Question 1

Selling and distribution: Which of the following is not classified as a sales expense for a chemical plant product?

Accepted Answer

Introduction / Context: Sales expenses (selling and distribution) are the costs incurred to move product to customers and support the selling process. Correct classification affects product costing, pricing, and profitability analysis. This question asks which item does not ordinarily fall under sales expenses. Given Data / Assumptions: Standard accounting categories used in chemical plant costing. Sales expenses include advertising, warehousing, distribution, field sales effort, order processing, and customer service. General legal fees are typically administrative (G&A), unless directly tied to selling (e.g., contract compliance specifically charged to sales). Concept / Approach: Advertising promotes product; warehousing stores finished goods for shipment; customer service supports the buyer post-sale; sales commissions are clearly selling. Legal fees, unless clearly defined as sales-related, are normally categorized under general and administrative expenses, not sales expense. Step-by-Step Solution: Classify each line item under common practice.Identify the outlier typically charged to G&A: legal fees.Select “Legal fees” as not a sales expense. Verification / Alternative check: Review standard cost summaries: sales expense headings almost always include advertising, warehousing/distribution, sales force costs, commissions, and customer service infrastructure—not general legal fees. Why Other Options Are Wrong: Advertising: Canonical sales expense.Warehousing: Distribution and inventory of finished goods; sales expense.Customer service: Post-sale support within sales/distribution budgets.Sales commissions: Directly tied to selling. Common Pitfalls: Misclassifying overhead items; occasionally, legal costs related to specific sales contracts may be charged to selling, but in general legal fees belong to G&A. Final Answer: Legal fees

Question 2

Capital structure in project economics: The total capital investment (TCI) of a chemical process plant comprises fixed capital investment plus which other component?

Accepted Answer

Introduction / Context: Total capital investment (TCI) is a fundamental figure in feasibility studies and financial evaluation. TCI covers both the cost to build and equip the plant (fixed capital) and the funds needed to operate it day-to-day before revenues stabilize (working capital). Given Data / Assumptions: Fixed capital investment (FCI) includes process equipment, installation, buildings, utilities, yard improvements, and related construction costs. Working capital funds inventories of raw materials and products, receivables, and initial operating cash needs. Overheads, direct/indirect production costs are operating (not capital) categories. Concept / Approach: By standard definition, TCI = FCI + Working Capital. FCI sets the physical capability; working capital supports initial operations and cash cycle timing (procure, produce, sell, collect). Without adequate working capital, plants can be technically complete but financially unable to run efficiently. Step-by-Step Solution: Identify the capital categories: fixed vs. working.Map operating costs (overheads, direct/indirect costs) to non-capital categories.Conclude: the missing component is working capital. Verification / Alternative check: Consult standard cash-flow statements: initial cash outflows typically show construction (FCI) and a working capital charge at start-up, both summing to TCI. Why Other Options Are Wrong: Overhead cost / direct / indirect production cost / general expenses: These are operating or period costs, not capital. Common Pitfalls: Confusing one-time capital outlays with recurring operating costs; failing to reserve cash for inventories and receivables during ramp-up. Final Answer: Working capital

Question 3

Fixed capital components: Which of the following is not part of the fixed capital investment for a chemical plant facility?

Accepted Answer

Introduction / Context: Accurate classification of fixed versus working capital is essential for estimating total capital investment and for cash-flow modeling. Fixed capital relates to long-lived assets installed to make the plant operational, whereas working capital covers current assets used in day-to-day operations. Given Data / Assumptions: Fixed capital includes process equipment, installation, buildings, site development, utilities plants, and safety/emergency facilities. Working capital includes inventories (raw materials, intermediates, products), cash, and receivables. Concept / Approach: Raw materials inventory is a current asset that turns over with production and sales; hence it is working capital, not fixed capital. In contrast, utilities plants, process equipment, buildings, and emergency facilities are fixed assets that remain in service for many years. Step-by-Step Solution: List fixed asset examples: process equipment, utilities, buildings, emergency systems.Identify current assets: raw materials inventory.Choose the item that is not fixed capital: raw materials inventory. Verification / Alternative check: Review standard project cost summaries: inventories are accounted for in working capital estimates, often as a multiple of monthly operating costs. Why Other Options Are Wrong: Utilities plants / process equipment / emergency facilities / buildings: These are core parts of fixed capital. Common Pitfalls: Placing inventories under fixed capital because they are purchased at start-up. Despite initial purchase, they remain circulating current assets and should be budgeted as working capital. Final Answer: Raw materials inventory

Question 4

Cash-flow timing: For a typical project, at which milestone does the cumulative cash flow first return to zero?

