Question 1

Capital costing — sum-of-years-digits (SYD) depreciation Let P be the equipment purchase cost, S the salvage value, n the life in years, and r the year number (r = 1 for the first year). What is the depreciation charge in the rth year using the SYD …

Accepted Answer

Introduction / Context: Depreciation allocates capital cost over useful life for accounting and economic evaluations. The sum-of-years-digits (SYD) method front-loads depreciation, reflecting higher early-year value loss common to process equipment. Given Data / Assumptions: P: purchase (installed) cost of equipment. S: salvage value at end of life. n: total life in years. r: year index (r = 1, 2, …, n). Concept / Approach: SYD uses a weighting scheme proportional to remaining life at the start of each year. The denominator is the sum of the integers from 1 to n, i.e., n(n + 1)/2. The first-year weight is n, second year (n − 1), …, last year 1. Depreciation is the fraction of depreciable base (P − S) allocated by that weight. Step-by-Step Solution: Compute denominator (sum of digits): SYD = n(n + 1)/2.Weight for the rth year: w(r) = n − r + 1.Depreciation in year r: Dep(r) = [w(r)/SYD] * (P − S) = [(n − r + 1)/(n(n + 1)/2)] * (P − S). Verification / Alternative check: Check endpoints: r = 1 ⇒ factor = n/SYD (largest); r = n ⇒ factor = 1/SYD (smallest). Sum over r = 1…n returns (P − S), confirming the distribution is correct. Why Other Options Are Wrong: (b) Uses ascending weight r, not the SYD decreasing weights. (c) Incorrect denominator and weight; does not sum to (P − S). (d) Straight-line method, not SYD. Common Pitfalls: Mixing up straight-line and SYD methods. Using r instead of (n − r + 1) for the weight. Final Answer: Dep(r) = [(n - r + 1) / (n(n + 1)/2)] * (P - S)

Question 2

Which depreciation method gives the highest early-year charge? Among the listed methods, which produces the maximum depreciation (especially in the first year) for plant equipment?

Accepted Answer

Introduction / Context: Process plants often prefer accelerated depreciation for tax and cash-flow reasons. Different methods allocate the depreciable base differently across the life of the asset. Given Data / Assumptions: Four methods compared: diminishing balance, straight-line, SYD, and sinking fund. Focus: which yields highest depreciation in early years (especially year 1). Concept / Approach: Declining-balance applies a fixed percentage to the book value each year. Since book value is largest at the beginning, the first-year charge is maximal among common methods. SYD also accelerates, but less aggressively than declining-balance. Straight-line is uniform each year, and sinking fund produces low early charges that increase later. Step-by-Step Solution: Straight-line: Dep = (P − S)/n (constant each year).SYD: weighted by remaining life; first year is n/SYD, lower than typical high declining-balance rates.Declining-balance: Dep(1) = rate * P (or book at start), often chosen so early depreciation is maximized.Sinking fund: accumulates funds; depreciation charge effectively increases with time. Verification / Alternative check: Example calculations show first-year diminishing-balance charges exceed SYD and straight-line for comparable assumptions. Why Other Options Are Wrong: Straight-line: not accelerated; constant each year. SYD: accelerated but typically below declining-balance in year 1. Sinking fund: back-loaded; smallest early charges. Common Pitfalls: Confusing cash accumulation (sinking fund) with depreciation allocation. Final Answer: Diminishing balance (declining-balance) method

Question 3

Typical share of instrumentation cost in modern chemical plants Instrumentation and control typically account for what percentage of total plant cost?

