The main feature for all these books is the solved problems. Step-by-step, authors walk readers through coming up with solutions to exercises in their topic of choice. Comprehensive explanations of the various topics covered in medical charting courses designed for nursing and allied health students Relevant examples and extensive end-of-chapter exercises motivate students to understand new material and reinforce acquired skills Supports the following courses: More than 40 million students have trusted Schaum'sto help them succeed in the classroom and on exams.
Schaum's is the key to faster learning and higher grades in every subject. Each Outline presents all the essential course information in an easy-to-follow, topic-by-topic format. You also get hundreds of examples, solved problems, and practice exercises to test your skills. This Schaum's Outline gives you: Use Schaum's to shorten your study time--and get your best test scores! Harry Potter Boxset Books by J. Mutually Exclusive Projects A set of projects are mutually exclusive if at most one of them may be accepted. It is thus a question of picking the single economically best project or of rejecting them all.
For mutually exclusive projects, the selection algorithm given below will always yield the maximum total return on the total amount invested. First, we shall need some terminology. W e shall say that project 1 dominates project 2 if Il 5 I2 and Rl r Rz. Clearly, a dominated project can never be the best of a mutually exclusive set.
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Step 2 Arrange the surviving projects in ascending order of investment break any investment-ties arbitrarily. Now eliminate any project that is dominated by another project; the candidates that remain will be in ascending order both of investment and of return. Step 4 From the surviving candidates, select as the standard that candidate which has the smallest investment. Step 5 Compute the incremental rate of return of the challenger that immediately succeeds the standard in the list of candidates.
Schaum's Outline of Medical Charting - 300 Review Questions + Answers (Electronic book text)
Step 7 Select the one surviving candidate: The six alternative machine sizes which are feasible are as given in Table Which machine should they buy? The application of steps 5 and 6 to the four surviving candidates is shown in Table ; step 7 gives Delux as the winner.
Consider the first comparison in Table Other Interrelationships Between Projects A project may be contingent upon some other project, in the sense that the acceptance or rejection of one may result in the corresponding acceptance or rejection of the other. For example, the purchase of a new computer storage disk may be contingent on the purchase of a new computer. Some projects may be joint, in that either both are accepted or both are rejected.
For instance, though they may be purchased separately, the tractor and trailer of a rig for highway hauling of steel are normally joint items. Some projects may be financially interdependent; i. Joint projects should be treated as a single, total project or investment. Contingent projects should be evaluated both jointly and separately. The basic investment should first be evaluated alone. The contingent items should then be brought in and their effect on the total investment evaluated.
Financial interdependences are usually resolved by considering the irreducibles, those factors to which a dollar value cannot be attached. The choice among them must be made on the basis of the intrinsic characteristics of the projects, the need for a diversified portfolio, and other irreducible factors. If such an assumption does not hold, and if the assets being compared have unequal service lives, fallacious results may be obtained. Here, C is the initial investment, A is the annual net cash inflow, and n is the service life of the asset.
The ROR method yields: Thus the initial investments being equal project B is actually the preferred alternative. The reinvestment fallacy can be avoided if the MARR is set at the reinvestment rate whose value, however, may be very difficult to predict and if future values based on this MARR are compared, as in Example 9. For other situations, a replacement method which assumes that each asset, at the end of its useful life, is replaced with a new asset identical in kind, may be more appropriate. This method will be employed in Chapter Which proposal s is are acceptable?
If the rule is: The board of directors of Wyandot is considering the three proposals whose cash flows a r e specified in Table Make an NPV calculation. The effect would depend on the amount of Wyandot's total invested capital. Since i i , the rate of return of proposal B, is Should proposal B be accepted or rejected under these circumstances?
We have seen that acceptance of proposal B is unprofitable per se. However, rejection could only prove more unprofitable unless Wyandot's profits are minuscule to begin with. Thus, proposal B should be accepted, as "the lesser of two evils. Step 2 Eliminate projects 2 and 4. Five alternative sizes are available, as given in Table Which size machine should they purchase? The selection algorithm Section 9.
