Page 23 - Plant design and economics for chemical engineers

6 PLANT DESIGN AND ECONOMICS FOR CHEMICAL ENGINEERS

Time value of money has been integrated into investment-evaluation
systems by means of compound-interest relationships. Dollars, at different times,
are given different degrees of importance by means of compounding or dis-
counting at some preselected compound-interest rate. For any assumed interest
value of money, a known amount at any one time can be converted to an
equivalent but different amount at a different time. As time passes, money can
be invested to increase at the interest rate. If the time when money is needed
for investment is in the future, the present value of that investment can be
calculated by discounting from the time of investment back to the present at the
assumed interest rate.
Expenses, as outlined in Chap. 8, for various types of taxes and insurance
can materially affect the economic situation for any industrial process. Because
modern taxes may amount to a major portion of a manufacturing firm’s net
earnings, it is essential that the chemical engineer be conversant with the
fundamentals of taxation. For example, income taxes apply differently to pro-
jects with different proportions of fixed and working capital. Profitability,
therefore, should be based on income after taxes. Insurance costs, on the other
hand, are normally only a small part of the total operational expenditure of an
industrial enterprise; however, before any operation can be carried out on a
sound economic basis, it is necessary to determine the insurance requirements
to provide adequate coverage against unpredictable emergencies or develop-
ments.
Since all physical assets of an industrial facility decrease in value with age,
it is normal practice to make periodic charges against earnings so as to
distribute the first cost of the facility over its expected service life. This
depreciation expense as detailed in Chap. 9, unlike most other expenses, entails
no current outlay of cash. Thus, in a given accounting period, a firm has
available, in addition to the net profit, additional funds corresponding to the
depreciation expense. This cash is capital recovery, a partial regeneration of the
first cost of the physical assets.
Income-tax laws permit recovery of funds by two accelerated depreciation
schedules as well as by straight-line methods. Since cash-flow timing is affected,
choice of depreciation method affects profitability significantly. Depending on
the ratio of depreciable to nondepreciable assets involved, two projects which
look equivalent before taxes, or rank in one order, may rank entirely differently
when considered after taxes. Though cash costs and sales values may be equal
on two projects, their reported net incomes for tax purposes may be different,
and one will show a greater net profit than the other.

OPTIMUM DESIGN
In almost every case encountered by a chemical engineer, there are several
alternative methods which can be used for any given process or operation. For
example, formaldehyde can be produced by catalytic dehydrogenation of
t