Accepted Answer

Introduction / Context: Project cost estimation requires realistic allowances for instrumentation and control (I&C). This includes transmitters, analyzers, control systems (DCS/PLC), wiring, and installation. Given Data / Assumptions: Modern chemical plant with standard DCS/PLC-based control. Total plant cost considered as the basis for percentage. Concept / Approach: Rule-of-thumb ranges for I&C cost share are typically on the order of single digits to low teens percentage of total installed cost for process plants. The exact value depends on process complexity, safety/automation level, and regulatory requirements, but a common planning estimate is around 5–10% of total plant cost. Step-by-Step Solution: List typical cost contributors: field devices, marshalling, control rooms, software, panels.Apply standard estimating ratios used in FEL and feasibility studies.Select 5–10% as the representative band for many chemical facilities. Verification / Alternative check: Industry estimating guides and historical cost studies place I&C costs commonly in single-digit percentages for average complexity plants. Why Other Options Are Wrong: 20–30%, 40–50%, 60–70%: far above typical I&C contributions and would imply extremely instrumentation-heavy facilities (not representative for standard plants). Common Pitfalls: Confusing I&C share with electrical + I&C combined totals or with specialized facilities (e.g., semiconductor fabs) where shares differ. Final Answer: 5 to 10%

Question 4

Fixed charges vs. operating charges in plant economics Which item below is not included under fixed charges for a chemical plant?

Accepted Answer

Introduction / Context: In plant cost accounting, distinguishing fixed charges from operating costs helps assess economics, pricing, and profitability. Fixed charges recur regardless of production rate and are tied to ownership and financing. Given Data / Assumptions: Fixed charges are time-dependent and not directly a function of throughput. Operating costs typically vary with usage and production. Concept / Approach: Fixed charges commonly include interest, taxes, insurance, rent/leases, and depreciation. Repair and maintenance (R&M) depends on operating hours, wear, and utilization; it is treated as an operating (or semi-variable) expense rather than a fixed charge. Step-by-Step Solution: List fixed charges: interest, rent/lease, property tax, insurance, depreciation.Identify R&M as utilization-dependent, not strictly time-only.Therefore, R&M is not a fixed charge. Verification / Alternative check: Standard chemical engineering economics texts classify R&M within operating expenses alongside labor, utilities, and consumables. Why Other Options Are Wrong: Interest, rent, taxes/insurance/depreciation are canonical fixed charges accounted for annually regardless of production. Common Pitfalls: Lumping all yearly recurring costs into fixed charges without considering dependency on plant utilization. Final Answer: Repair and maintenance charges

Question 5

Straight-line depreciation calculation — quick check A machine costs ₹5,000, has a service life of 5 years, and a salvage value of ₹1,000. What is the annual depreciation by the straight-line method?

Accepted Answer

Introduction / Context: Straight-line (SL) depreciation allocates an equal share of the depreciable base to each year of service, making it the simplest accounting method for capital cost allocation. Given Data / Assumptions: Purchase cost P = ₹5,000. Salvage value S = ₹1,000. Life n = 5 years. Concept / Approach: The straight-line formula is Dep(year) = (P − S)/n. The depreciable base is the portion of cost that will be written off over the life, excluding salvage. Step-by-Step Solution: Compute depreciable base: P − S = 5,000 − 1,000 = 4,000.Divide by life n: 4,000 / 5 = 800.Annual SL depreciation = ₹800 per year. Verification / Alternative check: Summing ₹800 for 5 years gives ₹4,000, which equals the depreciable base, confirming the calculation. Why Other Options Are Wrong: ₹300/₹600: understate the depreciable charge; total would not reach ₹4,000. ₹1,000: would overstate annual charge; total would exceed depreciable base. Common Pitfalls: Forgetting to subtract salvage value from purchase cost. Confusing SL with accelerated methods like SYD or declining-balance. Final Answer: ₹800 per year

Question 6

Cost scaling in process design — six-tenths factor rule The six-tenths factor rule is commonly used for estimating which of the following?

