Depreciation example

Simply looking at the feedstock prices or price ratios is iasufficient to accurately identify the most attractive feedstock because the values of all of the co-products and by-products must also be taken iato account. This is usually accompHshed by calculating the cost to produce ethylene with all other coproduct and by-product yields credited against the cost of ethylene. An example of the cost of ethylene is presented ia Table 4. The cash costs of ethylene from various feedstocks are compared for the months of July and November of 1991. Cash costs reflect all plant manufactufing costs except depreciation and are a measure of the out-of-pocket cash costs generated by the operation. 

For this example, the tax-basis depreciation method in line-item 11 is a straight-line calculation based on the capitalized fixed capital, ie, fixed capital plus interest to the start of operation any salvage should be subtracted from the capitalized fixed capital and the result divided by the number of expected operating years to obtain the aimual tax-basis depreciation. 

Example 2 Net Present Value for Different Depreciation Methods The following data descrihe a project. Revenue from annual sales and the total annual expense over a 10-year period are given in the first three columns of Table 9-5. The fixed-capital investment Cpc is 1,000,000. Plant items have a zero salvage value. Working capital C vc is 90,000, and cost of land C/ is 10,000. There are no tax allowances other than depreciation i.e., is zero. The fractional tax rate t is 0.50. 

An alternative to allocating overheads by using a single method is to classify the various overheads into groups and to use the most appropriate allocation for each group. For example, depreciation would be allocated on the basis of capital cost, while indirect labor might be allocated either on the basis of direct labor cost or on the number of employees. Clearly, this alternative method is more complex, increases the associated accountancy costs, and is prone to misinterpretation and possibly abuse. 

Of course, the benefits of microfabricated and stractured reactors are also applicable to even larger scale processes. For example, Evonik s development of a production-scale microstructured reactor for vinyl acetate manufacture (150000t per annum) claims depreciation and operating cost savings of 3 million per year [25]. 

Unless the precautions given in the previous two examples are taken, some employees could be injured or killed. Even if this did not occur the financial loss could be large, since if critical pieces of equipment were damaged it might take months before they could be repaired or replaced and before production could be resumed. For each day the plant does not run a number of expenses continue (salaries, depreciation, taxes, insurance). There is also the problem of supplying customers. If a customer goes to another supplier it may be difficult to lure him back. As a result, the company may furnish him with product made at a distant plant and not charge him the extra transportation expenses, or may buy a competitor s product and sell it to the customer at less than the purchase price. 

In determining profits for this case, no depreciation is included in the expenses. It is not necessary to assume a mature plant or to ignore startup expenses when using this method. Example 10-3 shows how to calculate the payout period for a plant that does not reach full production until the fourth year of operation. 

When determining the net present value, taxes should be included. To do this an understanding of depreciation is required. This is discussed in Chapter 11. For all further examples in this chapter it will be assumed that taxes and depreciation charges are included in the expenditures. 

For Example 11-1 compute the depreciation rate per year. Assume the plant will last 11 years. Use the straight-line method of depreciation. 

Determine the depreciation per year for Example 1 1-4 using the sum of the years digits remaining-life plan. 

The answers obtained in Example 1 1-6 are typical of those usually obtained. If earnings are the only consideration, the straight-line depreciation method is the worst plan to use. However, the present values for the other methods are generally so close that no obviously best one can be picked. 

In Chapter 3 we discussed the formulation of objective functions without going into much detail about how the terms in an objective function are obtained in practice. The purpose of this appendix is to provide some brief information that can be used to obtain the coefficients in objective functions in economic optimization problems. Various methods and sources of information are outlined that help establish values for the revenues and costs involved in practical problems in design and operations. After we describe ways of estimating capital costs, operating costs, and revenues, we look at the matter of project evaluation and discuss the many contributions that make up the net income from a project, including interest, depreciation, and taxes. Cash flow is distinguished from income. Finally, some examples illustrate the application of the basic principles. 

Property other than buildings (18-year property) placed into service at the present time must use the modified accelerated cost recovery system (MACRS) in calculating depreciation. Property is classified as having 3, 5, 7, 10, 15, or 20 years life. Some examples are ... 

Periodically Congress has permitted the use of tax credits as a direct reduction from income taxes. Examples are tax credits for installing energy conservation devices, use of alcohol fuels and electric vehicles, development of orphan drugs, creation of low-income housing, and some research expenditures. Tax credits have been used historically to stimulate capital investment in the United States. Such deductions are more valuable than depreciation because they represent direct deductions from the tax bill after taxes are computed on income. 

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%. 

Using a 260/wafer sales price for epitaxial silicon wafers and the United States MACRS tax-basis depreciation schedule, the investor s rate of return (IRR) is 18.3%. In addition, the return on investment (ROI) is 25.3%. These measures increase significantly with small changes in sales price for example, at 273/wafer, the IRR is 29.9%. Note that the economic analysis is somewhat shielded from variations in the price of epitaxial wafers because it is strongly linked to the price of the incoming polished wafers. In other words, the key metric of interest is the value added to the wafer by the epitaxial film deposition. 

The need for pest control in tropical crops is definitely on the increase, and this is brought out in the papers of this symposium. These by no means cover this important subject. Omission of discussion of many crops from this program does not depreciate their importance, but time does not allow their inclusion. Literature on pesticide control of tropical crops is accumulating in many scattered publications—for example, tea culture has been adequately covered by Lamb and others in World Crops for May 1954. It is hoped that this symposium will pave the way for future discussions of this important subject. Pest control in tropical agriculture is a challenge to both the scientist and the manufacturing chemist. 

The term f x D is only the result of an algebraic manipulation, and no interpretation should be assumed. This term f x D is the contribution to cash flow from depreciation, and (1 — t) x i and (1 — f) X C are the contributions to cash flow from revenues and cash operating expenses, respectively. Example 7 is a sample calculation of the after-tax cash flow and the tabulated results. 

Example 7 After-Tax Cash Flow The revenue from the manufacture of a product in the first year of operation is 9.0 million, and the cash operating expenses are 4.5 million. Depreciation on the invested capital is 1.7 million. If the federal income tax rate is 35 percent, calculate the after-tax cash flow. 

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 ... 

In calculations it is also important to take into account ar r income that may be expected from development grants etc. tax liabilities and the depreciation that takes place on capital items expenditure. This second sum needs to be set aside so that provision can be made to replace capital items at the end of their lifetime, especially as the effects of inflation may be different for the various items involved in the costing. Once the capital equipment has been depreciated then profitabihty can rise, since only variable costs have to be covered. Thus for instance the selling price of a product can be decreased, even down to the production cost, in order for example, to force a new competitor out of business. 

Once the plant is finished, there is the need to begin the production. Working capital is the money needed to get the plant into production. This includes, for example, raw materials and supplies carried in stock, finished products in stock, and available cash for monthly payments. This sum is usually equal to 10-20% of the fixed-capital costs. However, this money is not part of the fixed-capital costs, and cannot be accounted for in depreciation [13,14]. 

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