Page 178 - Plant design and economics for chemical engineers

152 PLANT DESIGN AND ECONOMICS FOR CHEMICAL ENGINEERS

in-an-instant such as for the purchase of land with a lump-sum payment or the
provision of working capital as one lump sum at the start of the operation of the
completed plant. Fixed capital for equipment ideally can be considered as
in-an-instant for each piece of equipment although the payments, of course, can
be spread over the entire construction period when considering the fixed-capital
investment for a complete plant. Because income from sales and necessary
operating costs can occur on an irregular time basis, a constant reservoir of
working capital must be kept on hand continuously to draw from or add to as
needed.
The rectangular box in Fig. 6-1 represents the overall operations for the
complete project with working-capital funds moving in and out as needed but
maintaining a constant fund as available working capital. Cash flows into the
operations box as total dollars of income (si) from all sales while actual costs for
the operations, such as for raw materials and labor, are shown as outflow costs
cc,). These cash flows for income and operating expenses can be considered as
continuous and represent rates of flow at a given point in time using the same
time basis, such as dollars per day or dollars per year. Because depreciation
charges to allow eventual replacement of the equipment are in effect costs
which are paid back to the company capital sink, these charges are not included
in the costs for operations shown in Fig. 6-1. The difference between the income
(Si) and operating costs (c,) represents gross profits before depreciation or
income-tax charges (si - co) and is represented by the vertical line rising out of
the operations box.
Depreciation, of course, must be recognized as a cost before income-tax
charges are made and before net profits are reported to the stockholders.
Consequently, removal of depreciation in the cash-flow diagram as a charge
against profit is accomplished at the top of the tree diagram in Fig. 6-1 with the
depreciation charge (d) entering the cash-flow stream for return to the capital
sink. The resulting new profit of si - c, - d is taxable, and the income-tax
charge is shown as a cash-flow stream deducted at the top of the diagram. The
remainder, or net profit after taxes, is now clear profit which can be returned to
the capital sink, along with the depreciation charge, to be used for new
investments, dividends, or repayment of present investment as indicated by the
various trunks emanating from the capital source in Fig. 6-1.

Cumulative Cash Position
The cash flow diagram shown in Fig. 6-1 represents the steady-state situation
for cash flow with si, co, and d all based on the same time increment. Figure 6-2
is for the same type of cash flow for an industrial operation except that it
depicts the situation over a given period of time as the cumulative cash position.
The time period chosen is the estimated life period of the project, and the time
value of money is neglected.
In the situation depicted in Fig. 6-2, land value is included as part of the
total capital investment to show clearly the complete sequence of steps in the