Proceeds per Dollar of Outlay annual

The Average Annual Proceeds per Dollar of Outlay is obtained by dividing the Proceeds per Dollar of Outlay by the number of years that it is estimated the plant will operate. Again, the plant having the highest indicator value is considered the best. 

The two indicators used in Example 10-5 give different answers. The Proceeds per Dollar of Outlay procedure is obviously wrong. It would take 12.5 years to pay off the investment for plant 1. If the 15,000,000 pretax profit available at the end of year 4 were invested at 7% interest, the accumulated interest would have exceeded 10,800,000 before plant 1 was paid for. In other words, the total profit for plant 1 would exceed 25,800,000 before plant 2 showed a profit. This is more than the total profit made by plant 2 during its whole life. If the 15,000,000 profit of plant 1 were invested for 21 years at 7% compounded annually, the total interest would amount to 47,100,000 or the total earnings would be 62,100,000. If after plant 2 were paid off die profits were invested at 7% per year, the interest would amount to 8,900,000 or a total pretax profit of 33900,000 25 years after the plant startup. This is 28,200,000 less than that earned in the same amount of time by plant 1. This shows that for this example the Annual Proceeds per Dollar of Outlay is a better economic indicator. 

The Annual Proceeds per Dollar of Outlay, however, does not consider the order in which proceeds are received, and has an even worse failing in that it favors investments that have large initial proceeds and a short life. 

Compare the following two plants using the Annual Proceeds per Dollar of Outlay. Plant 1 has a life of 2 years and plant 2 will last 5 years. The capital investment for each plant is 20,000,000. The proceeds (depreciation charges have not been included as an expense) are as follows ... 

Estimate the working capital and determine the annual proceeds per dollar of outlay and the payout time for a plant producing melamine. Use the figures given in Chemical Week, Nov. 25, 1967, p. 78. These are duplicated below. Melamine sells for 26.50/lb. 

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