PDD_16_Econ5 - Process Design Decisions(PDD Prof B V Babu...

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Unformatted text preview: Process Design Decisions (PDD) Prof B V Babu Process Design Designs Copyright © 2008-2009 B V Babu, BITS-Pilani Copyright © 2008-2009 B V Babu, BITS-Pilani LECTURE - 16 Process Design Decisions (PDD) Prof B V Babu Engineering Economics • Recap • Depreciation (Contd…) – Numerical Problem • Process Profitability – Methods (ROI, PT, DCFROR, CCF) eturn on Investment (ROI) Copyright © 2008-2009 B V Babu, BITS-Pilani Copyright © 2008-2009 B V Babu, BITS-Pilani • Return on Investment (ROI) • Payout Time (Payback Period) • Discounted Cash Flow Rate of Return (DCFROR) – Numerical Problem • Summary Process Design Decisions (PDD) Prof B V Babu Problem on Depreciation • A property has an initial value of Rs. 21 Lakh, service life of 20 years and final salvage value of Rs. 1.68 Lakh. It has been proposed to depreciate the property by the text-book declining balance method. Would this method be acceptable for income-tax purposes if the income-tax laws do not permit annual depreciation rates greater Copyright © 2008-2009 B V Babu, BITS-Pilani Copyright © 2008-2009 B V Babu, BITS-Pilani than twice the minimum annual rate with the straight line method? Process Design Decisions (PDD) Prof B V Babu Problem on Depreciation Solution: • V = Rs. 21,00,000; V S = Rs. 1,68,000; n = 20 years • By text-book declining balance method: 118638 . 88136 . 1 000 , 00 , 21 000 , 68 , 1 1 1 20 1 1 =- =      - =      - = n s V V f Copyright © 2008-2009 B V Babu, BITS-Pilani Copyright © 2008-2009 B V Babu, BITS-Pilani ( ) 89 . 613 , 22 Rs. ) 118638 . ( ) 118638 . 1 ( 000 , 00 , 21 1 life, service of end at the on Depreciati 1 20 1 =- =- =-- f f V d n f f V d n n 1 ) 1 ( : method balance declining book Text using year each for on Depreciati-- = 2,48,139.8 1 5 2,19,581.8 2 6 1,93,530.6 3 As can be seen, depreciation is maximum after the first year in text book declining balance method and then decreases with every year Process Design Decisions (PDD) Prof B V Babu Problem on Depreciation Solution (Contd..): • The maximum depreciation by text book declining balance method in this case = Rs. 2,49,139.80 • By income-tax laws, annual depreciation rates greater than twice the minimum annual rate with SLM is not ermitted ( iven Copyright © 2008-2009 B V Babu, BITS-Pilani Copyright © 2008-2009 B V Babu, BITS-Pilani permitted ( given ) • d SLM = depreciation by SLM = ( V- V S )/n • = (21,00,000-1,68,000)/20 = Rs. 96,600 • Hence, Text-book declining balance is not acceptable ( ) SLM TBDBM d d 2 max ≤ ⇒ 200 , 93 , 1 . ) 600 , 96 ( 2 2 Rs d SLM = = ⇒ ( ) ) 200 , 93 , 1 . ( 2 80 . 139 , 49 , 2 . max Rs d Rs d SLM TBDBM = 〉〉 = ⇒ Process Design Decisions (PDD) Prof B V Babu Process Profitability Measures • Difficult to assess • But prefer to use simple possible preliminary design calculation procedures • Methods – Return on Investment (ROI) ayout Time (Payback Period) Copyright © 2008-2009 B V Babu, BITS-Pilani...
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PDD_16_Econ5 - Process Design Decisions(PDD Prof B V Babu...

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