Accepted Answer

Introduction / Context: Cumulative cash flow tracks total cash outflows and inflows over time. Large negative outflows occur during design and construction. After start-up, operating inflows begin to offset the initial deficit. The instant when the running total first returns to zero identifies the payback, often called the break-even on a cash basis (not to be confused with accounting profit break-even based on revenues vs. costs for a single year). Given Data / Assumptions: Project undergoes typical phases: design, construction, start-up, operations. Initial cash flow negative due to capital spending and pre-operating costs. Steady positive net operating cash flow after ramp-up. Concept / Approach: The cumulative cash flow becomes zero when the total net cash generated from operations equals the total initial investment (including working capital and start-up expenses). This calendar time is the (undiscounted) payback time; with discounting, it is the discounted payback point. It is a widely used risk and liquidity indicator in project appraisal. Step-by-Step Solution: Sum cash flows from time zero onward to form a cumulative series.Identify the earliest time t when cumulative sum crosses from negative to zero or positive.Label that t as the (break-even) payback point. Verification / Alternative check: Plot cumulative cash flow vs. time: the minimum occurs during construction; the curve rises after start-up; the first intersection with zero marks payback. Accounting break-even (revenues = costs within a year) is related but not identical. Why Other Options Are Wrong: End of project life: By then cumulative cash flow is usually positive (if profitable) and not necessarily zero.Start-up / end of design / mechanical completion: These are earlier milestones when cumulative cash flow is still negative due to capital outlays. Common Pitfalls: Confusing cash-flow break-even with profit break-even; ignoring working capital recovery at project end (which affects cumulative cash flow after payback). Final Answer: At the break-even (payback) point

Question 5

Rate conventions: The effective annual interest rate equals the nominal rate only under which compounding schedule?

Accepted Answer

Introduction / Context: The nominal annual interest rate is a quoted rate that may be compounded multiple times per year. The effective annual rate (EAR) reflects the actual once-per-year growth including compounding effects. Understanding when EAR equals the nominal rate is important for comparing financial offers fairly. Given Data / Assumptions: Nominal annual rate r_nom. Compounding m times per year (m ≥ 1). Effective annual rate defined as EAR = (1 + r_nom/m)^m − 1. Concept / Approach: If m = 1 (annual compounding), then EAR = (1 + r_nom)^1 − 1 = r_nom, so effective and nominal rates are equal. For any m > 1 (e.g., monthly, daily), EAR exceeds r_nom because of intra-year compounding. Therefore, the equality holds only when interest is compounded annually (once per year). Step-by-Step Solution: Write the EAR formula: EAR = (1 + r_nom/m)^m − 1.Set m = 1 → EAR = (1 + r_nom) − 1 = r_nom.For m > 1, EAR > r_nom due to compounding gains. Verification / Alternative check: Example: r_nom = 12%. Monthly compounding (m = 12) gives EAR = (1 + 0.12/12)^12 − 1 ≈ 12.68%, which is greater than 12%. With annual compounding (m = 1), EAR = 12% exactly. Why Other Options Are Wrong: Fortnightly / monthly / half-yearly / daily: All involve m > 1, producing EAR > nominal. Common Pitfalls: Comparing loans or investments with different compounding intervals using nominal rates alone; always convert to EAR for apples-to-apples comparisons. Final Answer: Compounded annually (once per year)

Question 6

Depreciation and profitability link (plant economics context): In financial reporting for a chemical process plant, depreciation refers to a reduction that results in a __________ in reported profit over time, given other factors remain the same.

