Fixed-capital investments

Fixed capital investment Offsite capital Allocated capital Working capital Start-up expenses 

Other capital items (interest on borrowed funds prior to start-up  

Classification of Estimates There are two broad classes of estimates grass roots and battery limits. Grass-roots estimates include the entire facility, starting with site preparation, buildings and structures, processing equipment, utilities, services, storage facilities, raihoad yards, docks, and plant roads. A battery-limits estimate is one in which an imaginary boundary is drawn around the proposed facihty to be estimated. It is assumed that all materials, utilities, and services are available in the quality and quantity required to manufacture a product. Only costs within the boundary are estimated. 

Quality of Estimates Capital cost estimation is more art than science. An estimator mnst nse considerable jndgment in preparing the estimate, and as the estimator gains experience, the accnracy of the estimate improves. There are several types of fixed capital cost estimates  

Detailed information requirements for each type of estimate may be found in Fig. 9-3. 

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An overall Lange factor, E- j can be used to relate the battery-limits fixed capital investment Jg to the deHvered equipment cost Eg, so that... 

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. 

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. 

DecoveTj of Capital. In Figure 1, the annual book depreciation is used to retire the fixed capital investment. Whereas this accounting model does not correspond to the typical money flow, it is one possible model for recovery of capital. This model assumes that the investment is reduced each year by the amount of the annual depreciation. Another model (22) assumes that a uniform yearly book depreciation payment is made to an interest-bear sinking fund that accumulates to the depreciable fixed capital amount at the end of the venture. Using this second model, the investment is outstanding throughout the lifetime of the project. This also does not correspond to the actual money flow in most cases. ProfitabiUty analysis utilizes a third model based on discounted cash flows. 

Possible numerators include the gross income net pretax income net after-tax income gross profit, ie, gross income minus book depreciation cash flow or net income. An average return value is selected by defining a typical or mature proof year as the basis of calculation. The denominator can be the original total investment, depreciated book-value investment, lifetime averaged investment, or fixed capital investment. 

Profitability Diagram. The sensitivity of profitabiUty criteria to parameter changes or other effects can also be represented on a profitabiUty diagram. For example, plus 10% change in fixed capital investment for Venture A gives the results shown in Figure 7b. If several other investment levels were plotted, then interpolation would be a simple task and the sensitivity to investment level could be visualized readily. 

Working capital may vaty from a very small fraction of the total capital cost to almost the whole of the invested capital, depending on the process and the industiy For example, in jewelry-store operations, the Fixed capital is veiy small in comparison with the working capital. On the other hand, in the chemical-process industries, the working capital is hkely to be in the region or 10 to 20 percent of the value of the fixed-capital investment. 

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. 

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... 

Rapid Manufacturing-Cost Estimates Fixed manufacturing costs are a func tion of the fixed-capital investment and are independent of the production rate of the plant. Property taxes or rates depend on location. They may be taken as 2 percent of the fixed-capital cost of the plant in the absence of specific data. The cost of insurance depends on both location and the hazardous nature of the materials handled. This cost is normally of the order of 1 percent of the fixed-capital cost of the plant. 

Total Capital Cost The installed cost of the fixed-capital investment Cpc is obviously an essential item which must be forecast before an investment decision can be made. It forms pai4 of the total capital investment Cfc, defined by Eq. (9-14). The fixed-capital investment is usually regarded as the capital needed to provide all the depreciable facihties. It is sometimes divided into two classes by defining battery limits and auxiliaiy facilities for the project. The boundary for batteiy limits includes all manufacturing equipment but excludes administrative offices, storage areas, utihties, and other essential and nonessential auxihaiy facilities. 

Capital ratio = (fixed-capital investment)/(anniial sales revenue). 

Multiple-factor methods include the cost contributions for each given activity, which can be added together to give an overall factor. This factor can be used to multiply the total cost of dehvered equipment X (Ce(j)del lo produce an estimate of the total fixed-capital investment either for grass-roots or for battery-hmit plants. The costs may be divided into four groups ... 

The estimated values for the various contributions are given in Table 9-53, resulting in an estimate of 4,280,000 for the total fixed-capital investment, including a contingency factor. 

These methods have become increasingly popular. While they are similar to the preceding methods, labor ana materials costs are considered separately. Hence it is possible to allow for variations in efficiency and labor costs in different locahties or countries. H. C. Bauman Fundamentals of Cost Engineering in the Chemical Indus-tiy. Van Nostrand Reinhold, New York, 1964, p. 295) divides most of the components of Table 9-51 into material and labor components, quoting the data as ranges and medians of the percentage of the total fixed-capital investment. In Table 9-54, Bauman s data have been converted to factors of the delivered-equipment cost for a grass-roots installation. 

