Capital investments, profits covering

Ensuring that profits cover needed capital investments... 

In Section 2. the information needed to assess the economic feasibility of a process is covered. This includes the estimation of fixed capital investment and manufacturing costs, the concepts of the time value of money and financial calculations, and finally the combination of these costs into profitability measures for the process. 

Along with these very large plants and the associated enormous investment in them, most of the chemical industry is characterized by high investment versus low labor components in the cost of manufacture. The National Industrial Conference Board statistics list the chemical industry as one of the highest in terms of capital investment per production worker. The investment per worker in a base petrochemicals olefins plant may well exceed a quarter of a million dollars. Once again, however, such an index covers a spectrum of operations, and for a profitable chemical specialties manufacturer the investment may be on the order of 25,000 dollars per worker. Employment in selected parts of the chemical industry is given in Table 1.5. 

Assume that the capital for the project is borrowed at 25% interest with a required return on investment of 5 years. Five annual payments are made to the creditors. The calculations made to determine the size of these payments and their repayment schedule are given in Appendix E (Table E.6). The five payments needed are each of AS5.02 million. These will cover both the 25% interest rate and the AS13.5 million principal. Operating and production costs are tax deductible as is the interest on borrowed capital, only gross profit is taxed. In the calculations, the AS5.02 million capital cost term is therefore broken into two components. The first is the tax-free interest component and the second must come from operating profit. This profit is assumed to attract 49% company tax. 

Suppose that the conclusion, if the conpany invested 100,000 in a process modification, the break-even purchase price of toluene would rise to 0.25/kg. It is essential that everyone in the loop know that piece of information immediately. Therefore, a cover memorandum must summarize the key conclusions. What was found, how much it will cost up front (capital cost, if applicable), and what the profitability is (NPy DCFROR, raw material purchase price) must be stated. In a short report, which is likely to be the rule in industry, the cover memorandum takes the place of an abstract. Therefore, it is inperative to include key results in the cover memorandum... 

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