Accepted Answer

Introduction / Context: Depreciation is a cornerstone concept in chemical engineering plant economics. It allocates the capitalized cost of long-lived assets (reactors, heat exchangers, pumps, buildings) over their useful lives. Because depreciation is an expense in the income statement, it lowers reported accounting profit each period, even though it does not represent an immediate cash outflow. Given Data / Assumptions: We consider standard financial accounting for an operating plant. Revenue and other costs are held constant to isolate the effect of depreciation. Depreciation methods (straight-line, declining-balance, sum-of-years' digits) are acceptable accounting practices. Concept / Approach: Profit (accounting) = Revenue − Total expenses. Total expenses include operating costs (materials, utilities, labor), overheads, and non-cash charges like depreciation. Introducing or increasing depreciation raises total expenses and therefore reduces reported profit. While depreciation reduces taxable income (and taxes), the immediate directional effect on profit before tax is negative. Step-by-Step Solution: Recognize depreciation is an expense included in the income statement.Adding an expense reduces profit: Profit = Revenue − (Operating + Depreciation + ...).Therefore, ceteris paribus, depreciation causes a decrease in reported profit over time. Verification / Alternative check: Compare two identical income statements, one with zero depreciation and the other with positive depreciation. The latter shows lower earnings before tax by exactly the depreciation amount. Why Other Options Are Wrong: Increase: An expense cannot increase profit.No change: Profit changes unless revenue or other offsets adjust.None of these: “Decrease” is the precise effect. Common Pitfalls: Confusing cash flow with profit. Depreciation is non-cash; it lowers profit but may improve after-tax cash flow by reducing taxes. Also, do not confuse physical deterioration with the accounting allocation process. Final Answer: decrease

Question 7

Hydrogen supply routes for nitrogenous fertilizer production: Which commercial hydrogen source is typically the costliest for large-scale ammonia (nitrogenous fertilizer) manufacture?

Accepted Answer

Introduction / Context: Ammonia plants require large volumes of hydrogen combined with nitrogen (Haber–Bosch process). Hydrogen can be produced from fossil routes (natural gas/naptha reforming, coal gasification, coke oven gas) or via electrolysis of water. Cost structure varies with energy prices, plant scale, and capital intensity. Given Data / Assumptions: Conventional, fossil-based commodity ammonia plants operating at large scale. Grid electricity costs are typical and not heavily subsidized by renewable power purchase agreements. We compare levelized cost per unit of hydrogen. Concept / Approach: Electrolysis splits water using electricity, which is typically more expensive per unit of hydrogen than hydrogen derived from hydrocarbons (via steam reforming of naphtha or natural gas, coal gasification, or coke oven gas recovery). While electrolysis has decarbonization advantages when paired with low-cost renewable power, it remains the costliest route under conventional grid economics and current capital costs in many regions. Step-by-Step Solution: List common H2 routes → reforming, gasification, coke oven recovery, electrolysis.Compare cost drivers → electricity vs. fossil feedstock price and plant scale.Identify electrolysis as highest-cost in typical commercial ammonia contexts. Verification / Alternative check: Industrial benchmarks consistently show SMR/naptha reforming at the low end of cost, coal gasification higher, and electrolysis highest unless very low-cost electricity is available. Why Other Options Are Wrong: Coal gasification: capital-intensive but often lower LCOH than electrolysis with grid power.Steam reforming of naphtha: standard, relatively lower-cost hydrogen source.Coke oven gas: by-product hydrogen, typically cheaper in integrated steel-chemical sites. Common Pitfalls: Equating environmental superiority with cost; green hydrogen can be cleaner yet costlier without cheap renewables or incentives. Final Answer: Electrolysis of water

Question 8

Depreciation calculation approaches: Which of the following methods do not incorporate interest on investment when computing depreciation?