Accepted Answer

Introduction / Context: During conceptual design, engineers frequently estimate the cost of equipment at a new capacity based on a known cost at a different capacity. The empirical “six-tenths factor” provides a quick capacity exponent for many equipment types. Given Data / Assumptions: Known equipment cost C1 at capacity Q1. Need to estimate cost C2 at capacity Q2. Use a capacity exponent n ≈ 0.6 (the six-tenths factor) as a rule of thumb. Concept / Approach: The capacity scaling equation is C2 = C1 * (Q2 / Q1)^n. For many process equipment categories, n lies between 0.5 and 0.8; 0.6 is a common default when specific data are not available. This captures economies of scale, where cost increases slower than capacity. Step-by-Step Solution: Identify base data (C1, Q1) and target capacity Q2.Apply exponent n = 0.6 to compute C2 = C1 * (Q2/Q1)^0.6.Use for quick screening estimates before detailed vendor quotes. Verification / Alternative check: Compare results with vendor budget quotes or historical cost curves; deviations indicate the need for equipment-specific exponents. Why Other Options Are Wrong: Installation, piping, and utilities each follow different estimating bases and factors; the six-tenths rule specifically refers to equipment cost versus capacity scaling. Common Pitfalls: Applying 0.6 universally; some equipment requires a different exponent. Ignoring time escalation, material cost swings, and pressure/temperature class adjustments. Final Answer: Equipment cost by scaling (capacity exponent method)

Question 7

Engineering economics – Understanding payback period: In project appraisal for a chemical plant or process unit, the payback period is best defined as which of the following?

Accepted Answer

Introduction / Context: The payback period is a quick-screening capital budgeting metric widely used in chemical engineering economics to judge how rapidly a project returns its original investment through net cash inflows. Although simple, it is helpful for liquidity-oriented decisions and early risk triage. Given Data / Assumptions: Payback focuses on cumulative net cash inflows, not accounting profit. Initial investment is a known outlay at time zero (or over a short construction window). Time value of money is ignored in the basic (undiscounted) payback definition. Concept / Approach: By definition, payback period is the time it takes for cumulative cash inflows to equal the initial investment. It is a liquidity and risk proxy, not a profitability or value-creation measure. Projects with shorter payback are often preferred when uncertainty is high or capital is constrained. Step-by-Step Solution: Identify metric: payback looks at cumulative cash inflows only up to recovery.Compare choices: economic life is the useful operating life; it is not the same as payback.Note that earnings after recovery do not influence the payback number itself.Therefore, the correct definition is: time until cumulative inflows equal the initial investment. Verification / Alternative check: Test with a simple cash-flow table: if a project costs ₹100 and returns ₹40, ₹40, and ₹30 by years 1–3, payback occurs sometime in year 3 when cumulative reaches ₹110. Later inflows do not change the payback already computed. Why Other Options Are Wrong: Economic life equals operating/financial life; it is not the payback period. Payback explicitly ignores post-recovery cash flows; those do not affect the computed period. “All of the above” cannot be correct because the first and third statements are false. Common Pitfalls: Confusing accounting profit with cash flow; ignoring that payback does not incorporate the time value of money or later-year benefits. Final Answer: The length of time required until cumulative earnings (cash inflows) equal the initial investment.

Question 8

Capital budgeting – Limits of the payback method: Which statement correctly describes a limitation/feature of the simple payback approach for measuring return on investment (ROI)?

