Capital recovery costs costing method

If a process is to be profitable, the total annual cost must be offset by the revenue (R) the process generates. Moreover, if the revenue exceeds the TAC, income taxes will be owed. Finally, if income taxes are a consideration, so will be the depreciation of the process equipment. (Depreciation, an income tax book entry, should not be confused with the capital recovery cost see later discussion on the EUAR method.) Space does not permit a thorough discussion of either income taxes or depreciation, as the rules governing the calculation of both are quite complex. For our purposes, the following equation, which encompasses all of these variables, will suffice ... 

Calculate the capital recovery factor. In this method, each of the undiscounted net cash flows (NCFs) for years 1 to 20 is algebraically added to the capital recovery cost (CRC) to obtain the equivalent uniform annual revenue (EUAR). The CRC is the product of the total capital investment,... 

Even so, the EUAR method is best suited to those situations where (as in this case) the undiscounted net cash flows are constant. However, when they are not constant, each NCF must be discounted back to year zero, summed, and annualized by multiplying it by the CRF. Finally, this annualized NCF must be added to the capital recovery cost. By the time the analyst has done all of this, he or she could just as well have calculated the net present worths or internal rates of return of the competing projects. 

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 relationships among the various annual costs given by Eqs. (9-1) through (9-9) are illustrated diagrammatically in Fig. 9-1. The top half of the diagram shows the tools of the accountant the bottom half, those of the engineer. The net annual cash flow Acf> which excludes any provision for balance-sheet depreciation Apn, is used in two of the more modem methods of profitability assessment the net-present-value (NPV) method and the discounted-cash-flow-rate-of-retum (DCFRR) method. In both methods, depreciation is inherently taken care of by calculations which include capital recovery. 

Depreciation follows the depreciation method Modified Accelerated Cost Recovery System (MACl ). Under IRS regulations, most utility type investments use either a 15- or 20-year depreciation schedule. Certain investments, such as renewables, are allowed to use a 5-year depreciation schedule. The capital recovery factor (CRF) is calculated using... 

The idea of combining capital recovery into measurement of current financial performance is not new. A method called residual income has been practiced for decades. Residual income subtracts the cost of capital employed from the income statement. For example, Acme s 600,000 NC machine, described in Chapter 26, would be charged a capital cost of ownership of 90,000 (15% x 600,000) against the expected benefits. This is because Acme s hurdle rate is 15 percent. Because interest is deductible for tax purposes, many adjust the cost of capital to include the impact of taxes and asset life. 

Operating Cost Methods. In the previous section, yearly savings were converted to an equivalent present value using the present value of an annuity, and this was measured against the capital cost. An alternative method is to convert all the investments to annual costs using the capital recovery factor and measure them against the yearly savings. 

By use of selective membranes, water can be removed by filtration from the juice in order to effect its concentration. Depending upon the molecular size of the compounds and the cut-off value of the membrane used, there is likely to be some loss of flavour components. These may be recovered from the permeate by distillation and returned to the juice concentrate. Concentration by these methods is less effective in terms of folding than other methods but can provide advantages in specific cases for example, capital costs associated with hyperfiltration are around 10-30% less than for evaporative systems with aroma recovery equipment. 

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