Capital expenditures

As stated previously, the source of capital is often not known, and hence it is not known whether or not Eq. (A. 10) is appropiiate to represent the cost of capital. Equation (A. 10) is, strictly speaking, only appropriate if the money for capital expenditure is to be borrowed over a fixed period at a fixed rate of interest. Moreover, if Eq. (A. 10) is accepted, then the number of years over which the capital is to be annualized is unknown, as is the rate of interest. However, the most important thing is that even if the source of capital is not known, etc., and uncertain assumptions are necessary, Eq. (A. 10) provides a common basis for the comparison of competing projects. 

Over the lifetime of the field, the total undiscounted operating expenditure (opex) is likely to exceed the capital expenditure (capex). It is therefore important to control and reduce opex at the project design stage as well as during the production period. 

The cost of implementing CAO depends of course on the system installed, but for a new field development is likely to be in the order of 1 -5% of the project capital expenditure, plus 1-5% of the annual operating expenditure. 

Standardisation of equipment items is an area for potential cost savings, both in terms of capital expenditure (capex) and operating expenditure (opex), and is a decision which should be taken In consultation with the production operations department at the FDP stage. Standardisation can be applied to equipment items ranging from drilling platforms to valves. The benefits of standardisation are ... 

Within the project box, the cashflow oi the project (or other investment opportunity) is the forecast of the funds absorbed and the money generated during the project lifetime. Take, for example, the development of an oil field as the investment opportunity. Initially the cashflow will be dominated by the capital expenditure (capex) required to design, construct and commission the hardware for the project (e.g. platform, pipeline, wells, compression facilities). 

Once production commences (possibly 3-8 years after the first capex) gross revenues are received from the sale of the hydrocarbons. These revenues are used to recover the capital expenditure (capex) of the project, to pay for the operating expenditure (opex) of the project (e.g. manpower, maintenance, equipment running costs, support costs), and to provide the host government take which may in the simplest case be in the form of taxes and royalty. 

The treatment of expenditures will be specified by the fiscal system set by the host government. A typical case would be to define expenditure on items whose useful life exceeds one year as capital expenditure (capex), such as costs of platforms, pipelines, wells. Items whose useful life is less than one year (e.g. chemicals, services, maintenance, overheads, insurance costs) would then be classed as operating expenditure (opex). 

Boiler feed water pretreatment systems have advanced to such an extent that it is now possible to provide boilers with ultrapure water. However, this degree of purification requires the use of elaborate pretreatment systems. The capital expenditures for such pretreatment equipment trains can be considerable and are often not justified when balanced against the capabiUty of internal treatment. 

Environmental Pollution Control. The cement iadustry has had an iatensive program of capital expenditure to iastaH dust collection equipment on kilns and coolers siace the 1970s (60). Modem equipment collects dust at 99.8% efficiency. Many smaller dust collectors are iastaHed ia aew plants (61). 

The need for a large number of stages and for the special equipment makes gaseous diffusion an expensive process. The three United States gaseous diffusion plants represent a capital expenditure of close to 2.5 x 10 dollars (17). However, the gaseous diffusion process is one of the more economical processes yet devised for the separation of uranium isotopes on a large scale. 

Payback Period Another traditional method of measuring profitability is the payback period or fixed-capital-return period. Actually, this is really a measure not of profitability but of the time it takes for cash flows to recoup the original fixed-capital expenditure. 

Let us consider projects A and B, having net annual cash flows as listed in Table 9-2. Both projects have initial fixed-capital expenditures of 100,000. On the basis of payback period, project A is the more desirable since the fixed-capital expenditure is recovered in 3 years, compared with 5 years for projec t B. However, project B runs for 7 years with a cumulative net cash flow of 110,000. This is obviously more profitable than project A, which runs for only 4 years with a cumulative net cash flow of only 10,000. 

Let us consider another project in which the fixed-capital expenditure is spread over 2 years, according to the following pattern ... 

