Working-capital investment

The development and improvement of scientific-technical level of NDT and TD means for safety issues is connected with the necessity to find additional investments that must be taken into account at the stage of new technogenic objects designing, when solving new arising problems in social, economic, ecological and medical safety. It is not accidental, that the expenses for safe nuclear power plants operation cover 50% of total sum for construction work capital investments. That is why the investments for NDT and TD have to cover 10% of total amount for development and manufacturing of any product. 

The tree-growth concept, as shown in Fig. 6-1, depicts a trunk output to start the particular industrial operation designated as the total capital investment. This total capital investment includes all the funds necessary to get the project underway. This encompasses the regular manufacturing fixed-capital investment and the working-capital investment along with the investment required for all necessary auxiliaries and nonmanufacturing facilities. The cash flow for the capital investments can usually be considered as in a lump sum or... 

T = total capital investment V = manufacturing fixed-capital investment W= working-capital investment x = exponential power for cost-capacity relationships... 

The method of approach for a profitability evaluation by discounted cash flow takes into account the time value of money and is based on the amount of the investment that is unretumed at the end of each year during the estimated life of the project. A trial-and-error procedure is used to establish a rate of return which can be applied to yearly cash flow so that the original investment is reduced to zero (or to salvage and land value plus working-capital investment) during the project life. Thus, the rate of return by this method is equivalent to the maximum interest rate (normally, after taxes) at which money could be borrowed to finance the project under conditions where the net cash flow to the project over its life would be just sufficient to pay all principal and interest accumulated on the outstanding principal. 

Initial tied-capital investment = 100,000 Working-capital investment = 10,000 Service life = 5 years... 

A working-capital investment of 200,000 is needed at the time the plant starts operation and must be retained indefinitely. 

Working-capital investment The working-capital investment of 200,000 must be supplied at the time of plant startup or at the reference point of zero time. 

Determination of cash position at end of estimated useful life (i.e., ten years from zero time) in terms of profitability index r. At the end of the useful life with the correct value of r, the total cash position, taking into account the working-capital investment, the salvage value, and the land value, must be zero. 

The future worth of the total flow to the project after 10 years must be equal to the future worth of the total cash position at zero time (CPKto time) compounded continuously for 10 years minus salvage value, land value, and working-capital investment. Therefore, by Eq. (36) of Chap. 7 or part (e) of Table 3 in Chap. 7,... 

Graphical representation of problem solution. Equation (D) can be generalized, with the simplifications indicated in the preceding section of this problem, to give Table 3 (note that direct land value, salvage value, and working-capital investment are now included in the cash composition). 

In- vest- ment num- ber Totalnitial fixed-capital investment, Working-capital investment, Salvage valueatend of service life, Ser- vice life, years Annual casl Howto pro-jectaftcr taxes, Annuakash i expenses (constant for each year), ... 

COST. The necessary working-capital investment which must be kept on hand for the new plant is estimated to be 145,000. 

Wood as material of construction, 437 Working capital fiom balance sheet, 140 Working-capital investment, 157-158... 

To simplify preconstruction cost estimation, use 15 to 20 per cent of the fixed capital investment for working capital investment. Another method of estimation is based on fixed percentage of the annual sales dollar, averaging 25 per cent for 100 chemical process companies. 

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-... 

Finally, when calculating the cash flow for the last year of operation, it is common to take credit for the working capital investment. Some companies also take credit for a projection of the salvage value of the plant, assuming that it is dismantled and sold at the end of its useful life. Because salvage values are difficult to estimate, and in some cases distort the NPV and IRR, many companies prefer to be conservative and assume a zero salvage value. 

Table 27.8 shows that Activity 4, for example, is a heavy user of clerical and administrative resources. Activity 5, as observed, is capital intensive. It consumes the lion s share of both fixed asset and working capital investment. The complexity of the process also consumes the time of technical and professional support staff. 

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

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