Accepted Answer

Introduction / Context: Depreciation allocates asset cost over useful life. Some accounting methods conceptually relate to interest, but the depreciation charge itself typically excludes explicit interest on invested capital, which is handled separately as financing cost or opportunity cost. Given Data / Assumptions: Standard textbook definitions in plant economics. We consider the depreciation expense calculation, not the total annualized cost including interest. Methods cited: present worth, sinking fund, sum-of-the-years’ digits (SOYD). Concept / Approach: SOYD and other accelerated methods allocate book value declines based on predefined schedules; they do not embed interest on investment. Sinking fund uses an assumed interest rate to accumulate funds, but the depreciation charge is still a schedule of set-aside amounts; the interest notion here pertains to fund growth, not adding interest as a separate expense into the depreciation figure. Similarly, present worth relates to discounting cash flows but does not mix interest into the depreciation expense line in typical accounting. Step-by-Step Solution: Identify whether each method adds an interest expense to depreciation.Recognize that interest (cost of capital) is accounted for separately from depreciation.Conclude all listed methods compute depreciation without adding interest on investment to the depreciation charge. Verification / Alternative check: Compare annualized cost analyses where interest is a separate term versus depreciation schedules which change book value but do not include interest as an expense within “depreciation.” Why Other Options Are Wrong: Any single-method choice implies the others include interest in depreciation, which they do not in standard practice. Common Pitfalls: Confusing “uses an interest rate assumption” (for fund accrual or discounting) with “charges interest as part of depreciation expense.” These are distinct. Final Answer: All (a), (b) and (c)

Question 9

Financial statements overview: A balance sheet for an industrial enterprise primarily shows the __________.

Accepted Answer

Introduction / Context: The balance sheet is one of the core financial statements used by chemical engineers and managers to assess plant performance and solvency. Unlike the income statement (over a period), the balance sheet is a snapshot at a specific date, detailing assets, liabilities, and owners’ equity. Given Data / Assumptions: Standard double-entry accounting. Assets are classified as current and non-current (fixed), liabilities as current and long-term. Equity reflects residual claims after liabilities. Concept / Approach: The balance sheet answers “What do we own, and how is it financed?” at a point in time. It shows the financial condition on that date. It is not limited to current or fixed assets; it includes all assets, all liabilities, and equity, and thus cannot be summarized as only a subset of accounts. Step-by-Step Solution: Identify statement purpose: snapshot at date X.Recognize full scope: assets, liabilities, equity.Select the choice that captures this scope. Verification / Alternative check: Compare to the income statement (periodic flow) and cash flow statement (sources/uses of cash). Only the balance sheet is a point-in-time statement. Why Other Options Are Wrong: Only current assets / only fixed assets / only current+fixed assets: each omits liabilities and equity, so they do not describe a balance sheet. Common Pitfalls: Confusing working capital schedules (current assets and liabilities) with the full balance sheet. Final Answer: financial condition at any given time

Question 10

Time value of money (end-of-year payments): If an amount R is paid at the end of every year for n years at an interest rate i, what is the net present value (NPV) of this annuity?

Accepted Answer

Introduction / Context: Evaluating capital projects requires discounting future cash flows. The present value of a uniform series of end-of-year payments (an ordinary annuity) appears in equipment leases, service contracts, and maintenance reserves in chemical plant economics. Given Data / Assumptions: Annuity with constant payment R at the end of each year. Number of payments n; interest (discount) rate i per year. Ordinary annuity (end-of-period), not annuity due. Concept / Approach: The present value of an ordinary annuity is the sum of discounted payments. The closed-form factor is PV = R * [1 − (1 + i)^(−n)] / i. This factor is widely tabulated as the present worth of an annuity (P/A, i, n). Step-by-Step Solution: Write PV = Σ (R / (1 + i)^k) for k = 1 to n.Recognize geometric series with ratio 1/(1 + i).Sum to obtain PV = R * [1 − (1 + i)^(−n)] / i. Verification / Alternative check: Check limiting case: as n → ∞ with i > 0, PV → R / i, consistent with a perpetuity. For n = 1, PV = R / (1 + i), matching the formula. Why Other Options Are Wrong: R * [(1 + i)^n − 1] / i: this is the future value of an annuity (end-of-year compounding), not present value.R(1 + i)^n: future value of a single payment, not an annuity.R / (1 + i)^n: present value of a single payment at year n, not a series. Common Pitfalls: Confusing ordinary annuity with annuity due (beginning-of-year payments), which multiplies by (1 + i). Also, mixing up present vs. future value factors. Final Answer: R * [1 − (1 + i)^(−n)] / i

Question 11

Sales-to-capital benchmarking: The ratio of gross annual sales to fixed capital investment is known as the __________ ratio.

