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Using an improved method of capitalized cost to evaluate alternatives

8/14/2017 11:22:08 AM

The method of capitalized cost is often used to determine the most desirable economic alternative. In its most simplified form, it consists of the original cost of an alternative plus the capital cost of a perpetuity needed to generate funds to replace the item at known intervals of useful-life. It is expressed in Eq. 1.     

(1)        C=C0 + CR/(ert-1)                                            

Here, the continuous yearly interest rate, r is used. Continuous interest more closely simulates the nature of most of the chemical industry—continuous operation, continuous production, and continuous use of feed. The relationship between continuous yearly interest and discrete yearly interest is expressed in Eq. 2.

(2)        r=ln (1+i)                                                     

Depending upon the state of the economy and the policies of the Federal Reserve, r ranges from about 0.03 to about 0.12. The capitalized cost is computed for each alternative, with the minimum value selected. The use of Eq. 1 has several limitations: it does not account for alternatives having differences in scheduled maintenance, energy, taxes, labor, decontamination of equipment at the end of its life and productivity.

One can correct these deficiencies by adding more perpetuities to Eq. 1. The result is expressed in Eq. 3.

(3)        C= C0 +CR/(ert-1) + M/(er-1) + E\r +T/(er-1) +L\r + D\(ert -1)- Q\r                      

The costs of energy, labor and the productivity credit are treated as occurring continuously. The cost of scheduled maintenance and taxes are paid at intervals of one year. The charge for decontamination occurs at the end of the life of the equipment that is being replaced. Note that the productivity credit has a minus sign because improvements in productivity reduce the overall capitalized cost.

The competent engineering economic analyst will recognize that some of the terms of Eq. 3 may be insignificant or zero and can be deleted. Furthermore, some of the terms of Eq. 3 can be changed to accommodate local conditions. For example, perhaps taxes and scheduled maintenance are encountered at intervals other than one year. Finally, there may be other instances where unusual costs are going to occur and more terms needed to be added to Eq. 3.

Nomenclature

C          Capitalized cost, $

C0        Original cost, $

CR        Replacement cost, $

r           Continuous yearly interest rate, fraction

i           Yearly discrete interest, fraction

t           Interval of replacement, years

M         Maintenance cost, $/yr

E          Energy cost, $/yr.

L          Labor cost, $/yr.

T          Yearly taxes, $

D          Decontamination cost, $

Q         Productivity credit, $/yr.

Literature Cited

Peters, M.S. and K.D. Timmerhaus, Plant Design and Economics for Chemical Engineers, 4th ed., McGraw-Hill.

The Author

Kerr, C. P. - Contributing Writer,

Dr. Clayton P. Kerr has had a diversified career as a professional chemical engineer. He received his BS in chemical engineering with distinction from the University of Oklahoma in 1961. He began work at the Baton Rouge refinery of the Exxon Corporation. In 1966, he earned the MS in chemical engineering at Louisiana State University, and a PhD in 1968. He then joined the faculty of chemical engineering of Tennessee Technological University. Dr. Kerr became associate professor in 1971 and professor in 1977. He served as Interim Chair of the chemical engineering department from 2001 until his retirement in 2002. He has presented papers at technical meetings and published papers in technical journals dealing with physical properties, thermodynamics, optimization, air pollution control, process design, mathematical modeling, commercialization of Eastern oil shale and wood pyrolysis. He worked for 9 yr for the Industrial Environmental Research Laboratory of US Environmental Protection Agency in Research Triangle Park, North Carolina. This work dealt with the development of processes for the control of gaseous pollutants from coal-fired power plants. He served for 5 yr for EPA on their Alkali Wet Scrubbing Test Facility Steering Committee. Dr. Kerr also worked for 15 yr for various contractors responsible for providing engineering services to Department of Energy facilities located in Oak Ridge, Tennessee. He was appointed by Governor McWhirter to serve two terms on the Tennessee Air Pollution Control Board and he has served as President of the Emeritus Faculty Club at Tennessee Tech.

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