A new level-by-level methodology for flowsheet synthesis is presented. In the first level, an initial superstructure is constructed to form a master model. Optimization of the master model gives an initial optimal flowsheet, which indicates major structural features of a design, interconnections between subsystems and also optimal main parameters. In the second level this initial flowsheet is analyzed using exergy analysis to identify relevant modification options. The promising options are used to update the initial superstructure, which is optimized to obtain an improved design. the results from the above design process determine the flowsheet of overall system and provide targets for design of subsystems. Design of subsystems forms the third design level. The predetermined targets may not be met in the third level due to use of simplistic models in the previous design levels. The master models updated and then optimized again. The overall design process terminates when designs for subsystems can meet the design target determined by the master model.