Accepted Answer

Introduction / Context: Engineers often need quick indicators of how effectively fixed capital is being converted into sales. The turnover ratio provides a high-level benchmark for capital productivity and helps compare plants or projects within a sector. Given Data / Assumptions: Gross annual sales and fixed capital investment are known. Comparisons are meaningful among similar technologies and product mixes. No adjustment here for working capital or margins—this is a gross measure. Concept / Approach: Turnover ratio = Gross annual sales / Fixed capital investment. Higher turnover generally implies faster capital recovery potential, but it must be considered alongside margins, operating costs, and asset longevity. Step-by-Step Solution: Define numerator: gross sales over a year.Define denominator: fixed capital (installed plant cost, site prep, etc.).Compute ratio to evaluate comparative capital productivity. Verification / Alternative check: Cross-check with payback estimates: higher turnover can correlate with shorter paybacks, all else equal. Why Other Options Are Wrong: Cash reserve: unrelated to sales/capital ratio.Capital ratio / investment ratio: vague and not the standard term used for this specific metric. Common Pitfalls: Using turnover alone without considering profitability; high sales with thin margins may still yield poor returns. Final Answer: turnover

Question 12

Cost index application (CEPCI): The present cost of a plant = original cost × (current index / past index). In the Chemical Engineering Plant Cost Index (CEPCI), the most heavily weighted component is:

Accepted Answer

Introduction / Context: Cost indices allow quick escalation of historical capital costs to current prices. The Chemical Engineering Plant Cost Index (CEPCI) is widely used for process plants, combining weighted subindices to reflect equipment and material cost trends. Given Data / Assumptions: Present cost = Original cost × (Index_now / Index_then). We focus on CEPCI composition by weight. We assume standard CEPCI category weights used in practice. Concept / Approach: CEPCI aggregates several categories. Historically, the dominant weight belongs to fabricated equipment and process machinery (pressure vessels, exchangers, tanks, reactors, large rotating equipment). Because these items represent a major portion of installed cost and track key commodity and fabrication cost trends, this subindex drives overall movements more than smaller categories. Step-by-Step Solution: Recall CEPCI formula usage for escalation.Identify weight distribution among subindices.Select “fabricated equipment and machinery” as the largest contributor. Verification / Alternative check: CEPCI documentation and textbooks in plant design consistently show equipment and machinery as the most significant weight. Why Other Options Are Wrong: Process instruments and control: material but smaller weight relative to major equipment.Pumps and compressor: subset of equipment, not the overall largest category.Electrical equipment and material: important but not the dominant weight. Common Pitfalls: Applying a single index to projects with unusual content (e.g., instrumentation-heavy plants); consider custom weighting when atypical. Final Answer: fabricated equipment and machinery

Question 13

Profit identity: Profit, in standard accounting for process plants, equals revenue minus __________.

Accepted Answer

Introduction / Context: Clear definitions avoid confusion when comparing projects. Profit is the residual after all costs are deducted from revenue. Distinguishing between total cost and subsets like operating cost is essential in plant economics and project appraisal. Given Data / Assumptions: Total cost includes operating costs, fixed charges, depreciation, and other expenses. Revenue refers to gross earnings from product sales or services. We focus on accounting profit (not cash flow). Concept / Approach: Profit = Revenue − Total cost. Operating cost is only a portion of total cost. Book value is a balance sheet figure, not a cost component in the profit identity. Step-by-Step Solution: List all cost elements included in “total cost.”Subtract total cost from revenue to obtain profit.Confirm that operating cost alone would overstate profit if used incorrectly. Verification / Alternative check: Sample income statements directly show profit (EBIT, EBT, net) computed by subtracting comprehensive cost categories from revenue. Why Other Options Are Wrong: Book value: asset carrying value, not subtracted from revenue.Operating cost: excludes non-operating expenses and depreciation.None of these: incorrect because “total cost” is correct. Common Pitfalls: Confusing EBITDA with profit; EBITDA excludes depreciation and interest—profit includes appropriate expense categories per the definition used. Final Answer: total cost

Question 14

Tax base in practice: For industrial enterprises, income taxes are generally assessed on the __________.