Accepted Answer

Introduction / Context: The payback method is popular in process industries for rapid screening of projects. However, it is not a comprehensive measure of profitability or value creation. Understanding its limitations prevents incorrect go/no-go decisions. Given Data / Assumptions: Simple (undiscounted) payback is considered. Projects produce annual net cash inflows after startup. No tax, financing, or inflation effects are included in the definition. Concept / Approach: Payback measures the time to recover initial investment but ignores the time value of money and does not provide a rate-based return like internal rate of return (IRR). It also ignores cash flows occurring after the payback moment, which can distort comparisons among projects with different tails. Step-by-Step Solution: Check each statement against the definition of simple payback.Payback does not discount future cash flows, so it does not yield a discounted rate of return → statement (c) is true.It emphasizes, not underemphasizes, liquidity (so b is false).It ignores post-payback inflows (so d is false).It does not provide a full profitability picture (so a is false). Verification / Alternative check: Compare a short-payback/low-profit project with a longer-payback/high-NPV project. Payback can favor the former even if the latter creates more value when discounted cash flow is considered. Why Other Options Are Wrong: (a) Profitability requires NPV/IRR; payback alone is insufficient. (b) Payback actually favors early cash flows (high liquidity). (d) By definition, payback truncates analysis after recovery. Common Pitfalls: Using payback as the sole decision criterion; ignoring that two projects with the same payback can have vastly different NPVs. Final Answer: It does not measure the discounted rate of return.

Question 9

Depreciation – Diminishing balance method: Under the diminishing (declining) balance method, the depreciation in year n is computed by applying a fixed rate N% to which amount?

Accepted Answer

Introduction / Context: Depreciation allocation affects taxable income, performance metrics, and economic evaluations of chemical plants. The diminishing balance method accelerates depreciation by applying a fixed percentage to the remaining book value each year. Given Data / Assumptions: Diminishing (declining) balance method is used. Fixed depreciation rate N is specified. Book value evolves year by year as cost minus accumulated depreciation. Concept / Approach: In the diminishing balance method, annual depreciation is proportional to the opening book value for that year. Thus, the expense declines over time as the base (book value) declines. Step-by-Step Solution: Let BV(n−1) be the book value at the end of year (n − 1).Annual depreciation in year n = (N/100) * BV(n−1).Book value at the end of year n = BV(n−1) − depreciation(n).This repeats until salvage or replacement. Verification / Alternative check: Contrast with straight-line depreciation where a constant charge is applied each year to allocate from initial cost minus salvage over economic life. Why Other Options Are Wrong: Initial cost (a): used in straight-line, not in declining balance for the annual base. Prior year’s depreciation (c): not the base; the base is the book value. Difference between initial cost and salvage (d): straight-line would use this spread, not the declining balance base. Common Pitfalls: Confusing book value with historical cost; ignoring that the rate applies to the beginning-of-year book value each period. Final Answer: The book value at the end of year (n − 1).

Question 10

Costing and design statements – Identify the incorrect one: Which of the following statements is wrong regarding equipment and cost indices for process design?

Accepted Answer

Introduction / Context: Economic and fabrication choices in process design must be grounded in realistic cost relationships. Misconceptions about welding, geometry, and indices can lead to inaccurate capital estimates. Given Data / Assumptions: Tubular exchanger economics typically favor fewer shells and longer tubes per unit area. Cost indices (e.g., CEPCI) benchmark cost levels over years. Turnover ratio commonly relates sales to fixed capital investment. Welding methods affect shop time, edge preparation, and inspection cost. Concept / Approach: Butt welds require precise preparation and alignment; they are generally not inherently “less expensive” than lap welds simply because of “no squaring.” The statement as given is flawed and reverses practical considerations. The other statements reflect standard economic definitions or rules of thumb. Step-by-Step Solution: Evaluate each statement against standard practice.(a) Fewer shells and heads often reduce cost/area → generally acceptable rule of thumb.(b) Correct definition of a cost index.(c) Turnover ratio definition is standard in chemical plant economics.(d) Welding claim is inaccurate; butt-welds typically require edge prep, fit-up, and inspection, and are not intrinsically cheaper for the reason cited. Verification / Alternative check: Fabrication standards note additional QA/QC for butt welds (e.g., radiography), while lap joints can be simpler in certain platework, depending on design codes and service. Why Other Options Are Wrong (i.e., why they are not the incorrect statements): (a) Accepted heuristic for exchanger design cost per area. (b) Correct definition and usage of indices. (c) Common textbook definition for turnover ratio. Common Pitfalls: Overgeneralizing fabrication economics without considering code, thickness, NDT requirements, and corrosion allowances. Final Answer: Plates with butt-welded joints are less expensive than lap-welded joints because squaring of plates is not necessary.

