Business Considerations - Fundamentals of Industrial Chemistry: Pharmaceuticals, Polymers, and Business - page 72

1/1/2013 1/29/2013 2/26/2013 3/26/2013 4/23/2013 5/21/2013 6/18/2013

Patent and literature review

Laboratory experiments

Finalize synthetic route

Optimize route

Pilot plant work

Order manufacturing equipment

Manufacturing scaleup

Ship to customer

Figure 6.2 Gantt Chart of Required Tasks.

equation is cost. The cost includes many components, and detailed cost
estimates are usually performed by people with extensive experience and
training. The cost includes labor costs, both during the development and
later during the production. Overhead is also included. Raw material cost is
a major component. Because the amount of raw material cost varies with the
amount of product produced, this is often considered as a part of variable
cost. Another component is capital cost. This is money required to buy
anything from an entire plant to necessary equipment. Because this cost is
fixed and not dependent upon how much material you later make, this is
sometimes called a fixed cost to contrast it from variable costs.
When thinking about capital costs, it is important to think about a concept
sometimes referred to as the present value of money or the opportunity cost
of money. This fluctuates based upon inflation and interest rates. Let's think
about it with a very simple example. Imagine that if you spent $100, you could
build a plant that could generate $120 beyond cost in ten years. You might
consider a profit of $20 to be attractive. This is a 20% return on your initial
$100. However, you need to remember that because you spent the $100, it was
not available for other investments. Had you been able to invest the money in
a bond paying 7.2% interest, at the end of ten years, you would have $200.
So by investing in a plant and making $20, you have lost the opportunity to
make $100 profit in a bond. You have effectively lost $80 in opportunity cost.
This example is oversimplified and needs to reflect current interest rates as
well as risks both with alternative investments and with investments for the
project, but serves to illustrate that a dollar in the present is more valuable than
a dollar in the future. This needs to be factored into a detailed cost estimate.