losses and unforeseen events.

INDIRECT MANUFACTURING COSTS

Indirect costs are those expenses incurred as a result of (but

not directly for) the productive operations.

Social benefits of workers

It refers to: pensions, INCE, vacation payment, profits, social security

mandatory, social benefits according to labor law, insurance
unions, benefits derived from the application of collective labor agreements,
etc., that the company's workers pursue, besides the basic payment
stipulated in the salary scale.

The benefits related to the application of the Labor Law and the Social Security Law are
easy to determine according to those laws.
The year-end profits for cost estimation are calculated based on the
equivalent to two months' salary paid to each worker.

The other benefits: pensions, collective insurance, and benefits derived from the
the application of collective labor contracts varies greatly from one type of company to another
to another and from one region to another in the country.

Without having precise data on these last ones, it can be calculated that a
The total social benefits represent between 60 and 80% of the basic salaries.

Laboratories

Industries need to have laboratories for various quality control.

the products.

The operating cost of them varies greatly from one industry to another, but it can be
estimate an average between 3 and 4% of manufacturing costs.

Plant expenses

They refer to the expenses incurred by maintaining certain services that are required.
indirectly the production units. Included in this line are the costs
for the maintenance of medical and recreational services, the department of
purchases, warehouses, and engineering services.
Generally, these expenses are gathered into a single total to then distribute them among
the various productive operations, in direct proportion to their wages or
to the production capacities to the sales volumes of each section.

These costs can be estimated between 50 and 100% of the wage costs.
productive, plant expenses are generally proportional to salaries;
they will be larger for plants composed of complex operations and smaller for
plants with simple processes. Likewise, the proportion of 'hedge expenses over the
Indirect wages will be higher in small plants than in larger ones.

Packed

The cost of packaging for various industrial products varies according to

with their physical and chemical characteristics, the presentation, etc.
Many gaseous, liquid, and loose solid products are dispensed in bulk in
tank trucks or hopper cars. This is the most economical system of
packed.

Two types of packaging can be considered: single-use and multiple-use.

first ones are discarded after the first use and their cost is charged only once to the
production unit. This is the case, for example, of cardboard boxes, containers of
can for oil or food products, multi-purpose bags for sugar, etc. The cost
The industrial cost of these containers is relatively low.

The second type, of multiple use, are those whose cost is higher and is charged to a
determined number of production units, according to the number of
times it can be used. This type of packaging must be returned to the plant,
this represents an additional cost.

Examples of these advancements are: gas cylinders, carboys, glass bottles

of soft drinks, wooden crates for fruits, etc., the total cost of
packaged can be considered as a percentage of the selling price of the
products, in the following form:

PRODUCT COST, % ON PRICE OF

SALE

Pharmacists 35 - 40
Hardware and small parts 4-6
Confectionery 20 - 22
Paints and varnishes 13 - 15
Cosmetics and soaps 35 - 38
Food products 23 - 25
Adhesive inks 38 - 42
Oils 33 - 38
Product dispatch

Many products are sold in the plant's own warehouses (F.O.B.,

plant), in which case, the transport of them to the customer is at the customer's expense
and it is not important for cost estimation.

In other cases, the products must be transported to the customer's warehouses or

to the warehouses of the manufacturer itself, located in the consumption centers. In this
In this case, the transportation cost must be added to the product cost. Normally,
road or rail transport is paid based on rates expressed in
Bs. / Ton. Km., easy to obtain with the different carriers.

FIXED MANUFACTURING COST

Fixed costs are those charges that reflect the investment of the initial fixed capital.
linked to time and not dependent on the level of production.

Depreciation

Depreciation is an amount that is deducted from the value of the assets, in the
end of their productive life, to compensate for their exhaustion, wear, etc.,
including the obsolescence factor. In the industry, it is typically applied the
concept of straight-line depreciation.

The depreciation period varies from one type of industry to another; it is different for the
various teams individually. There are tabs indicating the half-life
normal both for the equipment and for the constructions that make up the plant, but
without considering obsolescence.

In North America, for the purposes of cost estimation calculations, it is recommended

take an annual depreciation amount between 8 and 10% of the total investment
made as fixed capital. These percentages can also be applied in
Venezuela.

Property taxes

Property taxes depend on the location of the plant. In

general, those located in cities will pay higher taxes than those located in
sparsely populated regions. Often regional governments, to attract
Industries exempt the payment of these taxes for a certain number of years.

In each case, this line must be investigated.

The commonly established taxes refer to:

 Industrial and commercial patent taxes.
Vehicle tax.
Urban and household sanitation.
Cadastral and front law.
Commercial propaganda and industry.
Others.

Insurance

Normally, insurance policies cover the risks of industries; they vary with
the danger of the process. For cost estimation purposes, it can be taken
annually the equivalent of 1% of fixed capital.

GENERAL EXPENSES

The various expenses incurred in the operation of the company, in addition to the
manufacturing expenses are grouped under the designation of general expenses. It
foreman: the expenses of administration, sales, research, and financing.
Administration Bs._________________

Sales Bs.