Step 1 Eliminate Super Delux. Step 3 Eliminate Economy. Steps 4 through 6 Compare Super against Regular: Compare Delux against Regular: Step 7 Select Delux. Now only Regular and Delux survive step 1 of the algorithm. In this case, Delux and Super Delux are eliminated in step 1 of the algorithm, and Economy in step 3. Then, only Regular and Super remain; from Problem 9. Classify the investment decisions and proposals involved in this situation.
The peripheral equipment are all contingent projects-contingent on the purchase of the basic computer. The slow and fast printers are mutually exclusive, as are the high- and low-resolution videos. The do-nothing alternative continuing with the handicraft technology of five persons and the computer purchase alternative are mutually exclusive projects.
What peripherals should be purchased? Basic Computer plus Software Slow vs. Fast Printer Low- vs. Computer with Two Disk Drives Zero vs. The cash flows for two competing systems are given in Table ; both systems have a five-year life and zero salvage value. However, a consideration of the irreducibles e. At the end of five years, the net future worth of system 1 is: Evaluate these three proposals by the NPV method. Assuming that capital is not rationed, which projects should the company select and what is the total investment required?
Use the ROR method. Projects2,3, and4 should be selected. The choice has been narrowed to the five mutually exclusive alternatives whose cash flows are presented in Table C dominates B Section 9. Cash flows for the six available models are shown in Table Retirement and replacement decisions should always be based on economics rather than on whether or not the equipment has reached the end of its physical service life. A piece of equipment may have many years of service life remaining beyond the point at which it has become uneconomical to operate it.
Only current and future costs and investments are relevant.
When summed, these two cost functions often result in a cost function that is generally U-shaped. Ideally, the equipment should be retired at the lowest point on this total cost function. The machine has a year service life. When is the optimum time to retire the machine? The data show that the machine should be retired at the end of 7 years. The time interval for which the E U A C of an asset is smallest 7 years, for the machine of Example The concept of economic life may also furnish the basis for a replacement decision, particularly when service lives are not precisely known, when salvage values in each year are not known, or when the equipment obsolesces rapidly.
This machine is not readily salable and is assumed to have a zero salvage value. For the old machine, which is a strictly increasing function of j. At the end of that year, the analysis should be repeated and updated to take any new information into account. If there is no new information, and the above data are still valid, then at the end of next year the old machine should be replaced by the new one, because, a t that time, the EUAC for the old machine will be Thus, in most cases, a joint retirernentlreplacement decision is made. Thus, if in Example For the past four years the operating and maintenance costs of this pump have been: If the pump is retained, the expected future operating and maintenance costs will be: Its costs are as follows: In computing the EUAC curve of the old pump, the sunk costs of years 1 through 4 are disregarded.
Hence, the old pump should immediately be replaced by the new one. Even in the worst case, where the new pump is kept for only two years, its EUAC would still be lower than that for keeping the old pump for even one more year. The reader should note the oscillation of the EUAC curve for the new pump; the curve is not of the simple form shown in Fig. Of course, the unexpected advent of some new technology could alter these plans, just as the availability of the new pump altered the XYZ Company's original plans. If the actual market or current salvage value, PI, is known, It is evident from Substituting the numerical values from Example Short-Study-Period Method for Unequal Service Periods In the case nl n2, we might compare the costs of a series of machines 1 and a series of machines 2 over the least common multiple of nl and n2; this approach will be illustrated in Section However, if we do not want to assume a continual substitution of machines in kind, we may restrict the study period to the smallest of nl, n2, and the forecasting horizon.
Thus, only known data are included and tenuous estimates are ruled out. In this short-study-period approach, any "unused" values or costs are distributed back over the study period. Data are as shown in Table The executives at the ABC Company do not feel that any estimates beyond 10 years are accurate for decision making purposes. The length of the study period is the minimum of 15, 10, and 10 years; i.