Accepted Answer

Introduction / Context: Understanding what constitutes the tax base is key for after-tax economic evaluations, NPV, and IRR calculations. In general, corporate income taxes are assessed on taxable income (commonly referred to here as total income after allowable deductions). Given Data / Assumptions: Standard corporate tax regimes are considered. Gross earnings and costs are accounted to arrive at taxable income. Terminology in the options uses “total income” to denote the tax base post-deductions. Concept / Approach: Taxable income is the result of gross earnings minus allowable deductions (operating costs, depreciation, interest where applicable, and other deductible items). Taxes are not levied on gross earnings, on costs, or on fixed costs in isolation. Thus, the correct conceptual selection is the enterprise’s total/taxable income. Step-by-Step Solution: Compute taxable (total) income from revenue less deductions.Apply tax rate to this base.Use after-tax cash flows for economic decision metrics. Verification / Alternative check: Check any standard income statement leading to “income before tax” as the base for tax calculation. Why Other Options Are Wrong: Gross earning: ignores deductions; not the usual tax base.Total product cost or fixed cost: expenses, not bases for income tax. Common Pitfalls: Equating “revenue” with “taxable income.” Always consider depreciation and other deductions. Final Answer: total income

Question 15

Types of depreciation: Functional depreciation of equipment primarily measures loss of value due to __________.

Accepted Answer

Introduction / Context: Depreciation can be categorized by its underlying cause. For chemical plant equipment, value declines due to physical deterioration, time, accidents, or loss of usefulness because technology or process requirements have changed. Knowing the type helps in replacement planning and economic analysis. Given Data / Assumptions: Equipment is still physically intact and operable. Newer technology or regulatory changes make existing equipment less useful or economically inferior. Market value is impacted by these external changes. Concept / Approach: Functional depreciation refers to a loss of value arising from functional inadequacy or obsolescence. Even if the asset is in good physical condition, changes in capacity requirements, process integration, energy efficiency standards, or environmental limits can render it less valuable. This contrasts with physical depreciation (wear and tear, corrosion) and sudden losses (accident). Step-by-Step Solution: Classify depreciation causes into physical vs. functional.Identify functional depreciation as tied to usefulness, not condition.Select “obsolescence” as the principal descriptor. Verification / Alternative check: Plant revamps often scrap functionally obsolete assets long before they are fully worn out, confirming functional depreciation’s practical importance. Why Other Options Are Wrong: Ageing / wear and tear: these are physical depreciation, not functional.Breakdown or accident: sudden impairment, not the ongoing obsolescence category. Common Pitfalls: Assuming maintenance eliminates depreciation entirely; it can slow physical depreciation but not functional obsolescence driven by external factors. Final Answer: obsolescence

Question 16

Plant economics — understanding the Lang factor The ‘‘Lang factor’’ is defined as the ratio of fixed capital investment to the delivered cost of major equipment. For a solid–fluid processing chemical plant, what is the typical range of the Lang fact…

