DK5739_CH4 - 4 Estimation of Capital Requirements A company...

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4 Estimation of Capital Requirements A company that manufactures a product has funds invested in land, buildings, and equipment. Some industries require very large capital investments as reflected in their assets per employee. These industries have a high degree of large, expensive equipment and automatic control equipment and are said to be “capital intensive.” Examples of such industries are crude-oil production, energy, petroleum refining, chemicals, and pharmaceuticals. Other industries that require a large amount of labor to manufacture or sell a product are said to be “labor intensive.” Examples are merchandising, textiles, and food consumer products. National magazines occasionally publish information listing the assets and the number of employees so that the capital or labor intensiveness may be determined [1]. Table 4.1 is a list of assets per employee for selected industrial sectors. Total capital investment includes funds required to purchase land, design, purchase, and install equipment and buildings, as well as to bring the facility into operation [2]. A list of these items includes: Land Fixed capital investment Offsite capital Allocated capital Working capital Other capital items Interest on borrowed funds prior to startup Catalyst and chemicals Patents, licenses, and royalties
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Each of the above items will be discussed in detail in this chapter. Not every item in the list appears in every estimate. 4.1 LAND Although land is a small part of the total capital investment, it should be included. Companies will frequently purchase a tract of land for a future plant location and will allocate a parcel of this land at cost to a project when the project is authorized. Other companies consider land as a sunk cost and since it is small will eliminate it from economic evaluation considerations. Land costs may be obtained by checking with the firm’s real estate department (if it has one). Local chambers of commerce or real estate agents may be able to give information on land costs. In the absence of such data, and for preliminary estimates only, about 3% of the fixed capital investment may be used to estimate land costs. 4.2 FIXED CAPITAL INVESTMENT The fixed capital investment for a plant includes the manufacturing equipment, piping, ductwork, automatic control equipment, structures, insulation, painting, T ABLE 4.1 Assets per Employee Industry sector Assets/employee Mining, crude oil production $2,203,000 Energy 1,978,000 Petroleum refining 1,373,000 Motor vehicles and parts 446,000 Chemicals 416,000 Pharmaceuticals 394,000 Forest and paper products 360,000 Semiconductors and electronic components 341,000 Beverages 304,000 Computers and office equipment 304,000 Metals 286,000 Soaps, cosmetics 235,000 Aerospace and defense 216,000 Food consumer products 131,000 Rubber and plastics 131,000 General merchandise 79,000 Textiles 75,000 Source : Compiled from Ref. 1.
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site preparation, and environmental control equipment, as well as engineering and contractor’s costs. One may think of it as that part of the total investment pertinent to the manufacturing of a product; it is “fixed” to the land. It is the
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This note was uploaded on 10/28/2008 for the course N n taught by Professor N during the Spring '08 term at Punjab Engineering College.

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DK5739_CH4 - 4 Estimation of Capital Requirements A company...

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