All other data remain the same. Using a five-year study period, we obtain for the current machine: In this case, using the shorter study period did not reduce the amount of discrimination between the alternatives. In most businesses, a piece of equipment will be replaced with a like one at the end of its useful life, in order for the firm to continue operating. When this is the case, the cash flows of the unequal-lived assets should be estimated into the future until the least common multiple of their individual useful lives has been reached. The EUAS method can then be readily applied.
Machine B Here, P is the initial outlay, A is the annual net cash flow, and n is the useful life of the machine. It is assumed that when either machine is at the end of its life, a similar replacement machine will be purchased. The cash flows for this fifteen-year period are displayed in Table Note the replacements of machine A by exact replicas at the end of five and ten years; and of machine B, at the end of three, six, nine, and twelve years.
Both machines are also replaced at the end of fifteen years, but those costs belong to the next study period. It is understood that if Mr. Jones fails to make a payment, the car will be repossessed by the loan company and, though Mr. Jones will owe nothing, he will lose all money already paid. He can also pay the outstanding balance of the loan at any time.
Twelve months after the transaction, Mr. Thanks to a good deal, Mr. Jones has this amount and is going to pay off the loan. At this point, Mr. Jones is wrong in her analysis. While it is true that they have invested a large amount of money so far, it is also true that this money will not be recovered, no matter what decision is taken. The sole question is whether Mr. Should the new machine be acquired? Assume that the used machine is unique, but that new machines are always available.
For the used machine: At that time, the new machine should be bought and kept for four years its economic life. The stand-by machine should not be purchased. Compare present-worth costs over the next 8 years. The study period is limited by the current equipment and the forecast horizon to 8 years.
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The machine has no present or future salvage value. It follows that the best course of action is to overhaul the current equipment and keep it for four years. Then provided an analysis indicates that things remain as expected , buy the new equipment and keep it for seven years. Analyze the situation, if the MARR is There are 3 possible alternatives: We calculate the present-worth costs for a year study period.
The conclusion is that plan 1 is best, with plan 3 being slightly superior to plan 2.
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The present worth of the decision is costs counted negative: Note that this is a conservative criterion, since it tends to preserve the existing situation when the challenger's edge consists in savings in the distant future, the estimation of which must be unreliable. The salvage value at the end of the sixth year is assumed to be zero.
After four years, its salvage value will be zero. Thus, the old machine should be kept for four more years. Tabulate the EUAC of the challenger and infer its economic life. Both machines are expected to have economic lives of 6 years from this date. Chapter 11 Depreciation and Taxes The cost, including any delivery or installation charges, is treated as a prepayment for future services; and depreciation consists in amortizing this prepayment over the period of use of the asset. The annual depreciation is the amount of the asset's cost that is charged off in a given year; the total of the annual depreciations to date is the accumulated depreciation.
The salvage value or scrap value of an asset is the estimated proceeds that will be realized from its sale or disposition when it is retired. Under federal tax law, the net salvage value is either zero or the salvage value minus the cost of removing the asset from the premises, whichever is greater.
The adjusted cost of an asset is its original cost less its net salvage value. The useful life, over which an asset is depreciated, may not be the same as its service life, physical life, economic life, market life, etc. Depreciable And Nondepreciable Assets The current tax laws permit only assets with a useful life or more than one year to be depreciated. Depreciation is allowed only for assets used in a business, trade or profession, or held for the production of income. Personal property, such as a family residence or automobile used for pleasure, is not depreciable; however, that portion of an automobile or other property which is used in business may be depreciable.
Depreciation is not permitted on land or on its upkeep , even when it is used for business purposes or income generation. However, buildings and equipment which occupy that land are depreciable if used in a business or to generate income. Inventories of goods used in a business, other stock in trade, and short-term assets that will be consumed during a normal year's operation of the business are not depreciable.
Computation Methods The four traditional methods of computing an asset's depreciation from its cost, useful life, and salvage value will be presented in Sections A newer method is treated in Section Determine the straight-line depreciation schedule for this machine. Thus, the declining-balance method results in a larger share of the depreciation being charged during the earlier years of the asset's life.
