I/EC
New Books
Plant Design and Economics For Chemical Engineers M A X S. PETERS. 511 pages. Mc Graw-Hill Book Co., Inc., 330 West 42nd St., New York 36, Ν . Υ. 1958. 811.00.
Engineering Economy H . G. THUESEN. xv + 581 pages. Prentice-Hall. Inc., Englewood Cliffs. N. J. 1957. $6.25. Both reviewed by JAMES B. WEAVER, Atlas Powder Co., Wilmington, Del. JL hcse two books, especially de signed for cost engineers, differ con siderably—mainly in the approach taken by the authors. Both men are professors, but M a x Peters presents essentially the practical viewpoint while H . G. Thuesen attempts to maintain theoretical correctness— and complexity. There is nothing wrong with the practical approach; the patterns for cost estimating covered in the first eight chapters of Peters can provide convenient short-cuts and check points in developing cost estimates. However, many familiar approxi mation factors appear, with neither source nor proof. For instance, "For chemical processes, operating labor usually amounts to about 15% of the total cost."' This seems in consistent even with a sentence in the preceding paragraph: " I n chemical plants, raw materials are usually i n the range of 10 to 50% of total product cost."' Is it possible for labor to adjust itself to the same per cent of total product cost, over the whole range of raw material cost percentages? Some attempt is made to qualify these generalizations; however, they outsweep the qualifications in most instances. I f there is any necessary or statistically developed relation ship of working capital to fixed in vestment, for instance, it is un familiar and is not cited. The danger seems to be the in clusion of such specific factors i n a description of methods for estimat ing. These may be typical relation ships, which can be useful to check the results of an estimate made by 94 A
other means. These sections should have stressed avoiding their use in making the estimate itself. Instead, the reader is merely advised that the factors "should be used only when more accurate data are not avail able." Certainly, lack of information is a real problem when decisions must be made, but the use of such factors may be a risky substitute. Thuesen suggests guessing unknown factors, if necessary, and studying the sensi tivity of the answer to the possible range of guesses. Such an approach seems preferable. Thuesen's approach i n general goes to the opposite extreme from Peters'—perhaps it is too theoretical. The approach of engineering econ omy is to seek analytic models, with some theoretical basis, which will represent the variables of the i n vestment decision. M u c h progress has been made along these lines, and Thuesen develops the theories and their application in an understand able manner. His reference system for designating interest factors is a particular convenience. Like most seekers of analytic models, he runs out of models long before the prob lems are all solved. Various com promises ensue which often seem to raise as many problems as they settle ; nevertheless, the problems are real ones which must be faced whether they are foreseen or not. The supe rior validity of the theoretical ap proach cannot be denied. Thuesen's book, however, contains errors of commission as well as omission that are hardly excusable, particularly i n a second edition. Let us now consider some matters which are or should be covered in both books. Profitability Methods. Peters uses return on original investment throughout, as a profitability meas ure. Concepts of compound inter est are introduced in detail, but the only references to the more refined methods for profitability evaluation which consider the time value of money are in two footnotes. I n the first of these—a footnote to a note following an example, Happel's pres ent value method is incorrectly i n
INDUSTRIAL AND ENGINEERING CHEMISTRY
cluded i n the group he defines. Thuesen, on the other hand, uti lizes the concepts of compound inter est to present the various advanced techniques. Depreciation. Neither book seems to consider properly the cash generation due to depreciation al lowances. Peters does not consider them in his economic balances; Thuesen has a whole chapter on the subject and still does not make it clear that depreciation is an ex pense only for tax purposes and does not involve a cash outlay. Income Taxes. Peters recog nizes the delay in due date of in come taxes but not the effect of this item of increasing accounts payable and reducing working capital. The importance of making rate of return studies after taxes is not recognized. Thuesen has added in this edition a chapter on income taxes which, strangely enough, is mainly con cerned with the necessary proce dures in filling out income tax forms for individuals and corporations. He does describe how to make rate of return studies after taxes i n the chapter, but he does not tell why it is necessary. The examples still seem to consider depreciation i n correctly. Working Capital. Peters repeats the common rules of thumb in the chemical industry, but does not make it clear that accounts receiv able must be included net of ac counts payable. Thuesen nowhere mentions working capital. "Engi neering Economy" seems so far to have considered, exclusively, fixed investments. Incremental vs. Accounting Costs. Peters states that incremental costs must be considered when the size of a fixed investment is at issue, but i n all his discussions of overheads he gives no hint that all of these overhead expenses may not increase in direct proportion when an additional prod uct is made at an existing plant. I n fact he says "cost accounting is the determination and analysis of the cost of producing a product or rendering a service. This is exactly what the design engineer does when he estimates costs for a particular
IEW B O O K S plant or process, and cost estimation is one type of cost accounting." Thuesen takes quite a different approach. " T h e most prevalent data available on costs, and particularly u n i t costs, are those produced by accounting and cost accounting systems. Unfortunately such data are often not to be relied on i n determining the effect of an increment of a c t i v i t y . " " I t is a c o m m o n error to infer that a reduction i n labor costs w i l l result i n a proportionate decrease i n overhead costs, particularly i f overhead is allocated on a labor costs basis." References. Peters' first reference is cited on page 33 and his basic list o f cost estimation references is tucked away at the end of Chapter 7. Some indication o f the narrow scope of approach to cost estim a t i o n i n this book can be gathered from the extent of these references. Thuesen's book has a separate final section on references; his list is more complete but shows evidences of lack of revision for this edition. Peters' book is essentially a detailed expansion, i t e m b y item, of the last chapter i n his earlier book "Elementary Chemical Engineering." T h e final two thirds of the book covers design considerations, and some correlated cost data from the literature. W e w i l l look forward to the second edition o f his current book w i t h the hope of finding some additional stress on the theoretical aspects of engineering economics. However, i f Thuesen's second edition is typical, the changes from the earlier edition may be m i n o r and may not clear up m a n y of the omissions or errors. But h o w can we i n industry carp at the content of professors' books u n less we are ready to provide meat for a more constructive substitute? Such books represent a lot o f h a r d work, and there are no others as good by those i n industry. W i t h o u t additional data on actual process costs and cost estimation, educators can do no more than repeat the estimating factors and rules o f t h u m b already published. Given the whole problem, fully stated as faced b y industry, these professors w o u l d be assisting even further i n t h i n k i n g out and reducing to w r i t i n g the methods and data useful to assist the investment decision.
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VOL. 50, NO. 8
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AUGUST 1958
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