Other investment costs working capital

Fixed-capital investment 2. Working capital 3. Total capital investment (1 + 2) 4. Annual income (sales) 5. Annual manufacturing cost (a) Raw materials (b) Labor (c) Utilities (d) Maintenance and repairs (e) Operating supplies (f) Laboratory charges (g) Patents and royalties (h) Local taxes and insurance (i) Plant overhead (j) Other (explain in Notes) 5-T. Total of line 5 ... 

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. 

Even when the time comes to make a purchasing decision, an energy-efficient motor purchase is not a certainty. Sometimes an energy-efficient motor will be the economically efficient choice at other times, not. The capital investment decision is based on the cost in relation to performance, efficiency and reliability. Moreover, the decision depends on the application and the amount of time the motor is in operation. It can be the major component of a product (drill or mixer), or a minor component (computer disk drive) it can be the major component cost of a product (fan), or it can be a minor component cost (stereo tape deck) it can run almost constantly (fan, pump, and machinery), or only a few minutes a day (vacuums and power tools). For example, contractors purchase circular saws almost solely based on performance and reliability. Time is money, and since the saw is operating only a few minutes a day and the contractor is often not responsible for the electricity costs to run the motor, energy efficiency is not a consideration performance and reliability are what matter most. On the other hand, an industrial user, who runs huge electric motors twenty-four hours a day to work pumps, machinery, and ventilation equipment, is very concerned tvitli energy efficiency as well as performance and reliability. 

SAQ 8.7 The product value at 100% capadty will now be (total cost of production + 7 to 15% ROD, ie 16.04 to 1654 + 1.12 to 2.48. So the minimum product value will be 17.16 per kg of L-phenylalanine and the maximum product value 19.02 per kg of L-phenylalanine. It is rattier difficult to say whether this fictitious process would survive or could compete. Actual data are absolutely necessary. On the other hand this exercise gives us a better understanding of process economics and can also be used to compare a fermentative process for the production of amino adds with, for example, a chemo-enzymatic process. Calculate the return on investment over a 15 year period for an amino add fermentation, based on the following data and assumptions. Production capadty = 500 tonnes per annum Selling price of product = 50 kg Cost price of product = 24.5 kg 1 Capital = 40 million Taxes = 50%. Assumptions Cost of dealer discount, distribution and freight = 20% total sales Startup costs = 10% of capital Working capital = 25% of net sales Administration plus R and D costs = 12.5% of net sales. 

Figure 2.2 shows the cash flow pattern for a typical project. The cash flow is a cumulative cash flow. Consider Curve 1 in Figure 2.2. From the start of the project at Point A, cash is spent without any immediate return. The early stages of the project consist of development, design and other preliminary work, which causes the cumulative curve to dip to Point B. This is followed by the main phase of capital investment in buildings, plant and equipment, and the curve drops more steeply to Point C. Working capital is spent to commission the plant between Points C and D. Production starts at D, where revenue from sales begins. Initially, the rate of production is likely to be below design conditions until full production is achieved at E. At F, the cumulative cash flow is again zero. This is the project breakeven point. Toward the end of the projects life at G, the net rate of cash flow may decrease owing to, for example, increasing maintenance costs, a fall in the market price for the product, and so on.

The total working capital must be added to this estimate of fixed capital to obtain the full composite figure for the capital cost. The working capital represents an investment in storage of feed ammonia for one week, product acid for one week, stores (e.g. catalyst) and others. Table E.3 in Appendix E summarizes these incurred costs. 

A capital investment is required for any industrial process, and determination of the necessary investment is an important part of a plant-design project. The total investment for any process consists of fixed-capital investment for physical equipment and facilities in the plant plus working capital which must be available to pay salaries, keep raw materials and products on hand, and handle other special items requiring a direct cash outlay. Thus, in an analysis of costs in industrial processes, capital-investment costs, manufacturing costs, and general expenses including income taxes must be taken into consideration. 

Capital investment, as defined earlier, is the total amount of money needed to supply the necessary plant and manufacturing facilities plus the amount of money required as working capital for operation of the facilities. Let us now consider the proportional costs of each major component of fixed-capital investment as outlined previously in Table 1 of this chapter. The cost factors presented here are based on a careful study by Bauman and associates plus additional data and interpretations from other more recent sources with input based on modem industrial experience. 

The total direct cost (TDC) includes both the direct installation costs and the costs of site preparation and buildings. Further, the sum of the total direct cost and total indirect cost (or direct installation costs) is termed the battery limits cost. Finally, the battery limits cost plus the cost of off-site facilities (e.g., a railroad spur) comprise the total depreciable investment. Put simply, this is the portion of the TCI for which the firm is permitted to take a depreciation deduction on its corporate income tax return. The other portion of the TCI, namely, land and working capital, may not be depreciated. Hence, this portion is called the total nondepreciable investment. 

Consequently, investment decisions require capital budgeting. This plant profitability analysis is the evaluation and the selection of the best investments from a set of alternatives. Methods for evaluating investments include NPV and rate of return, among others, for private companies and benefit-cost ratio for public works projects. All these come under the purview of plant profitability analysis. 

The products of each system were costed using two different techniques the equality method and the by-product work method (1, 2 ). Every case analyzed accounts for maintenance as well as fuel expenses but excludes other operating costs. Capital investment is amortized at an after-tax discount rate of 8.5%. The effects of income taxes, ad valorem taxes, and depreciation (see (3) for the formulation of the annualization factor accounting for capital, taxes and depreciation) are included, while the effects of inflation were neglected. 

The working capital is described in detail in the next chapter. It includes the initial investment in temporary and consumable materials, as well as cash for initial payments of salaries and other operating expenses, prior to the receipt of payments for plant products. These other costs, which represent a significant fraction of the total capital investment, are considered next. 

In our cases, Old Line and High Tech have fixed costs at 10 percent of total cost (refer to Table 27.3). On the other hand, Process has a structure with 40 percent fixed cost, most of which is capital investment. For purposes of illustration, we will consider those costs to include all capital recovery items for both working capital (e.g., inventory, receivables) and fixed asset investments (e.g., land, plant and equipment). 

We should also point out that the cost of capital might appear on the income statement in other ways. If the company borrows to finance the purchase of the machine, then the interest will be charged. If the asset is leased, the lease cost can be charged to the work center where the machine is installed. The use of EUAC is neutral with regard to financing source. The fact that different companies use different financing mechanisms is one more reason that supply chain partners should adopt a common method of recognizing investments. 

In general terms, the initial fixed capital investment and the minimum net working capital are covered by a mix of equity and long-term loans and additional net working capital from short- and medium-term loans or from positive net cash flow (equity). Within this structure, various combinations and permutations need to be considered related to cost of finance, financial flexibility, debt service, and taxation. Consideration should also be given to leasing, supplier credits, and other sources of finance. In all cases, a balance has to be struck between equity and debt finance. 

---