In contrast to the straight-line method, it is an accelerated depreciation method. Also unlike the straight-line method, the declining-balance method does not automatically take account of the net salvage value of the asset. Thus, according to the first equation Salvage value is included in the method by fiat: Federal tax law forbids the application of the method past the point at which ADDk becomes greater than the adjusted cost of the asset-which is precisely the point at which DBk becomes smaller than the net salvage value.
In either case, construct the depreciation schedule by applying The excess of the final book value over the net salvage value, will presumably be deducted from the firm's income as a capital loss, upon sale of the machine. Entries for years 1 through 7 are computed in normal fashion. The denominator of this fraction is the total of the digits representing the years of the estimated useful life of the asset; the numerator changes each year, so as to represent the number of years of useful asset life remaining at the start of that year.
Currently, the tax laws prohibit the sum-of-years'-digits method from being used on any property for which the double- declining-balance method is prohibited. Repeated application of Otherwise, the firm could take a total depreciation allowance in excess of the current asset's adjusted cost, and this is not allowed. By repeated application of When there are many like items, a group depreciation becomes convenient, whereby a single annual depreciation figure is computed for the ensemble, using the sum of the items' original costs and the sum of their salvage values.
The group's useful life is the average of the lives of all the items. Any of the unit depreciation methods can be used to compute the group depreciation. Compute the annual group depreciation charge, using the straight-line method. First, an annual depreciation charge is calculated for each life group by use of a group depreciation method. The sum of these charges then gives the composite annual depreciation. A composite life, n, can now be defined as the total of all adjusted costs, divided by the composite depreciation amount.
Applying the straight-line method to each life group, which in this case consists of a single item, we obtain: The composite depreciation rate or useful life is restricted by guidelines issued by the U. Variations from these guidelines must be individually approved by the Internal Revenue Service. Two incentives have been used, either of which may be enacted into law when the federal government feels stimuli are needed, and withdrawn when it feels stimuli are not needed.
The additional first-year depreciation provision allows an additional percentage depreciation deduction during the year in which the asset was purchased. The percentage is based on the original cost of the asset, and is in addition to any regular depreciation. The investment tax credit provision allows a business to reduce its annual income tax by some stated percentage of the original cost of any assets purchased during that year. The equipment has a useful life of 10 years, zero salvage value, and is depreciated by the straight-line method.
Compute the total first-year depreciation, depreciation for other years, and the first-year investment tax credit for the SSG Company. In addition, the SSG Company can reduce this year's tax bill by Figure makes manifest what we have said about the four traditional depreciation schemes: This holds true in general. Unincorporated businesses are generally taxed at the individual tax rate s of the owner s. Gross Receipts and Sales Less: Depreciation Net Taxable Income Capital gains losses occur when an asset is sold for more less than its book value. Long-term capital gains and losses are aggregated separately from short-term capital gains and losses.
If the long-term aggregate is negative a capital loss , this loss may be carried forward and spread arbitrarily over the next five years, as an offset to any capital gains during those years. If the short-term aggregate is positive a capital gain , it is taxed as regular income, at tr; if it is negative a capital loss , it is treated like a long-term capital loss. Thus, by lowering net income, depreciation lowers income taxes. Specifically, if the normal tax rate is t,, then the depreciation tax shield in year j, or amount of taxes saved in that year because depreciation is taken, is where Dj is the depreciation charge for that year.
Over the life of an asset, the total amount of depreciation tax shield will be the same under the straight-line, sum-of-years'-digits, and sinking-fund methods since each of these methods charges off the entire adjusted cost of the asset. The declining-balance method will often yield a slightly smaller depreciation tax shield over the life of the asset, which, however, will be more or less compensated for by the capital loss suffered when the asset is sold at a salvage value below its book value.
