Engineering economic analysis

Taxes

Chemical production facilities are subject to the same financial levies by the government as all corporations. Specifically, corporations typically pay income taxes, and may collect incentives based on state and federal regulations. Detailed tax filings are almost always conducted by the accounting or financial department of a corporation. When preparing process economics estimations, taxes should be included, however all final cost estimates reported to management should be prepared by the appropriate specialist (Douglas, 23).

Corporate Taxes

The specific tax codes will vary from state to state, and from country to country (Peters, 303). The common factor will be that income is taxed at marginal rates. In the United States, this percentage is 35%, although the effective rate may be lower.

Corporate income taxes is a yearly expense. The percentage rate is to be applied on the income, not the revenue. See other Economics sections on the difference between income and revenue.

Investment Incentives

Local, state, and federal governments generally encourage capital investments by corporations. Financial incentives afforded to corporations include low interest loans, free capital for research and development, and tax holidays for new technologies.

When conducting economic estimates of a chemical process plant, especially if the plant utilizes efficient or "green" technology, it is important to investigate any and all sources of government incentives.

Depreciation

Depreciation, in the colloquial sense, is the loss of value of an item. As it pertains to the chemical process industry, depreciation is the loss of value due to "wear and tear" of the components and facilities of the plant. It is important to note that this does not include working capital or land.

Economics of Depreciation

Depreciation can be thought of as a yearly expense that the plant incurs. It can then be considered a cost, effectively reducing the income and thus the income tax. However, depreciation is not an actual cash flow. There is no transfer of money.

Note how depreciation lowers the amount of taxes:

$T=(P-D)*t$

where $T$ is the taxes due; $P$ is the gross profit; $D$ is the depreciation; and $t$ are the taxes due.

Two commons methods of calculating depreciation are discussed in the next sections.

Straight Line Depreciation

Straight line depreciation is the most common method of approximating depreciation when calculating profitability measures, such as return on investment (Seider, 392).

In this method, the depreciable value $Cd$ is written off over the total life of $n$ years at a constant linear rate:

$Di=Cd/n$, where $i$ is each year in the lifetime.

Therefore, the book value $Bm$, or the initial cost of the item minus the accumulated depreciation charges, at year $m$, can be defined as:

$Bm=C-m*Cd/n$ where $C$ is the initial cost of the item.