Fixed and working capital

Fixed capital is the total cost of the plant ready for start-up. It is the cost paid to the contractors. 

Auxiliary facilities, such as utilities, land and civil engineering work. 

It is a once-only cost that is not recovered at the end of the project life, other than the scrap value. 

Working capital is the additional investment needed, over and above the fixed capital, to start the plant up and operate it to the point when income is earned. 

Funds to cover outstanding accounts from customers. 

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Most of the working capital is recovered at the end of the project. The total investment needed for a project is the sum of the fixed and working capital. 

Add the fixed and working capital to get the total investment required. 

Klein and Klimpel (1967) described an NLP involving the optimal selection of plant sites and plant sizes over time. The functions representing fixed and working capital were of the form... 

Expenses, as outlined in Chap. 8, for various types of taxes and insurance can materially affect the economic situation for any industrial process. Because modem taxes may amount to a major portion of a manufacturing firm s net earnings, it is essential that the chemical engineer be conversant with the fundamentals of taxation. For example, income taxes apply differently to projects with different proportions of fixed and working capital. Profitability, therefore, should be based on income after taxes. Insurance costs, on the other hand, are normally only a small part of the total operational expenditure of an industrial enterprise however, before any operation can be carried out on a sound economic basis, it is necessary to determine the insurance requirements to provide adequate coverage against unpredictable emergencies or developments. 

Total Capital Investment (TCI) contains fixed and working-capital. The first is recovered over several years by means of a depreciation charge D. The second is consumed in the first year of operation. It is important to note that depreciation of the fixed-capital is regulated by law and depends on the taxation system of each country. The depreciation charge is typically 10-20% of the fixed-capital. This topic of particular importance in cash flow formation will be developed in the section 15.3.4. 

The sum of fixed and working capital investments as determined by one or more of the methods outlined above constitutes the total capital investment. Since the fixed capital costs are generally greater than 85 per cent of the total capital costs, the errors inherent in using methods 1 to 7 for determining fixed capital costs also apply to total capital costs (Fig. 6-1). These derived figures are thus available for making manu-... 

As there is a direct relationship between fixed and working capital costs, method d can be expanded to get a quick estimate of total capital investment within an error of 20 to 40 per cent overestimated to 40 to 60 per cent underestimated. Table 6-7 summarizes this method. 

Summarize fixed and working capital investment as shown in schedule 1. 

To improve supply chain asset management efficiency The effectiveness of an organization in managing assets to support demand satisfaction. This includes the management of all assets—fixed and working capital... 

The third financial dimension to decision making is resource utilisation and specifically the use of fixed and working capital. The pressure in most organisations is to improve the productivity of capital - to make the assets sweat. In this regard it is usual to utilise the concept of return on investment (ROI). Return on investment is the ratio between the net profit and the capital that was employed to produce that profit, thus ... 

The investment consists of the fixed capital, eg, equipment, buildings, and faciUties land cost and working capital. Interest charges during constmction are frequently considered part of the fixed capital. This is called capitalization of the constmction interest expense. Part of the start-up costs are occasionally treated in the same manner. 

The nondepreciable investments, ie, land and working capital, are often assumed to be constant preoperational costs that are fully recoverable at cost when the project terminates. Equipment salvage is another end-of-life item that can represent a significant fraction of the original fixed capital investment. However, salvage occurs at the end of life, can be difficult to forecast, and is partially offset by dismantling costs. Eor these reasons, a zero salvage assumption is a reasonable approximation ia preliminary analysis. 

Capital costs can be estimated by applying installation factors to the purchase costs of individual items of equipment. However, there is considerable uncertainty associated with cost estimates obtained in this way, as equipment costs are typically only 20 to 40% of the total installed costs, with the remainder based on factors. Utility investment, off-site investment and working capital are also needed to complete the capital investment. The capital cost can be annualized by considering it as a loan over a fixed period at a fixed rate of interest. 

Land for the project is available at 300,000. The fixed capital investment was estimated to be 12,000,000. A working capital of 1,800,000 is needed initially for the venture. Start-up expenses based upon past experience are estimated to be 750,000. The project qualifies under IRS guidelines as a 5-year class life investment. The company uses MACRS depreciation with the half-year convention. At the conclusion of the prmect, the land and working capital are returned to management. Develop a cash flow analysis for this project, using a cumulative cash position table (Table 9-25). 

Neither of these methods makes provision for including land and working capital, and no consideration is given to cash flows that occur in a project s later years after the depreciable fixed investment has been recovered for projects that earn most of their profit in the early years. 

Finally, the total capital cost for the projeet equals the sum of the fixed capital cost and working capital. 

Total capital investment rC/=1000 k , with fixed-capital Fq =800 k and working-capital Fw =200 k . The depreciation is straight-line over eight years. 

ROI after tax is defined as the ratio between the profit after tax and the total capital investment (fixed plus working-capital), as follows ... 

A project requires fixed-capital of 850 k and working-capital of 150 k . It is expected that the annual income will be of 900 k and the expenses (including depreciation) of 600 k . Consider a tax rate of 35%. Calculate the rate of return before and after taxes. How ROI would change when a minimum annual return on investment before taxes of 15% is required ... 

Capital cost recognition Fixed assets and working capital supporting process steps Bottom up 27... 

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