Page 291 - Chemical engineering design

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CHEMICAL ENGINEERING
Capital is often recovered as a depreciation charge, which sets aside a given sum each
year to repay the cost of the plant. If the plant is considered to “depreciate” at a fixed rate
over its predicted operating life, the annual sum to be included in the operating cost can
be easily calculated. The operating life of a chemical plant is usually taken as 10 years,
which gives a depreciation rate of 10 per cent per annum. The plant is not necessarily
replaced at the end of the depreciation period. The depreciation sum is really an internal
transfer to the organisation’s fund for future investment. If the money for the investment
is borrowed, the sum set aside would be used to repay the loan. Interest would also be
payable on the loan at the current market rates. Normally the capital to finance a particular
project is not taken as a direct loan from the market but comes from the company’s own
reserves. Any interest charged would, like depreciation, be an internal (book) transfer of
cash to reflect the cost of the capital used.
Rather than consider the cost of capital as depreciation or interest, or any other of
the accounting terms used, which will depend on the accounting practice of the particular
organisation and the current tax laws, it is easier to take the cost as a straight, unspecified,
capital charge on the operating cost. This would be typically around 10 per cent of the
fixed capital, annually, depending on the cost of money. As an approximate estimate the
“capital charge” can be taken as 2 per cent above the current minimum lending rate. For
a full discussion on the nature of depreciation and the cost of capital see Happle and
Jordan (1975), Holland et al. (1983), Valle-Riestra (1983).

Local taxes
This term covers local taxes, which are calculated on the value of the site. A typical figure
would be 1 to 2 per cent of the fixed capital.

Insurance
The cost of the site and plant insurance: the annual insurance premium paid to the insurers;
usually about 1 to 2 per cent of the fixed capital.

Royalties and licence fees

If the process used has not been developed exclusively by the operating company,
royalties and licence fees may be payable. These may be paid as a lump sum, included
in the fixed capital, or as an annual fee; or payments based on the amount of product
sold.
The cost would add about 1 per cent to 5 per cent to the sales price.

Summary of production costs

The various components of the operating costs are summarised in Table 6.6. The typical
values given in this table can be used to make an approximate estimate of production
costs.