‘f 106 PFC + = 8000 /(1.06)« $379629 oe “no oor sumo many (7 andhave wo aaa: ak: rom By (48) Grn Sant 007 meget F=Wntooxaaray = 12197 4.23 Interest Rates Changing with Tine It we have an investment over «perc of yar an the ine eae at clean fot compound inet 9 en DY cljary-mesneroaea ] un 143) TIME BASIS FOR COMPOUND INTEREST CALCULATIONS nin pice gt of tine se xsi ere {minnie te ted wih ene tah 0 OP 2 a eh ore osm ao Sa econ pet oem ee a aa ey man aeatorsThe aa a a ig pe The eta de ale (ees 7s From) rea 9) ra 88 a en(1 4000/29" 1-068 6c % pad ‘he fective anal inteet ates rater than he nominal ann ae ‘Sa tr ve nest wl etme eae ena ok ‘onpounsing evs per year teense or the Lining case he ee ‘ompourde cio ee 43.2 Continuously Compounded Interest or the case of contin continously compounded interest, we must look at what ha wilh sreea areeereee PAE EE ROSIE Seton 3 losing nancial Pets seg teeta (+) sntotg itt i se nd tha for centinsus compounding 5 410 ers he i ie a inet ra eo Prom (40) org, = 0 ween x ean ey coarser with Esl 8 tb comparing corey awa nad oe uty eps In comparing ateratvs te effective anna ate and nt he rial al tive of otret mst eed 44 CASH FLOW DIAGRAMS _Dipeirr CAD, Sacha cg tfes eial p tipto this point, we have cosine ony an vesient made at asia pot it pte hi tre ad we fad erate he fue af it at en ated tersactone inlee severe veins 2/0 He ae rs made st diferent ines or more compl t Pe ea keep cea ack ofthe amount and ne of ah Sees se on ic te wrens nile Co ; resentation of ea ives 0 is sed oot ia CTT tech hw diagram for Example 61 Bebentrementsfthe scree” CFD. Se ea ca ean were made peril Tes a earns me he eee te er Fre 42 hws oe ee ET were recive at he end fhe rs son, and SL 2128 ne ih an cert eat, $200 and 8X eed Jee we tensconin the forh and ih 3 Sana cpr by vera tine wits eth proportion! © theca tine taencbon, Te sgncoventon wes a oworar-poining Cater Esiring ean Ans pe 2 ta bana Rant Dc Fw strom wench owe tad and an up pi ao hn nt io spread peietng arrow representing ne eet ins We eon ee mae ear tre ce tm on ce ie Heo i Septem ine Net gerne roar au ne "Tecan ow ape Sot in Figure 42 canbe present in implied forma sg ling mpc re 1. Theyaiss otshown 2 Unto monsarytnecon arent given for every even In ado tothe scat CFD deact above we in show the sein ‘pan eu” CFD. The peo CD rel i wad ot at ee fac pad. 4h Diet Cah ow Diagram The ate CF prove ce, wambigon pcr df he pe ond ting facta og nag te We os pees Re vad mange ade ave me tte at pet dhigany cain yousech ach ow agenExample 41 ‘Youborrow $10,000 froma bank to buy anew car and agree to make 36 equal114 Section 1 Engineering Economic Analysis of Chemical Processes Chapter 4 Engineering Economic Analysis t sett tt F nana Acutttr oun PT foran Annuity Transaction Discount Factor for X/Y = (X/Y, i,m) =f 4.5.1 Annuities—A Uniform Series of Cash Transactions encounter pr lue A, taking lue, P, by multiplying by the P/E, from Eq, (4.6), as shown below. Discount factor for P/A = (P/A, in) = F/A i P/F.) Figure 43 To avoid the need todo a yearby yea a ple 413, we will develop en equation ops Substituting for F/A and P/F gives: Q+or-1_ 1 The ne period nis found ing each of the investments forward to time as wedi in romp £13 F,= AQ +9" + AC PIA= FAD HIM oe This equation is a geometric series of . = [=I] For our case, we have: a= 4; r= 1+ i;1=n. Therefore, ma, a, 2... a with sum a+ 1 1 = P/A,in) Table 4.1 lists the most frequently used discount factors in this text with their common names and corresponding form s, Table 4.1. Commonly Used Factors for Cash Flow Diagram Calculations Conversion Symbol ‘Common Name Eq. No. yment Compound Amount 3) 4,5.2. Discount