Capital recovery

The most common approach to fixed cost estimation iavolves the use of a capital recovery factor to give the annual depreciation and return on capital. This factor typically is between 15 and 20% of the total capital investment. Property taxes are taken as 1—5% of the fixed capital and iasurance is assumed to be 1—2% of the fixed capital. If annual depreciation is estimated separately, it is assumed to be about 10% of the fixed capital investment. The annual iaterest expense is sometimes neglected as an expense ia preliminary studies. Some economists even beHeve that iaterest should be treated as a return on capital and not as part of the manufactufing expense. 

Net Present Va.Iue, Each of the net annual cash flows can be discounted to the present time using a discount factor for the number of years involved. The discounted flows are then all at the same time point and can be combined. The sum of these discounted net flows is called the net present value (NPV), a popular profit criterion. Because the discounted positive flows first offset the negative investment flows in the NPV summation, the investment capital is recovered if the NPV is greater than zero. This early recovery of the investment does not correspond to typical capital recovery patterns, but gives a conservative and systematic assumption for investment recovery. 

The NPV represents the present-value net return, because provision has been made for capital recovery and the cost of capital. In other words, the NPV is a discounted net return or profit, analogous to the net return of the example introduced earher. 

CRF Capital recovery factor RDF Refuse-derived fuel... 

This is then converted to annualized capital costs (ACC) with the use of the capital recovery factor (CRF), which can be calculated from the following equation ... 

The annualized capital cost (ACC) is the product of the CRF and TCC and represents the total instaUed equipment cost distributed over the lifetime of the project. The ACC reflects the cost associated with the initial capital outlay over the depreciable life of the system. Although investment and operating costs can be accounted for in other ways such as present-worth analysis, the capital recovery method is preferred because of its simplicity and versatUity. This is especiaUy true when comparing somewhat similar systems having different depreciable lives. In such decisions, there are usuaUy other considerations besides economic, but if all other factors are equal, the alternative with the lowest total annualized cost should be the most viable. 

The CCE spreads the investment over the lifetime of the measure into equal annual payments with the familiar capital recovery factor. The annual payment is then divided by the annual energy savings to yield a cost of saving a unit of energy. It is calculated using the following formula ... 

The right-hand side of Equation (3.5) is known as the capital recovery factor or present worth factor, and the inverse of the right-hand side is known as the repayment multiplier r. 

Cash operating expenses Depreciation Total operating expenses Operating income Net income before taxes Federal income taxes Net income after taxes Cash flow Capital recovery Cumulative cash flow... 

Expenditures are of two kinds instantaneous like land, working capital and capital recovery or uniformly continuous for plant investment, operating expenses, etc. A methodology involving after-tax cash flow is developed to reduce all the above to a manageable format. 

Example 10 Choice among Alternatives Two filters are considered for installation in a process to remove solids from a liquid discharge stream to meet environmental requirements. The equipment is to be depreciated over a 7-year period by the straight-line method. The income tax rate is 35 percent, and 15 percent continuous interest is to be used. Assume that the service life is 7 years and there is no capital recovery. Data for the two systems are as follows ... 

Thus net loss forgone = book value at the end of 3 years minus net capital recovery, or... 

Capital recovery The process by which original investment in a project is recovered over its life. 

The estimated treatment costs per ton, inclnding capital recovery, for the batch steam distillation are 299 to 393/ton and 266 to 350/ton at a 500-ton site and a 2500-ton site, respectively. 

Figure 13.6 The vertical dotted lines indicate the capital recovery periods, that is the number of years the project must run before initial capital is fully recovered and has earned its minimum 8% net of tax return each year on the capital balance outstanding. (Adapted from Franks, J.R.

Using the accelerated capital recovery system (ACRS) still showed negative cash flows for each project. The reason for these negative cash flows is that tire pyrolysis is only economic with unique situational variables. There are a number of questions about product quality, product price, and feed stock cost which tend to lend a vagueness to the economic analysis..."... 

Cost Estimation. The capital costing equations used in the cogeneration problem have been designed to yield approximate capital and maintenance expenditures and to reflect the consequence of changing the system s variables on these costs. The form of these equations expresses equipment costs in terms of stream and performance variables. In all cases a capital recovery factor is used to account for the cost of capital (i = 15%) and estimated useful life (n = 40 years). 

Because of the considerable uncertainties in all the assumptions made, this projected hydrogen cost should not be rigorously compared with the cost projections we have made for the other processes discussed in this paper. Moreover, we have not reworked Knoche and Funk s economics to conform with the guidelines of Table 1. (The assumptions they made were an 80% stream factor, utility financing, 12 % capital recovery factor, and mid-1976 dollars.)... 

Since all physical assets of an industrial facility decrease in value with age, it is normal practice to make periodic charges against earnings so as to distribute the first cost of the facility over its expected service life. This depreciation expense as detailed in Chap. 9, unlike most other expenses, entails no current outlay of cash. Thus, in a given accounting period, a firm has available, in addition to the net profit, additional funds corresponding to the depreciation expense. This cash is capital recovery, a partial regeneration of the first cost of the physical assets. 

The expression [(1 + i)n — l]/[i(l + i)B] is referred to as the discrete uniform-series present-worth factor or the series present-worth factor, while the reciprocal [i(l + /)"]/[(1 + /) - 1] is often called the capital-recovery factor. 

Fictitious expenses based on capital recovery with minimum profit = 520,000 + 150,000 = 670,000/year. Annual percent return on the total investment based on capital recovery with minimum annual rate of return of 15 percent before income taxes = [(800,000 - 670,000)/(900,000 + 100,000)K100) = 13 percent. 

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