Accepted Answer

Introduction / Context: Estimating the total capital required for a chemical process plant often starts from equipment quotes and then applies a multiplier to account for installation, buildings, piping, instrumentation, electricals, yard improvements, and indirect costs. This multiplier is known as the Lang factor. Knowing its typical range for various plant types helps engineers produce quick, order-of-magnitude estimates during pre-FEED and feasibility stages. Given Data / Assumptions: Definition: Lang factor = fixed capital investment / delivered equipment cost. Plant type: solid–fluid processing chemical plant. We seek the most representative range used in preliminary cost estimating. Concept / Approach: The Lang factor varies with complexity and the amount of on-site fabrication. Fluid processing plants (e.g., refineries) typically carry higher factors due to extensive piping and instrumentation, whereas solid handling can add structure and materials handling but not always the same level of piping intensity as full fluid networks. Typical literature values cluster around the low- to mid-4s for solid–fluid plants when counting fixed capital (installed) relative to delivered major equipment. Step-by-Step Solution: Identify the correct definition: fixed capital divided by delivered equipment cost.Recall typical ranges by plant family; solid–fluid processing commonly lies a little above 4.Select the only offered range consistent with practice: 4.2 to 4.4. Verification / Alternative check: Cross-checks with classic cost-estimating references show factors in the ~4 to 5 band for many hydrocarbon/chemical services, with solid–fluid mixed duty often near the low- to mid-4s when counting complete fixed capital (installed). Why Other Options Are Wrong: 1.2 to 1.4 — far too low; would omit most installation and indirect costs.2.5 to 2.7 — still low for installed fixed capital on a typical process site.6.2 to 6.4 — unusually high for standard chemical service; this would imply exceptional site or modular penalties. Common Pitfalls: Confusing ‘‘fixed capital’’ with ‘‘total capital’’ (which adds working capital) or applying a Lang factor meant for bare module cost methods. Also, using a single factor across very different plant types without adjustment can mislead early estimates. Final Answer: 4.2 to 4.4

Question 17

Financial definitions in plant economics — pick the correct statement Which one of the following statements is correct in the context of cost accounting and asset valuation for process plants?

Accepted Answer

Introduction / Context: Chemical engineering plant economics borrows core terms from accounting. Misusing words like revenue, depreciation, unamortised cost, scrap value, and salvage value can lead to incorrect profitability and tax calculations. This question checks precise definitions used in project evaluation and cost tracking. Given Data / Assumptions: We must select the one correct statement. Standard industrial accounting terminology applies. Concept / Approach: ‘‘Unamortised cost’’ (also called book value or undepreciated cost) is the portion of the original capitalized cost that has not yet been recovered via depreciation charges. Therefore it equals original cost minus accumulated depreciation. Gross revenue is not defined as income minus expense; instead, income minus expenses yields profit (e.g., gross profit, operating profit, or net profit depending on what is subtracted). Sum-of-the-years-digits (SYD) is an accelerated depreciation schedule without explicit interest accounting. ‘‘Scrap value’’ usually refers to the gross value of recoverable materials; when netted for removal/sale charges it is often termed ‘‘salvage value.’’ Step-by-Step Solution: Check option (b): matches the definition of unamortised (book) cost.Check option (a): mixes revenue with profit; incorrect.Check option (c): SYD accelerates depreciation; it does not embed interest.Check option (d): describes salvage value more than scrap value; terminology mismatch. Verification / Alternative check: Standard cost accounting texts define book value BV at time t as BV = original cost − accumulated depreciation to date. SYD provides a schedule of yearly depreciation fractions that sum to 1 over the life, but is interest-agnostic. Why Other Options Are Wrong: (a) ‘‘Income − expense’’ defines profit, not gross revenue.(c) SYD is purely a depreciation allocation; interest appears separately in discounted cash flow, not inside the SYD formula.(d) The wording aligns with salvage value; ‘‘scrap value’’ by itself is commonly the gross break-up value. Common Pitfalls: Treating ‘‘scrap’’ and ‘‘salvage’’ as interchangeable. Also, calling any ‘‘income − expense’’ quantity ‘‘revenue’’ instead of ‘‘profit’’ leads to errors in statements. Final Answer: Unamortised cost equals the original cost of a property minus all depreciation charges made to date.

Question 18

Depreciation in project evaluation — identify the complete truth Which statement best captures the role and behavior of depreciation in chemical plant economics?

