CH7 Process Engineering Economics - James R. Couper

CH7 Process Engineering Economics - James R. Couper - 7...

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7 Depreciation, Depletion, Amortization, and Taxes Everyone is aware of the fact that as equipment is used wear and tear results in the decline in value of the equipment. Most engineers and scientists accept the concept of obsolescence , for they are cognizant of the effect of obsolescence on equipment, processes, and techniques due to technological advancements. Depreciation is a more elusive concept but it is an important consideration in operating expenses and cash flow analysis. To understand a company’s strategy when funding projects, engineers need to be conversant with the depreciation concept. 7.1 DEPRECIATION “Depreciation is a decrease in value of a property over a period of time. Events that can cause a property to depreciate include wear and tear, age, deterioration, and normal obsolescence,” according to the Internal Revenue Service [1]. The intent of depreciation is to allow a business to recover the cost of an asset over a period of time. In this chapter a very important aspect of accounting, namely, accounting for depreciable fixed assets like machinery, equipment, buildings, and structures, will be considered. Depreciation begins when a property is placed in service in a business or trade for the production of income. It ends when the cost of the asset has been fully recovered or when the asset is retired from service, whichever occurs first.
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As suggested by the IRS definition, obsolescence plays a major part in determining the useful life of an asset [2]. The causes of obsolescence may be categorized as follows: . Product obsolescence . This is caused by the development and marketing of either cheaper or better substitutes. An example might be milk containers: Glass was used for many years and was followed by waxed paper cartons until polyethylene was introduced. . Equipment obsolescence . Equipment designs are radically improved. Consider the replacement of shell-and-tube heat exchangers by plate- type units in certain applications. . Process obsolescence . For many years phenol was made by a benzenesulfonic acid or chlorobenzene route. These processes involved large, expensive equipment subject to severe corrosion and erosion problems. The newer cumene–phenol process is less costly from a capital investment and operating expense standpoint for the same production rate. This is an example of technological improvement. . Capacity obsolescence . Batch processes are replaced by continuous processes for increased production, and for reducing overall operating expenses. In order for a property to be depreciated, it must meet the following requirements: . It must be used in a business or held to produce income. . It must be expected to have a useful life of more than 1 year. . It must be something that wears out, decays, gets used up, becomes obsolete, and loses its value from natural causes.
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CH7 Process Engineering Economics - James R. Couper - 7...

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