Effect of Depreciation Expenses on Profitability of Mineral Processing Plants

Hussin A. M. Ahmed

doi:10.3139/120.110586

Article

Effect of Depreciation Expenses on Profitability of Mineral Processing Plants

Published/Copyright: September 28, 2014

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From the journal Materials Testing Volume 56 Issue 6

Abstract

Depreciation expenses are tax free and thus they affect project profitability. There are different methods for depreciation expenses calculation. Some countries impose a well-defined depreciation method in its taxation system while others do not. Therefore, this paper aims at investigating the effect of the applied depreciation method on the profitability of a Saudi gold processing plant where a strict depreciation schedule of the taxation system is not defined. The study was applied to a Saudi gold mine in the southern part of the kingdom. The plant profitability – expressed by NPV, IRR and PBP was estimated applying different methods of depreciation estimation (straight line method, double declining method, sum of year digits method, and the fixed declining method). The obtained results showed that the plant profitability is highly affected by the method of depreciation calculation. An average change in the plant profitability indices may reach up to 30% due to the method applied for estimation of depreciation expenses. The method that returned the highest plant profitability was the fixed declining method for calculating depreciation (NPV = 95.7 Mw, IRR of 15.4% and PBP of 4.8 year). While using straight line method returned the lowest project profitability (NPV = 76.2 M$, IRR of 11.8% and PBP of 6.4 year).

Kurzfassung

Abschreibungen sind steuerfrei und wirken sich somit auf die Profitabilität von Projekten aus. Es gibt verschiedene Verfahren, um die Abschreibungen zu kalkulieren. Einige Länder erheben Abschreibungen nach sehr wohldefinierten Verfahrensweisen in ihrem Steuersystem, während andere dies nicht tun. Der vorliegende Beitrag hat das Ziel die Auswirkungen der angewendeten Abschreibungsverfahren auf die Profitabilität einer Goldverarbeitungsfabrik in Saudi Arabien zu untersuchen, wo das Steuersystem nicht streng geregelt ist. Die Studie wurde auf eine Goldmine im Süden des Königreichs Saudi Arabien angewendet. Die Anlagenprofitabilität, in Form von NPV (Kapitalwert), IRR (interne Rentabilitätsziffer), und PBP (Amortisierungszeitraum) wurde abgeschätzt, indem verschiedene Verfahren der Abschreibungsbewertung angewendet wurden (geradliniges Verfahren, degressive Abschreibung, Summe der Jahre und feste Abnahme). Die entsprechenden Ergebnisse zeigten, dass die Anlagenprofitabilität stark von dem Verfahren der Abschreibungsberechnung beeinflusst wird. Die durchschnittliche Veränderung der Anlagenprofitabilität kann bis zu 30 Prozent, je nach dem welches eingesetzte Verfahren zur Abschreibungsberechnung benutzt wurde, erreichen. Das Verfahren, das die höchste Anlagenprofitabilität ergab, war die feste Abnahme in der Kalkulation (NPV = 95,7 M$, IRR = 15,4% und PBP = 4,8 Jahre), während das geradlinige Verfahren die niedrigste Projektprofitabilität erzielte (NPV = 76,2 M$, IRR = 11,8% und PBP = 6,4 Jahre).

Keywords: Materials testing; deprecation; taxes; mineral processing; profitability indices

*Correspondence Address, Hussin A. M. Ahmed, Mining Engineering Dept., King Abdulaziz University, Saudi Arabia, E-mail: hussien135@gmail.com

Permanent address: Central Metallurgical Research and Development Institute (CMRDI), Helwan, Cairo, Egypt

Dr. Hussin A. M. Ahmed received his BSc in mining and metallurgical engineering from Assuit University, Egypt in 1991, and a master degree from Cairo University, Egypt in 1998. Since 2005, he obtained his PhD from Wroclaw University of Technology – Faculty of Geoengineering, Mining and Geology, Wroclaw, Poland. His permanent works is in Central Metallurgical Research and Development Institute in Egypt but currently he is an associate professor at Mining Engineering Department, King Abdulaziz University, Saudi Arabia.

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Published Online: 2014-09-28

Published in Print: 2014-06-01

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Articles in the same Issue

https://doi.org/10.3139/120.110586

Keywords for this article

Materials testing; deprecation; taxes; mineral processing; profitability indices