Thus, all four methods will give approximately the same total tax shield over the useful life of the asset. However, because of the time value of money, accelerated depreciation methods declining-balance and sum-of-years'-digits will yield a larger present-worth net income after taxes. This is because the accelerated methods provide a larger tax shield in the earlier years of the asset's life; and the earlier the savings, the less they are discounted in calculating the present worth.
Compare the effects of the four depreciation methods from a Example However, on a present-worth basis we have: It is mandatory for most tangible assets placed in service after December 31, Its main features are that salvage value is not relevant and that the useful life of the asset is limited to 3, 5, 10, or 15 years. The IRS publishes depreciation scales for each class life. This class life includes assets with a useful life of 4 years or less, such as automobiles, small trucks, and some manufacturing tools. Items used in research and experimentation are also included in this category.
Five-year property includes office furniture, some storage facilities, and, in general, all property that is not three-, ten-, or fifteen-year. Ten-year property includes assets with a useful life of less than Assets with a useful life of more than There is one rate structure for low-income housing and another for all other fifteen-year property. Percent- ages for the fifteen-year asset also depend on the month the property was placed in service; e. Year I 1 2 3 4 5 16 Example The calculations for this ten-year asset are given in Table Table Depreciation Depreciation Accumulated Book.
Compare the effect of the ACRS using Table with those of the four traditional methods, as found in Example The comparison made in Example However, had the useful life of the asset been 12 years, the ACRS would have been best the asset would still be ten-year property, but the traditional methods would have to be applied over the whole 12 years. For intangible assets franchises, designs, drawings, copyrights, patterns, subscription lists, customer lists, etc. As can be seen from Fig. However, this combination may result in an accumulated depreciation at the end of the useful life of the asset which exceeds the asset's adjusted cost-a violation of tax regulations.
Moreover, the current tax laws specifically prohibit certain switches in depreciation method without the prior approval of the Internal Revenue Service. However, it does influence the amount of income tax paid, which is a negative cash flow. For year j, let us write: We have seen that depreciation can cause the before-tax and after-tax pictures to differ. Deduction of interest paid on borrowed money will have a similar effect. Perhaps most significant is the fact that businesses are judged by analysts and investors on the basis of their after-tax performance. What is the ROR on the pump?
We make three different analyses, which give three different results. This pump also has a year life and zero salvage value; however, a special provision in the tax laws permits depreciation of this pump over a 5-year period. Which pump should the company buy? For the Superpump, we make two analyses: Comparing the above results with those of Example In such cases, the after-tax picture is always the correct one.
Assume that the IRS classifies the asset as five-year property. Note the benefit to the taxpayer when the asset's cost is depreciated over a period shorter than the useful life. Using composite depreciation, compute the annual straight-line depreciation charge and the composite life for this collection of cars. This loan is to be repaid at the end of the seventh year, but interest is due on the principal at the end of each year. Assume that the current machine is fully depreciated. Assume that salvage values are book values and that overhaul expenditures are depreciable.
Now the best action is to overhaul the old machine. Using straight-line depreciation, find the book value of the camera at the end of 8 years. Note that houses cannot be depreciated during the years used as the owner's personal residence. Again, straight-line depreciation would be used. NO salvage value is expected. The current truck is still depreciated by the straight-line method. Our frame of reference will be the presentation of a feasibility analysis t o a lending institution. Discuss the need for such an assumption and give examples of marginal projects.
A project is "marginal" if it will not significantly alter the economic environment. A dry-cleaner outlet in a major shopping center, a small die-casting factory in an industrial park, a new boutique in a fashion mall, are typical examples. Although undeniably important to their promoters, these ventures will not effect major changes in the economic patterns of the communities where they are to be implemented. For such ventures, clear-cut decisions may be derived from an engineering economic analysis.
By contrast, projects which represent a structural investment for the community which would, for example, significantly alter the unemployment level or the gross regional product would need in-depth study in every aspect and a thorough sensitivity analysis of each assumption underlying the feasibility study. Most likely, final decisions would be largely political in nature. Two such nonmarginal projects were Walt Disney World, which changed central Florida from a depressed rural area to a tourist capital, and the Trans-Alaska Oil Pipeline. The sections that follow will discuss, one at a time, the main components of the feasibility study.
