Page 183 - Plant design and economics for chemical engineers

COST ESTIMATION 157
be more than the unamortized value. This profit over the unamortized value
would have been taxable as long-term capital gain at 28 to 30 percent if it had
been held for nine months in 1977, one year from 1978 to mid 1984, and six
months from mid 1984 through 1987. Starting in 1988, the period for long-term
capital gain was one year and the tax rate on both short-term and long-term
capital gains was generally the same as that for ordinary income. Therefore, in
the example referred to above where a long-term capital gain would be realized
by selling equipment, the capital gain would have been fairly large if a fast
depreciation method had been used by the company. Prior to 1988, this gain
would probably have been taxed at a low rate (perhaps as low as 28 percent)
while the amount saved through fast depreciation allowance could have been at
an income-tax rate of nearly 50 percent. However, after 1987, new Federal tax
rules have been enacted which could make the capital-gains tax the same as the
income tax on ordinary income of about 34 percent.?
The preceding examples illustrate why the chemical engineer should
understand the effects of governmental regulations on costs. Each company has
its own methods for meeting these regulations, but changes in the laws and
alterations in the national and company economic situation require constant
surveillance if optimum cost conditions are to be maintained.

CAPITAL INVESTMENTS
Before an industrial plant can be put into operation, a large sum of money must
be supplied to purchase and install the necessary machinery and equipment.
Land and service facilities must be obtained, and the plant must be erected
complete with all piping, controls, and services. In addition, it is necessary to
have money available for the payment of expenses involved in the plant
operation.
The capital needed to supply the necessary manufacturing and plant
facilities is called the fixed-capital investment, while that necessary for the
operation of the plant is termed the working capital. The sum of the fixed-capital
investment and the working capital is known as the total capital investment. The
fixed-capital portion may be further subdivided into manufacturing jked-capital
investment and nonmanufacturing jked-capital investment.

Fixed-Capital Investment
Manufacturing fixed-capital investment represents the capital necessary for the
installed process equipment with all auxiliaries that are needed for complete
process operation. #Expenses for piping, instruments, insulation, foundations,
and site preparation are typical examples of costs included in the manufacturing
fixed-capital investment.

tFor a discussion of income-tax rates, see Chap. 8 (Taxes and Insurance).