Capital investment, fixed charges

Continuous vs. Batch Processing. It is the usual rule in process design to choose continuous processing in preference to batch processing based purely on economic reasons. By operation on a continuous 24 hr/ day basis, smaller-size, less expensive processing equipment is used. Process operation is steady state and easier to control by automatic instrumentation than is batch operation. Thus, capital investment, fixed charges, and labor requirements are minimized. However, batch processing is not a completely obsolete method in the chemical industry. It is feasible in such cases as ... 

Seawater Evaporators The production of potable water from saline waters represents a large and growing field of application for evaporators. Extensive work done in this field to 1972 was summarized in the annual Saline Water Conversion Repoi ts of the Office of Sahne Water, U.S. Department of the Interior. Steam economies on the order of 10 kg evaporation/kg steam are usually justified because (1) unit production capacities are high, (2) fixed charges are low on capital used for pubhc works (i.e., they use long amortization periods and have low interest rates, with no other return on investment considered), (3) heat-transfer performance is comparable with that of pure water, and (4) properly treated seawater causes httle deterioration due to scahng or fouhng. 

Assume that the plant in which this equipment is installed will operate 10 years, that a tax rate of 34%/year is applicable, and that a charge of 10% of the capital cost per year for depreciation will be employed over the entire 10-year period, that fixed charges including maintenance incurred by installation of this equipment will amount to 10%/year of the investment, and that a minimum acceptable return rate on invested capital after taxes and depreciation is 15%. Determine which of the two alternative installations should be selected, if any. 

Assume delivery charges are 5 percent of the purchased price. Estimate the fixed capital investment 2 years into the future, using the Lang, Hand, and Wroth methods. The inflation rates are 3.5 percent for the first year and 4.0 percent for the second. 

A graphical representation showing the meaning of an optimum economic pipe diameter is presented in Fig. 1-1. As shown in this figure, the pumping cost increases with decreased size of pipe diameter because of frictional effects, while the fixed charges for the pipeline become lower when smaller pipe diameters are used because of the reduced capital investment. The optimum economic diameter is located where the sum of the pumping costs and fixed costs for the pipeline becomes a minimum, since this represents the point of least total cost. In Fig. 1-1, this point is represented by E. 

Financing expenses include the extra costs involved in procuring the money necessary for the capital investment. Financing expense is usually limited to interest on borrowed money, and this expense is sometimes listed as a fixed charge. 

Certain expenses are always present in an industrial plant whether or not the manufacturing process is in operation. Costs that are invariant with the amount of production are designated as fixed costs or fixed charges. These include costs for depreciation, local property taxes, insurance, and rent. Expenses of this type are a direct function of the capital investment. As a rough approximation, these charges amount to about 10 to 20 percent of the total product cost. 

Self-insurance is being considered for one portion of a chemical company. The fixed-capital investment involved is 50,000, and insurance costs for complete protection would amount to 400 per year. If self-insurance is used, a reserve fund will be set up under the company s jurisdiction, and annual insurance premiums of 300 will be deposited in this fund under an ordinary annuity plan. All money in the fund can be assumed to earn interest at a compound annual rate of 5 percent. Neglecting any charges connected with administration of the fund, how much money should be deposited in the fund at the beginning of the program in order to have enough money accumulated to replace a complete 50,000 loss after 10 years ... 

To obtain reliable estimates of investment returns, it is necessary to make accurate predictions of profits and the required investment. To determine the profit, estimates must be made of direct production costs, fixed charges including depreciation, plant overhead costs, and general expenses. Profits may be expressed on a before-tax or after-tax basis, but the conditions should be indicated. Both working capital and fixed capital should be considered in determining the total investment ... 

Fixed-capital investment 2. Working capital 3. Total capital investment (1 + 2) 4. Annual income (sales) 5. Annual manufacturing cost (a) Raw materials (b) Labor (c) Utilities (d) Maintenance and repairs (e) Operating supplies (f) Laboratory charges (g) Patents and royalties (h) Local taxes and insurance (i) Plant overhead (j) Other (explain in Notes) 5-T. Total of line 5 ... 

The most common incentives used are tax allowances. Most countries allow some form of depreciation charge as a tax allowance, by which the fixed capital investment can be deducted from taxable income over a period of time, as described in Section 6.5.3. Other incentives that are often used include... 

A chemical plant with a fixed capital investment of 100 million generates an annual gross profit of 50 million. Calculate the depreciation charge, taxes paid, and aftertax cash flows for the first 10 years of plant operation using straight-line depreciation over 10 years and using MACRS depreciation with a 7-year recovery period. Assume the plant is built at time zero and begins operation at full rate in year 1. Assume the rate of corporate income tax is 35%, and taxes must be paid based on the previous year s income. 

The fixed capital investment is to be annualized over f 0 years at a 15% interest rate. For this interest rate and recovery period, the annual capital charge ratio is 0.199, so the annual capital charge is 0.199 x 361.3 = 71.99 MM/y, or 179.98 /MT of product. As a quick check, we can see that this is roughly 10% of the total cost of production, which is typical for commodity chemical processes. 

Variable costs are ongoing costs proportional to sales volume, and include items like raw materials and delivery charges. Fixed costs are ongoing costs treated as independent of sales volume, although more correctly they are step functions of sales volume. These include items like depreciation and administrative overheads. [15] Some costs, like labor and utilities, fall somewhere in between these two idealizations, and may be treated as either. Note that a fixed capital investment, unlike depreciation, is not an ongoing cost, and hence is not a fixed cost. 

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