A brief summary of the project, covering the nature of the venture, location, expected site, life, overall capital costs, financing, and return on investment 2. A description of the promoting individuals o r institution: The lender will charge interest; nevertheless, he is risking his money, and before committing himself, understandably wants to gauge the risk as accurately as possible. Complete details about the board and executive officers of the promoting company, any partnerships or relationships to other companies, insurance available, and-most important-a history of past and current projects, are all commonly required.
For industries currently in operation, data about their capacity, production level, productivity indicators, sales, labor force, salary structure, overhead, inventory turnover ratio, and other items which may include some seemingly unrelated to the project itself may be in order. Sometimes the lender requires an organizational chart, as well as details about production planning and control, quality control, labor relations, and financial situation end of year balances for the last few years. An analysis should be made of: The product-description, brand or name, quality standards to be met, characteristics, and utilization.
Subproducts if any -description, utilization if it is not going to be marketed. The market--estimated demand for the final product. If the product can serve as raw material or intermediate product for some other article e. An analysis of complementary and competitive products, as well as their current and expected availabilities, should also be included.
What should be included in it, and what should be its ultimate objective? Show a typical summary output of this phase of the analysis. A number of otherwise carefully planned ventures have failed because of an unjustified belief that the market will buy whatever can be produced. An excessive capacity is then built to exploit the good idea-so good, in fact, that it attracts immediate competition, and the long-term market share turns out to be lower than predicted.
A marketing study should provide information about: It should give a quantification and causes of any unmet demand. An analysis of main producers is a must: Also, an analysis of main consumers: The goal of the market study is to provide the basis for a forecast of demand for the product in the first say five years after the operations start up. Not just a single number, but a range of values should be sought. A pessimistic, an optimistic, and a most probable value would be invaluable in a sensitivity analysis, provided the technical bases of the forecast are sound.
A description of the techniques used in forecasting, as well as of the assumptions and data bases used in the analysis, should be included in an appendix to the report. Figure suggests the summary format. Year 1 Year 2 Year 3 units units units 1. Estimate of Regional Production 2. Describe what such an analysis would yield. Give an example of obvious need for this type of study. A raw materials analysis should include a study of prices in the national and international markets , with considerations of transportation, insurance, tariffs, quality and delivery reliability of provider included for the latter and normal commercialization channels.
If the project size is large, its potential effect on the raw materials market should be also considered. The availability of alternative providers, or even of alternative materials, may also turn out to be an important factor. An extreme instance of the necessity for raw materials analysis was provided by the oil crisis of the s.
A statement of the potential consequences of this selection, a comparison with the "normal" competitor, as well as with the "state of the art" competitor, are desirable. Opinions from outside consultants, if available, regarding the selection of technology are also recommended. Comment on the effect of technology, size, start-up, and major equipment. Illustrate a typical summary output of this phase of the analysis. The project engineering section of the economic feasibility report should include a thorough description of: No detail plans are needed; a flow diagram with durations of the stages, capacities, yields, and material and energy balances is normally sufficient for most manufacturing industries.
The planned production capacities must be forecast, indicating expected dates to attain them. Operating conditions shifts per day, days per year must be indicated. The relationship between this production plan and the market and raw materials studies should be included. An analysis of the market- share penetration must be provided. A justification of size from the point of view of the selected technology, financing limitations, plant location, seasonality factors, market restrictions, etc.
Analyses of size versus production costs, break-even point, resources needed to compensate for operating deficits over the start-up period, and impact of unforeseen slumps in sales are also required. A note should be made if future expansions to adapt to enlarged market share and product acceptance are envisioned. This extremely important factor is frequently lost in the shuffle.