Atc = total annual capital expenditure. Acf Aci — Aij — Atc net annual cash flow. f = discount factor at 10%. 

Relationship between (PBP) and (DCFRR) For the case of a single lump-sum capital expenditure Cpc which generates a constant annual cash flow Acf in each subsequent year, the payback period is given by the equation... 

Equations (9-59), (9-60), (9-61), and (9-62) may be used as they stand to assess expenditure on energy-conservation measures since a constant amount of energy is saved in each year subsequent to the capital outlay. However, the annual cash flows Acf corresponding to the energy savings remain constant only if there is no inflation or if the money values are corrected to their purchasing power at the time of the capital expenditure. 

We shall consider the simple case of(l) a single capital expenditure made immediately before the start of production and (2) equal positive net annual cash flows Acp in all the productive years of the project. For this case, Eq. (9-109) can be rewritten in terms of the payoack period and the (DCFRR) as follows ... 

Closing the Books At the end of the accounting period, the individual accounts are closed by balancing each in accordance with Eq. (9-126). The balances are transferred either to the balance sheet in the case of capital expenditure or to the income statement in the case of revenue expenditure. An alternative name for the balance sheet is the position statement the income statement is also caUed the trading and profit-and-loss account. 

The purpose of capital expenditure, such as the purchase of a piece of plant equipment for 50,000, is to earn future revenue. In contrast, the purpose of revenue expenditure is to maintain existing business. 

Some expenditures are partly capital and partly revenue. For example, repair and improvement work may be done on a plant simultaneously. In this case, the repair work should be classified as revenue expenditure and the plant-improvement work as capital expenditure. 

Heat pumps are particularly suitable for recycling heat energy in the chemical-process industries. For the outlay of an additional fixed-capital expenditure Cec on a heat-pump system, a considerable reduction in the annual heating cost can be effected. 

The mixed refrigerant cycle is a variation of the cascade cycle and involves the circulation of a single multicoiTmonent refrigerant stream. The simplification of the compression and heat exchange services in such a cycle can offer potential for reduced capital expenditure over the conventional cascade cycle. 

Although extremelv useful, tracer experiments require considerable capital expenditures and personnel. In addition to the difficulties and uncertainty in making estimates of various parameters, especially cr, one of the fficulties in interpreting tracer studies is relating the atmospheric conditions under which the study was conducted to the entire spectrum of atmospheric conditions. For example, trying to interpret a series of tracer... 

Since power is a substantial component of the fixed operating cost of a unit, the operating cost would run approximately seven times more on a scrubber installation. The installation costs of a hot-rolled steel precipitator to handle 100,000 cfm would be between 3.50 and 4.50/cfm as opposed to 1.40 to 1.80/cfm for a venturi scrubbing system. Although the initial capital expenditure is high for the precipitator, if the total operating and capital costs are amortized over an acceptable period of time, 8 to 10 years, the precipitator will prove to be the. lore economically feasible choice because of its low operating and maintenance costs. 

The TVM takes into consideration the total time that the principal was tied up into the investment. For the shares that we purchased on 1/1/01, the 100 was tied up for one full year. This portion of the investment made 10% in one year. But the shares that were purchased on 12/1/01 tied up 100 for only one month, which is a significantly higher return than the 10% per year. In fact, if an investment gained 10% every month like the latter share purchase, it would gain 207.5% in one year TVM formulas give the most accurate ROI calculation possible. They are the same formulas used by large investors and lending institutions to evaluate capital expenditures and investment alternatives. Unfortunately, in a real-world example, you would normally be unable to calculate the true TVM-ROI because the calculations require the application of advanced numerical analysis. 

The petroleum transportation and distribution network constitutes a major portion of the industry s total infrastructure and represents a large capital expenditure for producers. This means that production often outpaces demand. 

Figure 1-39. Process design manhours versus capital expenditures.

Capital expenditure, cash flow and operating cost analyses ... 

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