Question 11

Financial ratios and working capital – Identify the wrong statement: Which of the following statements is incorrect for standard chemical engineering economics terminology?

Accepted Answer

Introduction / Context: Accurate use of financial terms is essential for cash planning, credit analysis, and project evaluation in the process industries. Misstating definitions can distort liquidity and profitability assessments. Given Data / Assumptions: Standard definitions: net working capital = current assets − current liabilities. ROI in many texts uses profit before interest and tax (PBIT) over capital employed. Turnover (for goods) = opening stock + production − closing stock (before adjustments for WIP or scrap). Concept / Approach: Working capital measures short-term liquidity available to run operations. Adding current liabilities to current assets (as the statement suggests) inflates the figure incorrectly; the correct relationship is subtraction. Step-by-Step Solution: Recall: Working capital = Current assets − Current liabilities.Check each option: (a) and (b) align with conventional use; (d) is the standard stock reconciliation for turnover.Therefore, (c) is the incorrect statement. Verification / Alternative check: Cross-check any finance textbook or corporate finance primer: net working capital uses subtraction, not addition. Why Other Options Are Not Wrong: (a) Debt–equity ratio definition is widely used in project finance. (b) ROI formula is standard in plant economics. (d) The turnover expression is the classical identity before sales adjustments. Common Pitfalls: Confusing gross working capital (current assets) with net working capital (current assets − current liabilities). Final Answer: Working capital equals current assets plus current liabilities.

Question 12

Working capital planning – Raw material inventory norm: In estimating working capital, a typical allowance for raw materials inventory is approximately how many months’ supply (valued at delivery prices) for a chemical plant?

Accepted Answer

Introduction / Context: Working capital sizing is crucial to avoid stockouts and production interruptions in process plants. Rules of thumb guide raw material inventory levels when detailed logistics data are unavailable. Given Data / Assumptions: Continuous process operations with regular deliveries. Reasonable supply chain reliability. Raw materials valued at delivery prices for inventory purposes. Concept / Approach: Classic chemical engineering economics texts suggest that raw material inventories are often planned around one month of consumption under normal conditions. This balances carrying cost against supply risk, assuming stable procurement and transportation. Step-by-Step Solution: Identify typical norms: RM inventory ≈ 1 month.Recognize exceptions: remote sites or volatile supply chains may require more.Choose the standard baseline answer used in quick estimates: one month. Verification / Alternative check: Comparative industry practices often allocate about a month for RM, smaller for WIP, and modest finished goods inventory, adjusting by product shelf-life and demand variability. Why Other Options Are Wrong: Three to twelve months tie up excessive capital and storage, suitable only for very risky or seasonal procurement scenarios. Six or twelve months are atypical for standard continuous plants due to high carrying costs. Common Pitfalls: Ignoring lead-time variability and minimum order quantities; these may force deviations from the 1-month rule. Final Answer: One month

Question 13

Market research function – Core responsibility: Within a chemical enterprise, personnel in the market research group are primarily responsible for which of the following activities?

Accepted Answer

Introduction / Context: Successful chemical products require alignment with customer needs and market dynamics. The market research function informs product development and commercialization decisions before major engineering expenditures. Given Data / Assumptions: Market research focuses on external demand, competitive landscape, pricing, and customer preferences. Engineering groups handle equipment selection/design and cost estimation. Concept / Approach: Product evaluation considers value propositions, performance requirements, regulatory constraints, and price points to determine if a product concept merits further development and capital allocation. Step-by-Step Solution: Map responsibilities: marketing/research → product-market fit; engineering → equipment and design; finance/estimating → costs.Identify the market research deliverable: product evaluation in market context.Select option (b) as the correct responsibility. Verification / Alternative check: Stage-gate processes assign market assessment to front-end phases prior to basic/detailed engineering. Why Other Options Are Wrong: Equipment selection and design are engineering tasks. Cost estimation is typically done by process engineers and cost specialists. Common Pitfalls: Conflating “what to make” (market-led) with “how to make it” (engineering-led). Final Answer: Product evaluation (market need, customer acceptance, competitiveness)

Question 14

Production planning – What scheduling tells you: In manufacturing scheduling for a chemical plant, which statement best captures the information scheduling provides?