It is evident that remoteness of a location influences the pool of manpower available for the project, as well as the level of investment needed to provide housing, transportation, energy, water, sewage and tailings treatment, etc. These same factors should be considered for any location. Special consideration should be given to potential benefits related to the project's location, such as tax breaks, availability of cheap transportation, surrounding market, population, local regulations controlling noise and pollution, etc. The main factors influencing the selection of the project site should be discussed in detail, and an analysis of potential alternative sites, if any, should also be included.
Physical means of production. The plant site must be specified total and build surfaces. Buildings required must also be detailed. Areas should be classified as direct production, ancillary facilities, administrative, warehouses, etc. If some of the buildings are already available and require little renovation, that should be noted. It is also very important to specify any earth moving, roads, docks, railroad connections, fences, etc. Note that electric substations, water treatment plant, and the like, are normally considered auxiliary facilities see below.
Separate lists are usually made of domestic and imported equipment. The units are listed in order of decreasing value, until the total value of the two lists represents 60 to 70 percent of the entire capital investment. Numbers of the various units, their technical characteristics, theoretical capacities, prices FOB; for imported equipment, extra charges such as transportation, in-transit insurance, tariffs, etc.
Prices quoted should reflect actual market values, if at all possible. Pro forma invoices are of great help in documenting this phase of the analysis. Auxiliary facilities for direct production -electric energy, gas, fuel, compressed air, water treatment plant, internal communications, internal transportation, sewage, tailings treatment plant, etc. A global estimate of capital expenditures as a function of plant size, if applicable should also be included.
These include plant security, medical facilities, dining room, and other personnel-related facilities. A global estimate of capital expenditures as a function of plant size, if applicable is required. Raw materials and supplies. For each production level, an estimate must be made of quantity, quality requirements, annual consumption, availability, unit price, and consumption per unit of product.
For electric energy, it is customary to indicate installed power, processes at constant and at variable load, and maximum illumination-related load. An estimate of size and value must be given for all raw materials and for in-production or finished-product inventories expected for the process. Transportationexpenses-forraw materials, fuels, and intermediate and finished products. If contracts are to be awarded to third parties, their availability and maximum requirements at start-up and in the long run , as well as prices, must be included.
Estimate of personnel required at different levels in each unit, including labor, direct supervisory personnel, indirect supervisory personnel, service people labs, maintenance, security , ad- ministration, marketing, and management. Detail wage and salary structures, as well as fringe benefit charges.
Any contractual obligations should also be included. Any need for specially trained personnel, training facilities, start-up consultants, etc. The project engineering phase of the analysis should produce a summary bar diagram describing target completion date for all major project components, as well as a plan for project implementation until "normal" operation is achieved.
Such a bar chart is illustrated in Fig. From -- to -- From -- to -- From -- to -- period -2 period -1 period The investment costs include all expenditures related to the implementation of the project, from its conception until start-up. A distinction is usually made between depreciable and nondepreciable investment costs. Depreciable, except for land purchasing. These include costs of: Usually only buildings and main equipment and facilities are estimated accurately.
Spare parts, furniture, etc. This is theamount of money required to start up the project and keep it working. The operating capital costs usually increase until the project reaches the level of normal operation; then they stay on a plateau throughout the project's lifetime, and are recovered in the final year of operation. They cannot be depreciated. The analysis of first cost should produce a table such as Table for each alternative size of project considered.
Keep in mind that first costs, being incurred in year 0, are not discounted. Thus, too-large estimates of investment costs can kill a project's feasibility a lot faster than any overestimation of operating expenses. Table 1 2 2 Item Year 1 Year2 The most common error in this phase of the analysis is to assume that all the production will be sold.
Sometimes market conditions will not permit this to happen; or the product quality may fluctuate, and sizable quantities may have to be recycled or scrapped. Another common error, from a company point of view, is to forget that revenue consists only in actual incremental receipts.
For example, if an ice cream distributor is evaluating a new line of products, actual net receipts attributable to this product is given by the expected sales less the loss in sales of current products because of customers' shifting preferences. In the extreme case, the public may not be spending more money for the company's products although the new product is experiencing brisk sales ; rather, they have ceased buying some of the old products and are using that money to buy the new one!