Capital Argument$

A trademark of Paperitalo Publications
Published on the 15th of every month
March 2016
Horizontal PM
Horizontal PL II
 
Repair vs. Replace
 

Earlier this month, in PaperMoney, I penned a column entitled, "Signs of Recession--will maintenance suffer?"  Reports from the field, even in the two weeks since this column came out, confirm my worst fears.

For major corporations, whose leaders have more of a fear of their stock performance than cash flow, help is at hand, although it may mean going into your next capital budget planning cycle to effect a solution.  
 
Most mills with any age on them have a vital piece of equipment--it may be a refiner, a major pump, a breast roll, or something else--that just does not perform up to standards.  It constantly needs repair, causes downtime, and is a potential source of injuries (because people are around it more often than should be necessary).
 
If this item is fully depreciated, or if the amount of book value left is somewhat less than what you have been spending per year to maintain it for the last few years, there is a great solution at hand, if you are able to convince the powers that be. (Show them this column if necessary.)
 
That solution? Buy a new one whose cost is capitalized. Operationally and maintenance-wise, life will be much better, and the books will show better results, too.
 
Let's say this errant piece of equipment is causing you $100,000 per year in lost production, maintenance and excessive energy costs (as compared to a new model).
 
A new one costs $500,000 (TIC) and can be depreciated in 20 years. (I am making that up, as I don't know what the depreciation schedule is).
 
Further, the old one is on the books with a residual value of $50,000.
 
Let's talk about the old one first.  You are going to eliminate $100,000 in costs the first year by replacing it (see above).  Because it has a book value of $50,000, you will have to take a hit on your P & L for this amount the first year.  So, first year savings is $100,000 minus $50,000 equaling $50,000.  
 
The new one is going to depreciate over 20 years, or at a rate of $25,000.
 
At today's interest rates, even if your company is a sad case with a poor credit rating, the $500,000 is going to cost $30,000 per year in interest.
 
So, in the second year, we saved $100,000 in costs the old unit was incurring, less $25,000 in depreciation, less $30,000 in interest for a total savings of $45,000 per year.  Now, you are going to have to pay off that new piece of equipment, but I have $45,000 in free cash flow to retire the debt incurred for this piece of equipment and to send a little to the shareholders in their dividend. Plenty of wiggle room here.
 
My example is ultra-simplistic, but you get the idea.  Even when you bring in tax considerations, which I have not done, it is still a big winner.  
 
And your mill has one less operational and maintenance headache.
 
Engineering Manager of the Year, call for nominations

We are looking for an individual who has done an extraordinary project, one that almost defies belief.  Its extraordinary features can be schedule, technology, cost or all three.
 
We have often gotten nominees that go something like this, "I nominate Joe because he has done a great job of running our engineering department for the last fifteen years." Quite frankly, we are not interested in such nominees.
 
However, if you know someone who has led a very exceptional project in the recent past (the last two or three years), we want to know about it.  We want to honor them and hold them up as an example for Engineering Managers in every pulp and paper mill around the world.
 
Just send your nomination, with as much details as you can provide, to [email protected].  We will seriously consider it.
 
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Current Patent Activity is available here.
 
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Capital Arguments Engineering Manager of the Year
Hall of Fame

CA LogoSince its inception, Capital Arguments has believed extraordinary projects are possible.  They can be done safely, responsibly and offer a great advantage to their mills with lower capital costs and saved downtime. We established this award in 2008 to recognize those people and companies that follow this philosophy. This award is given once per year somewhere in the world.  We honor our inductees permanently here.



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Engineering Manager of the Year 2015

We have a winner and will be announcing them shortly.

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Not Awarded 2014

You have to be really good to get this award.  We did not receive any qualifying nominations in 2014.

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Not Awarded 2013

You have to be really good to get this award.  We did not receive any qualifying nominations in 2013.

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Not Awarded 2012

You have to be really good to get this award.  We did not receive any qualifying nominations in 2012.

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Ed Kersey--Engineering Manager of the Year 2011


Jim presents Ed with the Engineering Manager of the Year for 2011.
(L - R) Matt Nilsen, Jim Thompson, Ed Kersey and Wayne South.  Nilsen is Account Manager and South is Business Development Manager for Kadant Black Clawson, underwriter of this year's award.  Ed Managed the construction of the Pratt Industries mill in Shreveport, Louisiana which took 13 months from piling to paper on the reel.  His reward?  They made him mill manager!

Peter Flynn and Steve Roush

Kadant Black Clawson was a major sponsor of the 2011 Award.  Here, on the left,  Peter Flynn, President of Kadant Black Clawson, receives the company's duplicate of Ed's Award from Steve Roush, Publisher and Editor, Paperitalo Publications. 
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Not Awarded 2010

You have to be really good to get this award.  We did not receive any qualifying nominations in 2010.

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Dean Abrams--Engineering Manager of the Year 2009

Now retired, Dean was an engineer at Corrugated Services, Forney, Texas, USA in the summer of 2009 when he completed his award winning project.  Dean managed a team that installed a secondary headbox in 11 hours, 30 minutes, paper-to-paper.  The experts had said it would take at least 3 days.  In April 2010, we presented the award to Dean in the presence of a number of his colleagues.

Dean Abrams Award 
 
Here is the award we presented to Dean:

Deans Plaque























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Mike Ahcan--Engineering Manager of the Year 2008

Mike works at the UPM Blandin Mill in Grand Rapids, Minnesota, USA. In 2008, the mill's sole effluent pipe, running outside a building, almost in the Mississippi River, was determined to be in a state of imminent collapse.  The experts said it would take a week of total mill downtime to replace it.  Additionally, there was a danger of leakage into the river.  Mike and his team went to work and replaced the pipe without any downtime and with no spillage.  We had a banquet in Grand Rapids for him in July 2009.

OpTest Official Solid Background









And here is Mike's award:

OpTest Official Solid Background













We normally accept nominations in the November-December time frame.  They can be sent to [email protected] with "EMOY Nomination" in the subject line. 
 
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