Factors We introduce the shorthand note Rin) Single Payment Present Worth Factor 46 for the future value of an annuity starting with Eq. (4.11) We shorten the tem F, by simply calling it F and then by divide AtoF —7AAa) Uniform Series Compound Amount am ing through by A, we get Factor, Future Worth of Annuity FioA —(WRin) Sinking Fund Factor aaa F/A = [0 +9" 1 = fim) ‘This ratio of F/A is a function of i and n, that is, ig) Te can be evaluated PtoA (Ain) Capital Recovery Factor 9 when both the interest rate, i and the ime duration, are aor The ve of flinyis referred to as a discount factor. If either A or Fis the ‘unknown can be evaluated, In general terms, a discount factor is designated as AtoP —(P/A,in) Uniform Series Present Worth Factor, a1 Present Worth of Anauitybank charging for this loan? sreed to make 36 manthly payments of118 46 Chapter 4 Engineering Economic Analysis the use of Eq. (4.15) to estimate the inflation rate inte ing examp! Example 418 What yearly interast rate was used in th b. How ve costs associated with bulling chemical 8 21980 through 1986 192 the Chemical Engineering Plant C (CEPCI ace INFLATION Asa result of nation, a dolar st aside (not invested) wil and services in the ftare than the same dolar would today, In Chapters? od 3 we have seen that we can track the inlation of equipment abort fuel costs by the use of cost indexes. We sometimes wish to express these trends in terms of sates of ination (f). This en be dane using the sst indexes ae flows: : a nee We ow write Eq (417 in tems of an CECI im the effect of inflation, By comparing Ea. (4,120 Section 1 Engineering Economic Analysis of Chemi Foetal fs : Tf ise ce For small values off <0.05, we can approximate Eq, (4.19 by m-p G aoe ae Example 4.19 a In this example, we consider thee set aside for retirement in Exampl available atthe time of retirement in 40 years t 507 468 for twenty years, lation r ‘& How does Part a compare with the total annuity payments of $5,000 a Using Eq, (4.16) for f=0.02, n= 40, and F= $774,000 Chapter 4 Engineering Economic Analysis 1a 4,7 DEPRECIATION OF CAPITAL INVESTMENT When we talk about the depreciation of capital inv distinguish between what can and cannot be depreci Investment = Fixed Capital + Working Capital (4.21) ted with building the plant ond was cov: (or grass roots cos). The only part of cated is the land, which usually lired to startup the plant andEngineering Ec nalysis of Chemical Processes Since the working capital is fully recoverable, it cannot be depreciated. Typi values for the working capital are between 15% and 20% of the fixed capital in- ‘vestment. 4.1.2 Different Types of Depreciation First of all, we will introduce and define terms that we will use to evaluate depre- ation: Fixed Capital Investment, FCI,: This represents the fixed capital land and represents the dé Salvage Value, S: This represents the fixed capi Jess the value of the land, evaluated at the end focess equipment currently has a deprecat “B55 years (see Problem 18). for Depreciation: The total amount ‘Sum of the Years Di thod, SOYD: The formula, culating the deprecia oe ' en below (23) ‘The method gets its name from the denominator of Eq. (4.23), whichis equal number of years over which the depreciation is allowed 14243. 