Accepted Answer

Introduction / Context: Scheduling allocates limited resources over time to meet demand and due dates. In the process industries, it coordinates equipment, utilities, and personnel to reduce bottlenecks and idle time. Given Data / Assumptions: Finite equipment capacity and sequence-dependent setups may exist. Jobs or campaigns must meet due dates and quality constraints. Utilities and raw materials are available per plan. Concept / Approach: A good schedule defines what starts when, where, and how much progress should be made in each time window. This inherently supports high utilisation and low idle time, rather than addressing only one of these aspects in isolation. Step-by-Step Solution: Recognise scope: scheduling spans start/finish times and resource assignments.Infer outcomes: proper utilisation and minimal idle time arise from an effective schedule.Therefore, the comprehensive statement (d) is correct. Verification / Alternative check: Common scheduling tools (Gantt charts, finite-capacity schedulers) explicitly output start/finish times, resource loads, and expected completions per period. Why Other Options Are Wrong: (a), (b), (c) each capture only a subset of scheduling information. Common Pitfalls: Confusing scheduling (time allocation) with loading (capacity allocation) or dispatching (issuing work orders). Final Answer: It specifies start times and required work completion within defined periods, thereby minimising idleness and aiding proper machine utilisation.

Question 15

Operating profit – Standard definition in plant accounts: Operating profit for a chemical plant is equal to which of the following?

Accepted Answer

Introduction / Context: Operating profit isolates the profitability from core operations before financing and tax effects. It is also called EBIT (Earnings/Profit Before Interest and Taxes) and is central to ROI calculations in plant economics. Given Data / Assumptions: Interest expense reflects financing choice, not operating performance. Taxes depend on jurisdiction and incentives; they are external to operations. Concept / Approach: Operating profit = EBIT = revenue − operating costs (including depreciation and amortisation) before subtracting interest and tax. Equivalently, EBIT = net profit + interest + tax. Step-by-Step Solution: Start from net profit after interest and tax (NPAT).Add back tax and interest to remove financing and statutory effects.Result equals operating profit (EBIT). Verification / Alternative check: Income statement layout confirms EBIT precedes interest and tax lines; reconciling from NPAT by adding interest and tax is standard. Why Other Options Are Wrong: (b) PAT + depreciation is closer to a cash proxy, not operating profit. (c) Net profit + tax omits interest; still not EBIT. (d) Profit after tax is already downstream of interest and tax. Common Pitfalls: Confusing EBITDA with EBIT; EBITDA also adds back depreciation and amortisation. Final Answer: Profit before interest and tax (i.e., net profit + interest + tax)

Question 16

Materials of construction – Relative cost for pressure vessels: Among the following common choices for pressure-vessel fabrication, which material is typically the costliest per unit mass?

