The real world of costs and values

We touched above on the impact of fiscal authorities and capital sources on the economic trade-off which determines the optimum choice of many plant design features. Their impact is such that they are worthy of further elaboration. 

Low-interest finance packages, such as export incentives, may also have a major effect on the cost of capital, and influence the design more directly by restricting the sources of supply. Thus in the real world, it is usually necessary to work out each year s cash flow in detail, and to apply actual taxation and item-specific capital interest, to reach the correct trade-off for individual item design optimization. Failure to ascertain the real impact of the fiscal and investment environment can lead to quite uncompetitive designs. 

There are some factors that affect the capital/operating cost dynamics which are best left to the plant owner. One is the assessment of uninsur-able risk, related to the possible effects of changes of cost inflation and changes of the market for the plant s product. The second is that in the wider field of the client s operations, especially for global companies, it may be expeditious to incur apparently sub-optimal costs and profits at isolated parts of the overall operation, in order to centralize profits in one place rather than another, and thereby make significant tax gains. 

However, if the correct attention and consultation is given at the outset of the project or study, it is usually possible to arrive at a simple set of rules, expressed in pay-off time, that makes financial analysis relatively simple. (The reservations expressed above on the credibility of certain technical aspects of the analysis remain.) 

---