Page 280 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

9.7.1 Fixed Capital, Working Capital, and Land

When the depreciation of capital investment is discussed, care must be taken to distinguish between what
can and cannot be depreciated. In general, the total capital investment in a chemical process is made up of
two components:

(9.21)

Fixed capital is all the costs associated with building the plant and was covered in Chapter 7 (either total
module cost or grassroots cost). The only part of the fixed capital investment that cannot be depreciated is
the land, which usually represents only a small fraction of the total.

Working capital is the amount of capital required to start up the plant and finance the first few months of
operation before revenues from the process start. Typically, this money is used to cover salaries, raw
material inventories, and any contingencies. The working capital will be recovered at the end of the
project and represents a float of money to get the project started. This concept is similar to that of paying
the first and last month’s rent on an apartment. The last month’s rent is fully recoverable at the end of the
lease but must be paid at the beginning. Because the working capital is fully recoverable, it cannot be
depreciated. Typical values for the working capital are between 15% and 20% of the fixed capital
investment.

9.7.2 Different Types of Depreciation

First the terms that are used to evaluate depreciation are introduced and defined.
Fixed Capital Investment, FCI : This represents the fixed capital investment to build the plant
L
minus the cost of land and represents the depreciable capital investment.
Salvage Value, S: This represents the fixed capital investment of the plant, minus the value of the
land, evaluated at the end of the plant life. Usually, the equipment salvage (scrap) value represents a
small fraction of the initial fixed capital investment. Often the salvage value of the equipment is
assumed to be zero.
Life of the Equipment, n: This is specified by the U.S. Internal Revenue Service (IRS). It does not
reflect the actual working life of the equipment but rather the time allowed by the IRS for equipment
depreciation. Chemical process equipment currently has a depreciation class life of 9.5 years [1].
Total Capital for Depreciation: The total amount of depreciation allowed is the difference between
the fixed capital investment and the salvage value.

D = FCI – S
L
Yearly Depreciation: The amount of depreciation varies from year to year. The amount allowed in

the kth year is denoted d .
k
Book Value: The amount of the depreciable capital that has not yet been depreciated.