Fixed capital investment methods

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. 

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 ... 

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. 

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... 

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. 

Example 5 Fixed Capital Investment Using the Lang, Hand, and Wroth Methods The following is a list of the purchased equipment costs for a proposed processing unit ... 

Assume delivery charges are 5 percent of the purchased price. Estimate the fixed capital investment 2 years into the future, using the Lang, Hand, and Wroth methods. The inflation rates are 3.5 percent for the first year and 4.0 percent for the second. 

Lang method The Lang factor for a fluid processing unit starting with purchased equipment costs is 5.0. Therefore, fixed capital investment is 2,820,000 X 5.0 X 1.035 X 1.040 = 15,177,000. 

Therefore, the summary of the fixed capital investment by the various methods is... 

Experience has shown that the fixed capital investment by the Lang method is generally higher than that of the other methods. Whatever figure is reported to management, it is advisable to state the potential accuracy of these methods. 

Two general methods have been used to estimate piping costs when detailed flow sheets are not available. One method is to use a percentage of the FOB equipment costs or a percentage of the fixed capital investment. Typical figures are 80 to 100 percent of the FOB equipment costs or 20 to 30 percent of the fixed capital investment. This method is used... 

In Equation 8.3-1, D is depreciation, FCI is fixed-capital investment, t is the number of years over which the depreciation is accounted for, and S is the salvage value. Thus S is the value the plant could be sold for after the t years of operation. In this discussion we assume that the plant lasts for ten years, and that its salvage value is zero. With the straight-line method, annual depreciation costs are constant. Other methods, such as the sum-of-the-years-digits method, determine depreciation costs to be greater in the early years of the property than in the later years. Local regulatory laws generally define which method can be used to determine depreciation costs. 

For the alkylation unit, purchased-equipment costs may be estimated using the equipment-specification information of Table 1 and the cost data presented in Chaps. 14 through 16 of this text. Table 2 presents these costs updated to January 1, 1990. The required fixed-capital investment for the nonbiodegradable detergent manufacturing process may be estimated from the total purchased-equipment cost using the equipment-cost ratio method outlined in Table 17 of Chap. 6. The total purchased-equipment cost is, presented in... 

Table 3 and is the basis for the estimated fixed-capital cost tabulation given in Table 4. The probable error in this method of estimating the fixed-capital investment is as much as + 30 percent.

METHOD E POWER FACTOR APPLIED TO PLANT-CAPACITY RATIO. This method for study or order-of-magnitude estimates relates the fixed-capital investment of a new process plant to the fixed-capital investment of similar previously constructed plants by an exponential power ratio. That is, for certain similar process plant configurations, the fixed-capital investment of the new facility is equal to the fixed-capital investment of the constructed facility C multiplied by the ratio R, defined as the capacity of the new facility divided by the capacity of the old, raised to a power x. This power has been found to average between 0.6 and 0.7 for many process facilities. Table 19 gives the capacity power factor (x) for various kinds of processing plants. 

Example S Estimation of fixed-capital investment with power factor applied to plant-capadty ratio. If the process plant, described in Example 1, was erected in the Dallas area for a fixed-capital investment of 436,000 in 1975, determine what the estimated fixed-capital investment would have been in 1980 for a similar process plant located near Los Angeles with twice the process capacity but with an equal number of process units Use the power-factor method to evaluate the new fixed-capital investment and assume the factors given in Table 20 apply. 

Results obtained using this procedure have shown high correlation with fixed-capital investment estimates that have been obtained with more detailed techniques. Properly used, these factoring methods can yield quick fixed-capital investment requirements with accuracies sufficient for most economic-evaluation purposes. 

METHOD G TURNOVER RATIOS. A rapid evaluation method suitable for order-of-magnitude estimates is known as the turnover ratio method. Turnover ratio is defined as the ratio of gross annual sales to the fixed-capital investment,... 

The methods for estimating capital investment presented in the preceding sections represent the fundamental approaches that can be used. However, the direct application of these methods can often be accomplished with considerable improvement by considering the fixed-capital investment requirement by parts. With this approach, each identified part is treated as a separate unit to obtain the total investment cost directly related to it. Various forms of compart-mentalization for this type of treatment have been proposed. Included in these are (1) the modular estimate,+ (2) the unit-operations estimated (3) the functional-unit estimate,1 and (4) the average-unit-eost estimate.tt... 

Depreciation (depends on life period, salvage value, and method of calculation-about 10% of fixed-capital investment for machinery and equipment and 2-3% of building value for buildings)... 

Estimate by the turnover-ratio method the fixed-capital investment required for a proposed sulfuric acid plant (battery limit) which has a capacity of 140,000 tons of 100 percent sulfuric acid per year (contact-catalytic process) using the data from Table 19 for 1990 with sulfuric acid cost at 72 per ton. The plant may be considered as operating full time. Repeat using the cost-capacity-exponent method with data from Table 19. 

Payout period, or payout time,% is defined as the minimum length of time theoretically necessaiy to recover the original capital investment in the form of cash flow to the project based on total income minus all costs except depreciation. Generally, for this method, original capital investment means only the original, depreciable, fixed-capital investment, and interest effects are neglected. Thus,... 

Piping is a major item in the cost of chemical process plants. These costs in a fluid-process plant can run as high as 80 percent of the purchased equipment cost or 20 percent of the fixed-capital investment. There are essentially two basic methods for preparing piping-cost estimates-the percentage of installed equipment method and the material and labor take-off method. Several variations of each method have appeared in the literature. 

METHOD F investment COST PER UNIT OF CAPACITY. Many data have been published giving the fixed-capital investment required for various pro-eesses per unit of annual production capacity such as those shown in Table 19. Although these values depend to some extent on the capacity of the individual plants, it is possible to determine the unit investment costs which apply for average conditions. An order-of-magnitude estimate.of the fixed-capital investment for a given process can then be obtained by multiplying the appropriate investment cost per unit of capacity by the annual produetion eapaeity of the proposed plant. The necessary correction for change of eosts with time can be made with the use of cost indexes. 

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