Research Bs.

Bs.________________

GENERAL EXPENSES Bs.__________

ADMINISTRATION

Administrative expenses are made up of:

Salaries of managerial and general administration staff.

Audit.
Rent, electricity, phone, etc.
Office expenses, stationery, various supplies, etc.

For cost estimation purposes, it can be considered equivalent to 2 to 3%

of sales or between 3 and 6% of manufacturing costs.

SALES

Sales expenses vary greatly depending on the type of production, methods of

distribution, market, promotion and propaganda. Due to the great variety of
factors that intervene in sales expenses, it is very difficult to assign a factor for
estimation effects. They can vary from 2 to 3% of the selling price. The lower range
will be applicable to standardized products that require little promotion that are
sold in large quantities to other manufacturers. The other extreme will be
applicable to new products that require significant advertising and promotion. Without
embargo, when estimating costs, the equivalent of 5 can be assigned to this item.
15% of the selling price or 5 to 25% of the manufacturing costs.

RESEARCH

Every industry, to maintain a favorable position within the market

competitive, needs to spend a percentage of its revenue on research and
improvement of their products. These expenses are estimated to be between 1 and 2.5% of sales.

FINANCING

Nowadays, it is common practice to turn to large investors or institutions.

specialized to obtain the necessary capital for the creation of industries. This
it results in the payment of interest on the loan obtained. For
cost estimation effect, it can be considered that these interests are of the
order of 10 to 30% annually on the loan or otherwise take the interest of
market.

2.2.4 SALES AND PROFITS

When selling a produced item, one expects to achieve a profit or benefit from it.
so that the amount obtained from sales exceeds the total cost of producing said item.
article.

SALES

It is the total amount of money obtained as a result of selling the product.

manufactured and is equal to the unit price of the product multiplied by the number of units
placed on the market.

Sales (Bs) = PV (Bs/Unit) * Q (Units)

GROSS PROFIT

It is the benefit obtained by subtracting the costs from the sales value.
manufacturing and overhead expenses.

Gross Profit = Sales - (Manufacturing Costs + Overhead Expenses)

NET INCOME

It is the profit that remains after deducting the income tax on the
gross profit.

Gross Profit - Income Tax

The net profit is determined as follows:

Sales Bs.___________________

Manufacturing costs BS.__________________

General expenses Bs.__________________

Total cost Bs.__________________

Gross Profit (before ISLR) Bs.____________________

Income Tax Bs.____________________

Net Profit Bs.___________________

3.- Profitability Indices.

There are several methods to numerically express the financial performance of

a company. In some cases, just one of them is enough, but in other cases
It will be necessary to have more than one of these expressions to conclude on the studies of
evaluation of a project.
Some of these methods of expressing profitability are:

Percentage of profit on sales

Return on investment percentage

Current value

Annual equivalent

Internal Rate of Return

Payment time
Percentage of Profit on Sales

In this method, profitability is expressed in terms of a ratio and between the

profit and the selling price:

Profitability = Net (or gross) profit per unit / Selling price per unit.

Return on Investment Percentage

It is one of the most used methods to express the profitability of a project. It is

the relationship expressed as a percentage of annual profits to investment
fixed capital.

Net (or gross) profit * 100

Fixed Capital

This method is similar to the internal rate of return but in an approximate form.

Present Value (PV)

The Present Value expresses the profitability of an investment project in the form of a
amount of money (Bs) in the present (t=0), which is equivalent to the flows
net monetary (Ft) of the project at a certain minimum rate of return,
that is, the Present Value represents an equivalent profit or loss in the
zero point of the time scale. It is expressed algebraically as follows
way
n
VA = Σ Ft . (1+i)-t
t=0
where:

i = interest per period

t = minimum rate of return
n = time period
Ft = monetary flows

If the NPV {i > 0 the project is profitable

Annual Equivalent (AE)

The Annual Equivalent is an index with characteristics very similar to the Present Value.
For how much, express the profitability of the project in the form of an annual series.
uniform (Bs. /year) that is equivalent to the net cash flows of the project to
a certain minimum rate of return. Consequently, the annual equivalent
it represents the equivalent benefit or loss in the form of an annual series
uniform.

It is expressed algebraically in the following way:

EA (i) = VA (i) i(1+i)n

(1+i)n1

where:

i = Interest per period

n = period of time
Present Value

If EA(i) > 0 the project is profitable

Internal Rate of Return

The Internal Rate of Return expresses the annual net benefit obtained from
relationship with the investment pending to be recovered at the beginning of each year. Also
it is the interest rate that makes income and costs equal. This
relationship is expressed in percentage and represents the annual interest generated by the
investment.

It is an index in which an internal interest of the project is calculated through trial and error.
In it, the annual cash flows are made equal to zero in present value.

VA (i*)=O i* = internal rate of return

Where the unknown in the equation is i*, which can be calculated with a
tender procedure.

If i* > minimum i, the project is profitable

It is one of the most widely used methods.