Accepted Answer

Introduction / Context: Material selection for pressure vessels balances corrosion resistance, strength, fabricability, availability, and cost. Exotic alloys can drastically raise capital cost, so understanding relative pricing is essential. Given Data / Assumptions: Typical market conditions and standard grades. Comparison is qualitative (relative cost ranking) rather than exact ₹/kg. Titanium is considered in corrosion-resistant service (e.g., chloride-rich media). Concept / Approach: Low alloy steels are inexpensive mainstream materials. High alloy steels (stainless) are costlier but still far below titanium for most grades. Lead is inexpensive per kilogram but is heavy, soft, and used for specific linings, not general vessel shells. Step-by-Step Solution: Rank by typical market price: low alloy steel < high alloy steel < titanium.Lead is low cost but unsuitable structurally; used selectively for lining.Therefore, titanium is the costliest option among those listed. Verification / Alternative check: Vendor quotes and historical cost data consistently place titanium well above stainless steels and carbon/low-alloy steels. Why Other Options Are Wrong: Low alloy steel: economical structural choice. High alloy steel: costlier than low alloy, but cheaper than titanium in most cases. Lead: cheap but not a vessel shell material; used as lining where needed. Common Pitfalls: Choosing titanium solely for corrosion resistance without evaluating cheaper alternatives (e.g., rubber-lined steel, FRP, or specific stainless alloys). Final Answer: Titanium

Question 17

In engineering economics for process plants, which of the following is NOT considered a component of depreciation (i.e., the systematic loss in asset value due to wear, deterioration, or obsolescence)?

Accepted Answer

Introduction / Context: In plant economics, depreciation is the planned allocation of an asset’s cost over its useful life. It captures value loss from physical deterioration, obsolescence, and inadequacy. Distinguishing depreciation from operating expenses (like maintenance) is essential for correct costing, pricing, and tax calculations. Given Data / Assumptions: We are classifying items that do or do not belong to depreciation cost. Standard textbook definitions for chemical engineering plant design and cost accounting apply. Single-best-choice question; precisely one option should be non-depreciation. Concept / Approach: Depreciation reflects systematic value loss: physical wear and tear, technological obsolescence, and possible economic obsolescence. It is not a cash outflow but an accounting expense. By contrast, repairs and maintenance are periodic operating outlays to keep equipment serviceable, not part of depreciation. Likewise, sudden losses from accidental damage are usually extraordinary/maintenance items, not systematic depreciation. Step-by-Step Solution: 1) Identify depreciation components: physical deterioration (wear), functional/technological obsolescence, and inadequacy.2) Compare options: obsolescence (option b) and physical wear (option e) are classic depreciation drivers.3) Decrease in demand (option c) is a form of external/economic obsolescence sometimes recognized in valuation, but it aligns more closely with the obsolescence category than with operating expense.4) Repairs and maintenance (option a) are operating expenses, not depreciation.5) Accident/breakdown losses (option d) are abnormal or maintenance-related costs, not scheduled depreciation; however, the clearly intended non-depreciation routine item is repairs and maintenance. Verification / Alternative check: Accounting standards and plant design texts separate depreciation (systematic, non-cash) from maintenance (cash operating expense). Financial statements report them in different lines. Why Other Options Are Wrong: Loss due to obsolescence: part of depreciation rationale. Decrease in demand: often treated under economic obsolescence, a recognized depreciation driver in valuations. Accident/breakdown: abnormal loss; while not depreciation, the canonical routine non-depreciation expense is repairs and maintenance. Wear and tear: core to depreciation. Common Pitfalls: Confusing periodic maintenance cash costs with non-cash depreciation; mixing abnormal casualty losses with planned depreciation. Final Answer: Repairs and maintenance cost

Question 18

Which project profitability evaluation method typically does NOT account for the investment tied up in land (an asset that does not depreciate and may be excluded from payback calculations)?

