1132 CHAPTER 19
The associated costs include the following elements:
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Any licensor’s paid up royalties
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Cost of land
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First inventory of chemicals and catalyst
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Cost of any additional utilities or offsite facilities incurred by the project
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Change in feed and product inventory
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Working capital
Capitalized construction period loan interest
Construction period. This is the period before year 0 during which the plant is con-
structed and commissioned. Assume this period is 3 years, this is designated as end of
year –2, –1, 0. During this period, the construction company will receive incremental
payments of the total capital cost of the plant with final payment at the end of year 0.
The construction cost may be paid from the company’s equity alone or from equity
and an agreed loan or entirely from a loan. In the case of a loan to satisfy this debt, the
payment of the loan interest commences in this period. The interest payment over this
period, however, is usually capitalized and paid over the economic life of the project.
Depreciation. Part of the cost to a project or venture which is considered as a de-
ductible from the gross profit for tax purposes is the depreciation of the plant value.
This is calculated over the PLANT LIFE as the plant capital cost divided by the plant
life. The term Plant Life is the predicted life of the facility before it has to be disman-
tled and sold for scrap. Usually this is set at 20 years and indeed all specifications
relating to engineering and design of the facilities will carry this requirement. So all
material and design criteria, such as corrosion allowances, associated with the plant
will meet this plant life parameter.
Discounted cash flow, definition of. The development of a DCF return on investment
is a combined effort between the Technical Disciplines and the company’s Finance
Specialist. The engineers provide the technical input to the work such as operating
costs, type of plants, construction schedules, and cost, yield and refinery fence product
prices, and the like. While the financial specialist provides the financial data based
on statutory and company policies, such as the form of depreciation, tax exemptions,
tax credits (if any), items forming part of the company’s financial strategy, etc. The
calculation itself is in two parts, which are:
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Calculation of Cash Flow
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Present Worth Calculation. (or any other method for calculating the Return on
Investment the Company may use)
Economic life. This is the number of years over which the project is expected to
yield the projected profit and pay for its installation. These are the number of years