Capital investment, cost references

The annual depreciation of a fixed capital investment is referred to as annualized fixed cost. It allows the company to set aside an annual portion of profit and use it for purposes of capital-cost recovery and tax deduction. 

Fixed capital investments are characterized by the fact that they have to be replaced after a number of years commonly referred to as service life or useful life period. This replacement is not necessarily due to wear and tear of equipment. Other factors include technological advances that may render the equipment obsolete. Furthermore, over the usefiil life of the equipment, the plant should plan to recover the capital cost expenditure. In this regard, the notion of depreciation is useful. Depreciation or amortization is an annual allowance which is set aside to account for the wear, tear, and obsolescence of a process such that by the end of the useful life of the process, enough fund is accumulated to replace the process. The simplest method for determining depreciation is referred to as the straight line method in which... 

In addition to the fixed capital investment needed to purchase and install process equipment and auxiliaries, there is a continuous expenditure referred to as operating cost, which is needed to operate the process. The operating cost (or manufacturing cost or production cost) includes raw materials, mass-separating agents, utilities (fuel, electricity, steam, water, refrigerants, air, etc.), catalysts, additives, labor, and maintenance. The total annualized cost of a process is defined as follows ... 

A certain amount of money must be invested if any product is to be produced. This is referred to as capital. The capital is made up of the fixed capital needed to construct the plant and the working capital needed to operate it. The fixed capital is the cost of building and equipping the plant and all its peripheral buildings and operations. Chapter 9 was devoted to methods for estimating the fixed capital investment. 

Suppose you are asked to evaluate the purchase of the multicone cyclone referred to in Example 3.4. The capital investment is 35,000 (see Example 3.4), and the equipment has a class life of 5 years, after which it will be sold for the salvage value of 4000. The income stream generated by the machine is on line A in Tables EB.5A and EB.5B. As the equipment ages, its operating and maintenance costs increase, and line B lists the expense profile. Assume a tax rate of 35 percent with no investment tax credit. Evaluate two possible scenarios (a) 100 percent use of equity and (b) 100 percent debt financing. Use straight-line depreciation for debt financing, for simplicity assume equal annual payments (principal plus interest) to the lender for the 5 years at a rate of 10.5%. 

An alternative scheme is to split the evaporation process into stages (in different vessels), commonly referred to as effects, where the flow of liquor may be in the same direction, the backward direction, or normal to the flow of vapor. In such a scheme, the vapor generated in a given effect is used to boil the liquid in a different effect where a proper temperature driving force exists. In multiple-effect evaporation, one exchanges savings in steam costs for increased capital investment in equipment. 

The two major costs associated with evaporators, as with any process equipment, are capital investment and operating costs. The best estimate of the installed cost of evaporation systems is, of course, a firm bid from a vendor. The installed cost, however, can be estimated based on the heat transfer surface area, as in Peters and Timmerhaus. Costs taken from published references must be adjusted for changes subsequent to the time of publication. To do this, one may use an index such as the Marshall and Swift allindustry index. The value of this index is published each month in Chemical Engineering, a McGraw-Hill publication. Further information on the use of this and other cost indices as well as their histories are available, for example, in Peters and Timmerhaus and Ulrich.f Variation of purchased evaporator costs with material of construction and pressure can also be found in Ulrich. ... 

The working capital is estimated as 7 weeks cash cost of production minus 2 weeks feedstock costs plus 1% of the fixed capital investment, as described in Section 6.2.2. Because the cash cost of production includes the interest payable on the working capital, this sets up a circular reference in the spreadsheet. The spreadsheet options must be adjusted to ensure that the calculation iterates to convergence. The converged result is 59.5 MM. Note that the value calculated is about f 0% greater than it would have been had we estimated the working capital as f5% of fixed capital investment. 

Facility size (M Nm /d) Specific total capital investment ( /GJ) Hydrogen unit cost ( /GJ) Reference... 

This chapter draws heavily from a background paper on the cost of capital prepared by Stuart Myers and Lakshin i Shyam-Suodei (285). The cost of capital is also referred to as the opportunity cost of capital, because the investor expects to get at least as much return as he or she can get from other opportunities to invest at the same level of risk. 

Tax and Insurance costs refer to annual properly taxes at 1.5% of capital investment and aimual insurance premiums at 1% of capital investment. Highway/road sales taxes are not included. 

Depending on capital investment limitations, extruders may be heated by passing steam through the barrel jacket and/or by direct steam injection. Low-cost autogenous machines, which create heat by friction between the feed material and the surfaces of the barrel, screw and steam locks, and do not require steam-generating equipment, are also used (Wiejratne et al., 2004). This process is referred to as dry extrusion, and the extruder can be powered by a farm tractor and was originally developed to cook whole soybeans on-farm to prepare feeds. 

The terms can be expressed in different ways, which might create confusion. The annual net profit may be considered before or after tax. Sometimes the net profit in the third year after start-up is used. The invested capital may be referred to the original total capital investment, fixed-capital, depreciated investment, average investment, or something else. The operating costs could include the depreciation in the fixed costs. 

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