Accepted Answer

Introduction / Context: Depreciation is a non-cash accounting charge that allocates the cost of long-lived assets over their useful life. Even though no cash leaves the firm when depreciation is recorded, it lowers taxable income and thus affects after-tax cash flow. Understanding its behavior across methods is critical for comparing alternatives. Given Data / Assumptions: Straight-line method spreads cost evenly across years. Plant assets physically and economically decline over time. Corporate taxes apply to taxable income after depreciation. Concept / Approach: Under straight-line, annual depreciation charge = (cost − salvage) / life, a constant number each year. Depreciation reflects wear, obsolescence, and time (economic depreciation), and although the accounting schedule may differ from physical decay, it captures the loss of ‘‘book’’ value. Taxable income is revenue − expenses − depreciation; thus depreciation reduces taxes even as it does not consume current cash. Step-by-Step Solution: Confirm (a): Straight-line produces equal annual amounts ⇒ true.Confirm (b): Depreciation embodies time-related value loss ⇒ true.Confirm (c): Depreciation reduces taxable income ⇒ affects tax and cash flow ⇒ true.Therefore (d) all of the above is correct. Verification / Alternative check: Cash flow after tax often uses: CF = (revenue − cash expenses − taxes) + depreciation tax shield. The shield equals tax rate * depreciation. Why Other Options Are Wrong: Each single option (a), (b), or (c) is true but incomplete relative to (d). Common Pitfalls: Confusing depreciation with a cash outlay; failing to include the depreciation tax shield in project NPV; or mixing tax and book lives with economic life. Final Answer: all (a), (b) and (c)

Question 19

Depreciation methods — which yields higher book value than straight-line? Select the method that results in book values that are greater (i.e., depreciate more slowly) than those from the straight-line method over the life of the asset.

Accepted Answer

Introduction / Context: Different depreciation methods alter the timing of expense recognition. Accelerated methods charge more earlier, leading to lower early book values. Conversely, methods that defer charges produce higher early book values. Knowing these patterns is important when covenants, asset disposals, or tax timing matter. Given Data / Assumptions: Straight-line is the baseline for comparison. We compare book values across methods at the same service year. Concept / Approach: The sinking fund method sets annual depreciation charges that start small and increase each year such that the accumulated fund (with interest) equals the cost minus salvage at end of life. Because the yearly depreciation is low in early years, the remaining book value stays higher than with straight-line for much of the life. In contrast, declining balance and sum-of-the-years-digits are accelerated methods producing lower early book values than straight-line. Step-by-Step Solution: Establish straight-line as constant annual charge.Recognize sinking fund front-loads less depreciation initially.Therefore, book value under sinking fund > book value under straight-line in early to mid years. Verification / Alternative check: A simple two-year example with life 5 years shows SF annual charges increasing, while straight-line remains constant. Early-year SF book values exceed straight-line book values. Why Other Options Are Wrong: Multiple straight-line — not a standard alternative offering higher book values; typically a scheduling variant.Declining balance — accelerated; reduces book value faster than straight-line.Sum-of-the-years-digits — also accelerated; reduces book value faster than straight-line. Common Pitfalls: Equating tax accelerated depreciation with financial reporting; schedules and permitted methods can differ. Always specify method and basis. Final Answer: Sinking fund method

Question 20

Working capital components — identify what is not included Which of the following is not considered part of working capital for a chemical process plant?

Accepted Answer

Introduction / Context: Working capital covers current assets required to operate the plant day-to-day: inventories, receivables, cash, and short-term items. Distinguishing these from fixed assets (plant and equipment) is essential for investment and financing calculations. Given Data / Assumptions: Working capital = current assets needed for operations. Fixed capital = long-lived physical assets, installed. We must select the item that belongs to fixed capital, not working capital. Concept / Approach: Inventories (raw, in-process, finished goods) and minimum cash balances are current assets and thus working capital. Storage facilities (tanks, warehouses, silos) are physical structures with multi-year life and are part of fixed capital investment. Step-by-Step Solution: Identify current assets: inventories and cash ⇒ working capital.Identify long-lived structures: storage facilities ⇒ fixed capital.Therefore, storage facilities are not working capital. Verification / Alternative check: Balance sheets list storage tanks under property, plant, and equipment (PP&E), depreciated over time; inventories and cash appear under current assets. Why Other Options Are Wrong: Product inventory — current asset; part of working capital.In-process inventory — current asset; part of working capital.Minimum cash reserve — current asset; part of working capital. Common Pitfalls: Confusing ‘‘inventory storage’’ (the stock itself) with ‘‘storage facilities’’ (the fixed asset that holds it). Only the stock is working capital. Final Answer: Storage facilities

Chemical Engineering Plant Economics Questions