Page 56 - Chemical process engineering design and economics

42 Chapter 2

There are several depreciation methods, which are discussed in many economic
texts. Since we want to develop a rapid method of estimating the production cost,
we will use the simple linear depreciation method. For this method, divide the
difference of the depreciable capital cost and its salvage value by the life of the
plant, as shown in Table 2.1. An entire plant or individual equipment has three
lives: an economic life, a physical life, and a tax life. The economic life occurs
when a plant becomes obsolete, a physical life when a plant becomes too costly to
maintain, and a tax life, which is fixed by the government. The plant life is usually
ten to twenty years. The depreciable capital cost includes all the costs incurred in
building a plant up to the point where the plant is ready to produce, except land
and site-development costs. Care must be taken not to include costs that are not
depreciable.

Plant Overhead

Plant overhead is the cost of operating the services and facilities required by the
productive unit, as listed in Figure 2.3. Also included in this category are all the
fringe benefits for direct as well as for indirect labor. It is common practice to in-
clude the fringe benefits of direct labor in the overhead rather than in direct costs.

GENERAL COSTS

General costs are associated with management of a plant. Included within general
costs are administrative, marketing, financing, and research and development
costs. Figure 2.3 divides general costs into their various components. Administra-
tive costs vary from 3 to 6% of the production cost [1]. Use an average value of
4.5% in Table 2.1. Marketing costs include technical service, sales, advertising,
and product distribution, consisting of packaging and shipping. If a plant sells a
small quantity of a product to many customers, the plant will incur a higher cost
than if it sells larger volumes to a few customers. Marketing costs vary from 5 to
22% of the production cost. Table 2.1 contains an average value of 13.5%.
In the past, the interest rate on borrowed capital has increased considerably.
Usually, corporations and individuals will borrow capital when interest rates be-
come favorable. Because the interest rate may change rapidly over short time in-
tervals, Table 2.1 does not include a numerical value. The current interest rate can
be obtained from the financial section of newspapers or from banks.
Finally, process and product improvements are continuously being sought.
Thus, we must add the cost of research and development to the production cost,
which varies from 3.6 to 8% of the production cost. Use an average value of 5.8%
in Table 2.1.

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