Accepted Answer

Introduction / Context: Project screening in process industries uses several profitability measures. Some consider the total capital employed (including land), time value of money, and salvage; others are simplified screening tools. Understanding which methods ignore non-depreciating assets like land helps avoid biased decisions. Given Data / Assumptions: Land typically has no depreciation and may be treated separately. We compare standard methods: NPV, DCF-based IRR, accounting ROI, and payback. Concept / Approach: The payback period focuses on how quickly initial cash outlay is recovered from net cash inflows. Many simplified payback analyses omit land cost or treat it as recoverable at resale, so it often does not affect the payback calculation. In contrast, NPV and DCF-based approaches include all cash flows and capital employed (including land), discounted over time. Step-by-Step Solution: 1) Identify what each method counts: NPV/DCF count all costs and benefits by discounting cash flows.2) Accounting ROI generally uses total investment base, frequently including land.3) Payback method frequently excludes land or treats it as fully recoverable, thus not impacting the payback horizon.4) Therefore, the payback method is the one that typically does not account for land investment. Verification / Alternative check: Texts in plant design and engineering economy list payback as a crude, non-discounting screen that may omit non-depreciating assets such as land. Why Other Options Are Wrong: NPV and DCF IRR: always include all cash flows and investments. Accounting ROI: uses investment base, usually including land. Benefit–cost ratio: a discounted measure that includes all costs and benefits. Common Pitfalls: Assuming all capital items affect payback equally; ignoring salvage/resale value and time value of money in payback leads to poor comparisons. Final Answer: Pay out period (payback period)

Question 19

Cost structure relationships in a chemical process plant: which of the following expressions is NOT correct?

Accepted Answer

Introduction / Context: Accurate cost definitions are the backbone of pricing, profitability analysis, and budgeting in process industries. Mixing up manufacturing cost, general expenses, and total product cost leads to errors in break-even and ROI calculations. Given Data / Assumptions: Standard chemical engineering cost definitions apply. Total product cost includes both manufacturing cost and general expenses. Concept / Approach: Manufacturing cost typically comprises direct production cost (raw materials, direct labor, operating supplies), fixed charges (depreciation, insurance, taxes), and plant overhead. General expenses cover administrative, selling, distribution, and R&D. Total product cost is manufacturing cost plus general expenses. Step-by-Step Solution: 1) Check (a): Matches standard definition of manufacturing cost.2) Check (b): General expenses are admin plus selling/distribution; correct.3) Check (c): Total product cost = manufacturing cost + general expenses; correct.4) Check (d): Omits general expenses; hence, it is not correct. Verification / Alternative check: Referencing common plant design texts confirms the decomposition of costs into direct, fixed, overhead, and general expense categories culminating in total product cost. Why Other Options Are Wrong: They are standard expressions accepted in plant cost accounting; only (d) leaves out general expenses, so it is incorrect. Common Pitfalls: Confusing manufacturing cost with total product cost; forgetting selling and administration in pricing decisions. Final Answer: Total product cost = direct production cost + plant overhead cost

Question 20

In a manufacturing operation, the break-even point (BEP) is reached when which condition holds true?

Accepted Answer

Introduction / Context: Break-even analysis is a staple of plant economics, revealing the sales volume where neither profit nor loss occurs. This helps set pricing, capacity utilization, and risk thresholds for chemical plants. Given Data / Assumptions: Single product or equivalent product-mix with linear costs and revenues in the relevant range. Fixed and variable costs are identifiable. Concept / Approach: At BEP, total revenue equals total cost. Profit is zero and contribution just covers fixed costs. Any additional unit sold beyond BEP generates profit equal to its contribution margin. Step-by-Step Solution: 1) Define: Total cost = fixed cost + variable cost.2) At BEP: total revenue = total cost, so profit = 0.3) Therefore, the condition is total annual product cost equals total annual sales. Verification / Alternative check: Graphical BEP shows the intersection of total cost and total revenue lines at the break-even output level. Why Other Options Are Wrong: (a) Production rate equality to an assigned value is arbitrary and unrelated to BEP. (c) Profit equals budgeted value is not the BEP definition. (d) Sales equal fixed cost ignores variable cost recovery, which must also be covered at BEP. (e) Contribution margin cannot be zero at BEP; contribution equals fixed cost at BEP. Common Pitfalls: Ignoring variable cost coverage at BEP; confusing cash break-even with accounting break-even. Final Answer: Total annual product cost equals total annual sales (revenue)

Chemical Engineering Plant Economics Questions