Effect of Depreciation Expenses on Profitability of Mineral Processing Plants

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).