4n= (n\n + 1/2 for example, ifn =7, then the denominator equals 2 Double Declining Balance Depreciation Method, DDB: The for calculating the depreciation allowan ‘We cannot, however, depreciate more than the value of D. To avoid this roblem, we reduce the final year’s depreciation to obtain this limiting Pr ue. ‘The following example illustrates the use of each of the above formulas to caleulate the yearly depreciation allowances. of land) ofa new project is estimated tobe vi $100 milion. Assuming e 7-year sing:Fr BS 124 Section 1 Engineering Economic Analysis of Chemical Processes Table £4.20 Calculations and Results for Example 4.20: The Depreci E 20: tio of Capital Investment for a New Chemical Plant (all values in $10"), omen Year Book Value s | (k) 4, ager ao Fct, — Sd2%* 0 (15 ~ 0) = 15 GS-1), +1 -10s-1 1 Spon. Crtus-0_ 45 O09). 429 (15 - 429) = 10-71 3-1 7+1-205~1 2 Span © CHI BUS) 39, QOD — 306 (10.71 ~ 306) = 7465 (+ 1-315-1) _ (7.5) | . a =25 OCS) 219 (765 - 219) = 546 (+ 1-9 05-1) _ (2)(5.46) = as ah 20 B49) 156 (5.46 ~ 1.56) = 3.90 @+1-905-1) | 23.90) _ n+ 28 =15 7 ==111 (3.90 — 1.11) = 2.79 @+1-905-9 _ eae eee eee 28° 10 7 = 0.80 (2.79 — 0.80) = 1.99 CAWSEY 95 1.99-1.0= 0.99 (1.99 - 0.99) = 4 14.0 14.0 1.0 = Salvage Value” =[7+1]72=28 : | jon allowance in the final year of the double declining ba final book value equal to the salvage vale nce method is adjusted to give a For SOYD depreciation, using Eq. (4.23), dy = (7 + 1 ~ 2) ($150 x 10° ~ $10 x 10°)/28 = $30 x 10" For double declining balance depreciation, using Eq. (4.24), dy = (2/7) ($150 x 10° - $42.86 x 10") = $30.6 x 10°tt: eee & Fe 26 Table £4.20 Calculations and Re: ‘of Capital Investment for a New For SOYD depreciation, using Bg (623), dya71-2)(S150% 10° —$10109/28=126 Section 1 Engineering Economic Anal 3. The straight line method represents the slowest depreciation in the early years. We characterize the SOYD and the DDB methods as examples of accelerated depreciation schemes (relative to the straight will be shown in Section 48, that"accelerated—depretiation has significant efonomic advantages over the straightTine method. However, we must remember that; We can only depreciate capital investment in accordance with current tax regulations, 4.8 TAXATION, CASH FLOW, AND PROFIT Taxation has a direct impact on the profits realized from building and operating a plant. Tax regulations are complex and companies have tax accountants and at torneys to assure co we are considering i count for the effect in change frequently, and for the purposes of t ed taxation rate of 30%, unless specified differen Taxation Rate Table 4.2 provides the definition of important terms and equations used to evaluate the cash flow and the profits produced from a project. We use the equations from Table 4.2 in the next example. xxes, Taxation rates for compai + and Profits! in Terms of Revenue (A), Table 4.2 Evaluation of Cash Flows? and Prof : Cost of Manufacturing (COM), Depreciation (d), and Tax Rate (t) Description Formula = Manufacturing Costs + Depreciation = COM, + 4 = (Revenue ~ Expenses)(Tax Rate) = Revenue ~ Expenses ~ Income Tax = Net Profit + Deprec Manufacture Excluding Depreciation J a@ Depreciation: Depends upon method | used [x Revere from Sales SL SOYD DDB ProftaterTx -(175—=70—S—«LA Cash Flow afterTax 375 420.4437 ‘The calculations for years 1 through 10 are plotted in Figure E421. From this plot, ‘we can see that the ash flow atthe start ofthe project is greatest for the DDB method and lowest forthe SL method. er the 10-year period are $217 and $357128, ‘Section 1 Engineering Economic Analysis of Chemical Processes Year Ate Sar-Up of Plat £4.21 Comparison «Depron Schedles om Example 2 Chapter 4 Eng 19 4.9 SUMMARY the evaluation of profit inciples and concepts directly end!). The bank, on the other hand, will charge me a nominal interest rate of 12% pa. compounded monthly. a. If Lintend to repay the loan in a lump sum at the end of one year, from ‘whom should I borrow? ‘a, 11.0% pa (nominal rate) compounded continuously,