Page 234 - Plant design and economics for chemical engineers

COST ESTlMATlON 205

Depreciation
Equipment, buildings, and other material objects comprising a manufacturing
plant require an initial investment which must be written off as a manufacturing
expense. In order to write off this cost, a decrease in value is assumed to occur
throughout the usual life of the material possessions. This decrease in value is
designated as depreciation.
Since depreciation rates are very important in determining the amount of
income tax, the Internal Revenue Service has established allowable depreciation
rates based on the probable useful life of various types of equipment and other
fixed items involved in manufacturing operations. While several alternative
methods may be used for determining the rate of depreciation, a straight-line
method is usually assumed for engineering projects. In applying this method, a
useful-life period and a salvage value at the end of the useful life are assumed,
with due consideration being given to possibilities of obsolescence and economic
changes. The difference between initial cost and the salvage value divided by the
total years of useful life gives the annual cost due to depreciation.
The annual depreciation rate for machinery and equipment ordinarily is
about 10 percent of the tied-capital investment, while buildings are usually
depreciated at an annual rate of about 3 percent of the initial cost.

Local Taxes
The magnitude of local property taxes depends on the particular locality of the
plant and the regional laws. Annual property taxes for plants in highly popu-
lated areas are ordinarily in the range of 2 to 4 percent of the fixed-capital
investment. In less populated areas, local property taxes are about 1 to 2
percent of the tied-capital investment.

Insurance
: Insurance rates depend on the type of process being carried out in the
i
manufacturing operation and on the extent of available protection facilities. On
an annual basis, these rates amount to about 1 percent of the fixed-capital
investment.

Annual costs for rented land and buildings amount to about 8 to 12 percent of
the value of the rented property.

PLANT OVJ3RHJZAJJ COSTS
The costs considered in the preceding sections are directly related with the
production operation. In addition, however, many other expenses are always