TABLE 9-51 Factors to Convert Delivered-Equipment Costs into Fixed-Capital Investment... 

Air stripping is used to remove 90% of the toluene (molecular weight = 92) dissolved in a 10 kg/s (159 gpm) wastewater stream. The inlet composition of toluene in the wastewater is 500 ppm. Air (essentially free of toluene) is compressed to 202.6 kPa (2 atm) and bubbled through a stripper which contains sieve trays. In order to avoid fire hazards, the concentration of toluene in the air leaving the stripper is taken as 50% of the lower flammability limit (LFL) of toluene in air. The toluene-laden air exiting the stripper is fed to a condenser which recovers almost all the toluene. A schematic representation of the process is shown in Fig. 2.11. Calculate the annual operating cost and the fixed capital investment for the system. The following physical and economic data are available ... 

The ratio of the fixed capital investment to the purchased equipment cost (Lang factor) is taken as 4.83. 

For instance, in the aforementioned heat exchanger example, the FOB equipment cost was 40,100. If this exchanger is to operate in an oil refinery (primarily a fluid processing plant), the fixed capital investment is 4.83 x 40,100 - 193,700. 

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... 

The annual depreciation of a fixed capital investment is referred to as annualized fixed cost. It allows the company to set aside an annual portion of profit and use it for purposes of capital-cost recovery and tax deduction. 

Total capital investment = Fixed capital investment... 

In addition to the fixed capital investment needed to purchase and install process equipment and auxiliaries, there is a continuous expenditure referred to as operating cost, which is needed to operate the process. The operating cost (or manufacturing cost or production cost) includes raw materials, mass-separating agents, utilities (fuel, electricity, steam, water, refrigerants, air, etc.), catalysts, additives, labor, and maintenance. The total annualized cost of a process is defined as follows ... 

It is an indication of how fast the plant can recover the initial fixed capital investment. The shorter the payback period, the more attractive the process. For... 

It is reported that between 10 and 11 million cars are taken apart every year in North America once the metallic portion has been recovered from the crushing operation, the remainder - representing over 20% of the total mass or 3.5 million tons - must be eliminated. Pyrovac, in collaboration with Universite Laval and under the sponsorship of E.T.P. Technologies, recently undertook a research programme to recover valuable products from this Automobile Shredder Residue. A process flow sheet for a 4000 kg/hr plant is presented, with fixed capital investment estimated to be 5 million US dollars. Details are given. 

Thermoeconomics of the LHS system involves fixed capital investment, operational and maintenance cost, and exergy costs (Domanski and Fellah, 1998). Total fixed capital investment consists of (i) direct expenses that are equipment cost, materials, and labor, (ii) indirect project expenses that are freight, insurance, taxes, construction, overhead, (iii) contingency and contractor fee, and (iv) auxiliary facilities, such as site development, auxiliary buildings. 

Economic analysis can determine the discounted profitability criteria in terms of payback period (PBP), net present value (NPV), and rate of return (ROR) from discounted cash flow diagram, in which each of the annual cash flow is discounted to time zero for the LHS system. PBP is the time required, after the construction, to recover the fixed capital investment. NPV shows the cumulative discounted cash value at the end of useful life. Positive values of NPV and shorter PBP are preferred. ROR is the interest rate at which all the cash flows must be discounted to obtain zero NPV. If ROR is greater than the internal discount rate, then the LHS system is considered feasible (Turton et al., 2003). 

A certain amount of money must be invested if any product is to be produced. This is referred to as capital. The capital is made up of the fixed capital needed to construct the plant and the working capital needed to operate it. The fixed capital is the cost of building and equipping the plant and all its peripheral buildings and operations. Chapter 9 was devoted to methods for estimating the fixed capital investment. 

Often, as in the case of the return on the investment, expenses not incurred directly in the design and construction of the plant are excluded when the payout period is calculated. If the only prestartup expense considered is the fixed capital investment, a payout time of 3-5 years is reasonable. A time longer than this is considered unacceptable. 

Although there is quite a strong research effort in both the private and governmental sectors, especially in the United States, no firm plans to construct commercial Fischer-Tropsch plants have been announced. Nevertheless, several coal-conversion pilot plants are in an advanced stage of development, and conceptual designs, together with economic evaluations, have been produced for plants capable of processing 140,000 tons of coal per day (20). Such plants would involve a fixed capital investment of some 2.8 billion (1975 estimate) (2/). 

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