Payment time

This method is perhaps one of the most used. It can be defined as the number of
Years that the capital investment must be replenished with the gross profits obtained
without deducting depreciation.

Payment time Fixed capital

Gross profit + Depreciation
The maximum acceptable payment period, in years (before the payment of the tax on the
rent) for some industries is:

INDUSTRY LOW RISK GREAT RISK

CHEMISTRY 5 2
PAPER 4 2
PHARMACEUTICAL 3 2
PAINTING 3 2
METALMECHANICS 4 2

4.- BREAK-EVEN POINT ANALYSIS

The cost estimation studied above refers to a certain

plant, with a determined capacity as well, however, not in all cases
the plant will operate at 100% capacity, either due to issues in the
equipment and machinery, whether due to market conditions. It is advisable to make
some considerations about the effect on costs and profits if it varies
that production capacity. When this happens, some lines will remain
proportionally constant, while others will vary according to certain
specific conditions of each case. For example, the selling price of the
the product may remain the same, although the level of production may vary, it
the same will possibly happen with raw materials and shipping rates,
but wages and salaries will not vary proportionally with the decrease in production.

The simplest way to visualize the problem is through the construction of a

graph showing the relationship between annual expenses and sales product
different production capacities. This graph will represent the profits or
losses and will determine a 'break-even point' (Break-Even Point), at which,
to the corresponding production capacity, the product of sales is equal to the
total cost, that is, the sum of the expenses to obtain that same production.
Any plant, operating at a capacity lower than what it corresponds to
that point will inevitably result in losses, and with greater capacity, it will yield profits.
The Break-even Diagram is an idealization of the behavior of the
costs that allow visualizing the relationship between costs and revenues for
different levels of production which allows for making decisions about how much
produce to achieve the company's objectives.

To construct this graph, the different cost elements are grouped.

fixed costs and variable costs.

Fixed Costs

That remain constant at any level of production, as seen in the

figure and sound:
 Depreciation

Taxes

Insurance

Rentals

Interest on loan

CF = K (Constant)

Bs. /year

Fixed Costs
K
100%
0
Production Units / year

Fixed costs for different levels of production

VARIABLE COSTS

They are those that vary proportionally to the level of production, as

shown in the figure and they are:
Raw materials

Services

Containers

Dispatch (Transport)
 Royalties

Sales commissions

Salaries and wages

Social benefits

Supervision

General expenses

Maintenance

Consumables

Some of these costs, for example, salaries and wages, general expenses,
laboratories, maintenance, consumables and others, may to some extent
not be directly proportional to the level of production. These frequently are
they are called semi-variables, but for the analysis of the break-even point, they are taken
as variables:

Variable costs
Bs. / year

0
PRODUCTION UNITS / YEAR 100%

Variable costs for various levels of production

Y = Variable costs
Annual production
A = Unit variable cost
If we add fixed expenses and variable expenses, we obtain the total cost which
we can represent ourselves in the following way:

CT= K + AX
CT= CF+CVu . Q

Costs
Total Cost Variables

Bs. / year

CF Fixed Costs

0
Production Units / year
Total costs for different levels of production

Determination of the breakeven point

If we represent fixed costs, variable costs, and the cost in a single graph
total and sales, a diagram is obtained that shows the relationship of costs with
the revenues, which is called BREAK-EVEN POINT DIAGRAM, is
shown in the following figure.

Sales
Profits
Total Cost
Bs. / year

Total Cost

Fixed Costs CV

CF

Production Units /year

Break-even Point Diagram

Break-even Point Diagram
The relationship between costs, sales, and benefits will also be shown in the form of
table.

RELATIONSHIP OF COSTS, SALES, AND PROFITS

FOR DIFFERENT LEVELS OF PRODUCTION

PRODUCTION 10 20 40 60 80 100
CF 500 500 500 500 500 500
CV 100 200 400 600 800 1000
CT 600 700 900 1100 1300 1500
SALES 225 450 900 1350 1800 2250
EARNINGS (375) (250) 0 250 500 750

ALGEBRAIC SOLUTION OF THE EQUILIBRIUM POINT

The break-even point can be calculated algebraically by equating the costs.

totals to sales:

SalesT
Pv * Q = CF + Cvu* Q

Q= CF
Pv - Cv u

CTTotal costs

CF= Fixed Costs

Resumeu= Unit variable costs

Production at the break-even point

The breakeven point can also be calculated based on the value of sales.
assuming that sales will be equal to the sum of fixed costs and variable costs
variables.

VE= CF + CvE
where

VESales at the break-even point

CF = Fixed costs

CV= Annual variable costs

 V = Annual sales

ResumeE=variable costs at equilibrium

As long as the selling price and the unit variable cost are constant,
the relationship between variable cost and sales for any level of sales,
it will also be constant.

CV/V = CVE/ VE ; CVE=CV / V * VE

By substituting into the previous equation, it becomes:

VE= CF + CV / V * VE
where V can be clearedE

VE = CF
1 - CV
V