Depreciation life

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 depreciable value of the asset is the initial cost of the fixed capital investment, C, minus the salvage value (if any) at the end of the depreciable life. For chemical plants the salvage value is often taken as zero, as the plant usually continues to operate for many years beyond the end of the depreciable life. 

Straight-line depreciation must be used in the United States for software (with a 36-month depreciable life), patents (with life equal to the patent term remaining), and other depreciable intangible property (IRS publ. 946). 

The fraction Fj must be less than 2/n, where n is the depreciable life in years. When Fj = 2/n, this method is known as double declining-balance depreciation. 

We lease certain retail locations, warehouses, distribution centers, office space, land, equipment and software. Assets held under capital leases are included in property and equipment. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date we take possession of the property. At lease inception, we determine the lease term by assuming the exercise of those renewal options that are reasonably assured. The exercise of lease renewal options is at our sole discretion. The lease term is used to determine whether a lease is capital or operating and is used to calculate straight-line rent expense. Additionally, the depreciable life of leased assets and leasehold improvements is limited by the expected lease term. ... 

Raw material costs should be estimated by direct computation from flow rates and material prices. The flow rates are deterrnined from flow sheet material balances. The unit prices are obtained from vendors, company purchasing departments, or the Chemical Marketing Reporter. For captive raw materials produced internally, a suitable transfer price must be estabHshed. Initial catalyst charges can be treated as a start-up expense, working capital component, or depreciable capital, depending on the expected catalyst life and cost. Makeup catalyst is frequendy treated as a raw material. 

In the fourth case, a plant or a piece of equipment has a limited use-Ril life. The primary reason for the decrease in value is the decrease in future life and the consequent decrease in the number of years for which income will be earned. At the end of its life, the equipment may be worth nothing, or it may have a salvage or scrap value S. Thus a fixed-capital cost Cpc depreciates in value during its useful life of s years by an amount that is equal to (Cpc S). The useful life is taken from the startup of the plant. 

On the basis of straight-line depreciation, the average annual amount of depreciation Aq over a service life of s years is given by... 

The declining-balance method of depreciation allows equipment or plant to be depreciated by a greater amount during the earlier years than during the later years. This method does not allow equipment or plant to be depreciated to a zero value at the end of the service life. 

On the basis of sum-of-years-digits depreciation, the annual amount of depreciation for a specified number of years s for a plant of fixed-capital cost Cpc, scrap v ue S, and service life s is given by... 

A fourth method of computing depreciation (now seldom used) is the sinking-fund method. In this method, the annual depreciation A is the same for each year of the life of the equipment or plant. The series of equal amounts of depreciation Aq, invested at a fractional interest rate i and made at the end of each year over the life of the equipment or plant of s years, is used to build up a future sum of money equal to (Cpc S). This last is the fixed-capital cost of the equipment or plant minus its salvage or scrap value and is the total amount of depreciation during its useful life. The equation relating i Fc S) and Ao is simply the annual cost or payment equation, written either as... 

It is preferable not to think of annual depreciation as a contribution to a fund to replace equipment at the end of its life but as part of the difference between the revenue and the expenditure, which difference is tax-free. 

The annual rate of straight-line depreciation of the fixed-capital investment Cfc, from 1,000,000 at startup to a salvage value S, of zero at the end of a productive life s of 10 years, is given hy... 

Fig. 22-2 Annuity as a function of service life for a depreciation of 8% interest plus 0.8% charges.

These considerations are always relevant to water pipelines, which must have a very long service life. With natural gas, oil, and product pipelines, shorter periods are usually assumed for depreciation. Disregarding the fact that in this case cathodic protection is compulsory for safety reasons and protection of the environment, the costs of repairs resulting from wall perforation after a long service life can exceed the costs of cathodic protection. 

Depreciation. This is a noncash cost that accumulates money to rebuild the facilities after the project life is over. There are usually two depreciation rates. One is the corporation s book depreciation, which reflects the expected operating life of the project. The other is the tax depreciation, which is usually the maximum rate allowed by tax laws. To be correct, the tax depreciation should now be called Accelerated Capital Cost Recovery System (ACRS). 

Economics can be shown using either depreciation rate. If book depreciation is used, a line for defen ed income tax must be used. This is a cash available item that becomes negative when the tax depreciation becomes less than the book depreciation. At the end of the book life, the cumulative defeired income tax should be zero. 

The 1984 allowable ACRS tax depreciation is shown in Table 1. Most chemical plants have a five-year tax life. 

Fixed capital investments are characterized by the fact that they have to be replaced after a number of years commonly referred to as service life or useful life period. This replacement is not necessarily due to wear and tear of equipment. Other factors include technological advances that may render the equipment obsolete. Furthermore, over the usefiil life of the equipment, the plant should plan to recover the capital cost expenditure. In this regard, the notion of depreciation is useful. Depreciation or amortization is an annual allowance which is set aside to account for the wear, tear, and obsolescence of a process such that by the end of the useful life of the process, enough fund is accumulated to replace the process. The simplest method for determining depreciation is referred to as the straight line method in which... 

Expenses associated with the capital cost of equipment. Depreciation will be provided over the useful life of the equipment, varying according to the engineer s estimate. Present-day custom is to write assets down on a straight-line basis, but there are several accepted ways of providing the necessary depletion of the asset value. 

Salvage value of the whole seasonal storage S = 50,000 Useful life of the system n = 15 years depreciation over 10 years Discount rate i = 8%... 

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