Annual Profit

The total production cost (variable plus fixed operating costs, overheads and depreciation) when subtracted from the factory netback (total revenues less selling costs) leads to an operating profit, often called gross profit , but more correctly profit before interest and tax (PBIT). From this, then, is subtracted the annual interest paid on the loans 

The corporation tax payment is usually a percentage of the PBT figure, and is frequently actually paid in the year following that in which the profits were earned. However, it is customary to account for it in the same year, as far as feasibility calculations are concerned. 

With the tax deducted from the PBT, the net profit, net earnings or profit after tax (PAT) is determined, to be the prime source of real income for the project, but not the only one. 

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The terms gross annual profit Agp and net annual profit Avp are commonly used by accountants and misused by others. Normally, both Agp and A vp are calculated before tax is deducted. Gross annual profit Agp is given by... 

FIG. 9-1 Relationship between annual costs, annual profits, and cash flows for a project. A d — annual depreciation allowance Acf — annual net cash flow after tax Ac/ = annual cash income Age = annual general expense Aqp = annual gross profit A/r = annual tax A e = annual manufacturing cost Avc/ = annual net cash income Avvp = annual net profit after taxes A/ p = annual net profit As = annual sales Apc = annual total cost (DCFRR) = discoiinted-cash-flow rate of return (NPV) = net present value. 

Since different meanings are ascribed to both annual profit and invested capital in Eq. (9-25), it is important to define the terms precisely. The invested capital may refer to the original total capital investment, the depreciated investment, the average investment, the current value of the investment, or something else. The annual profit may refer to the net annual profit before tax A vp, the net annual profit after tax Awp, the annual cash income before tax Aci, or the annual cash income after tax A vcf... 

The fractional interest rate of return based on the net annual profit after tax and the original investment is... 

As for the contribution efficiency T[, it is the ratio of (1) the annual profit that can actually be achieved in a given year for a given sales volume to (2) the profit that could be obtained if no repayment of capital or interest were required and all fixed-expense items were credited free to the project. It is defined by... 

In both Eq. (9-127) and Eq. (9-128), the net annual profit can be either before or after tax. It can also include interest and dividends receivable, etc. 

Obviously, the net annual profit must be clearly defined before comparisons are made with other companies. Similarly the term investment in Eq. (9-128) can have a variety of meanings. The two most common ones (used when assessing the profitability of companies as opposed to projects) are total assets and owners equity or capital employed. In the first case, Eq. (9-128) can be written as... 

Stockholders equity = total assets — total debt (9-136) Equations (9-130) and (9-136) can be combined to give net annual profit... 

Row 2 in Table 9-24 is the profit margin (PM) of Eq. (9-127). In this case, the net profit referred to is the net annual profit after tax and depreciation Awp. The net sales is the revenue from annual sales As after deductions for returns, allowances, and discounts for gross sales. 

The profit of 10 percent, indicated by ratio 3 in Table 9-26, will be reduced by any dividend due to preferred stockholders, because such payments are not part of fixed-debt expenses the residue is shared among the ordinaiy stockholders. If all the long-term debts were in redeemable 6 percent preferred shares, then (from ratio 3) the net annual profit (aftertax) is Av.vp = 0.10(0.40 A ), or 0.04 A. Interest due on preferred shares is 0.06(0.12 As), or 0.0072 As- Therefore, the earnings for the ordinaiy shares are... 

Clearly, the value of Cinv affects both the annual cash income and the net annual profit. Since annual cash incomes are the basic data for (NPV) and (DCFRR) methods of estimating profitability, the actual value per unit of inventory is of direcl importance for chemical engineers engaged in economic assessments. 

However, the annual profit (before tax) does depend on the value of the inventoiy. Since the tax payable in any individual year is based on A vp, the net annual profit A v fp (after tax) is also dependent on the method chosen for valuing inventoiy. Frequently, a particular method for valuing inventoiy is chosen to delay payment of tax as long as it is legally possible to do so. 

An income statement or profit-and-loss account gives the net annual profit A vp before tax. In order to assess the annual cash income Ac, as a source of funds from the value of the net annual profit A vp given in the income statement, it is necessary to add back all noncash expenses such as the balance-sheet annual depreciation charge Abd-This practice sometimes erroneously suggests that depreciation is a source of funds, whereas cash income is the only source of funds. 

The gross annual profit Acp in Table 9-36 is dependent on the balance-sheet annual depreciation charge Abd, whicm is not necessarily the same as the depreciation allowance used for tax purposes. Since Abd is arbitrarily chosen, it can be used to make the gross annual profit Agp high or low according to the company policy. 

The gross annual profit Acp for a product is given by Agp = As Ah — ApD where Ac is the revenue from annual sales, A... 

Absorption, rate-of-return, and marginal pricing have been considered here on the basis of manufacturing cost. Total cost, which is the sum of manufacturing and general costs, can also be considered as the basis. In this case the appropriate profit to consider is the net annual profit rather than the gross annual profit. 

What is the objective function We select the annual profit so that... 

The net annual profit is the difference between the revenue from sales and the total manufacturing expenses. Out of this profit, the company has to pay income taxes, which are supposed to equal 50% of the net annual income. The after-tax net annual income is the difference between the net annual income and the income taxes. 

It is now possible to compute the after-tax rate of return, which is the net annual profit after tax, divided by the total capital investment (fixed capital costs plus working capital), multiplied by 100. In the case presented here, the after-tax rate of return is 18.16%. 

This phenomenon has had a dramatic effect on strategic planning within large pharmaceutical companies. The resulting abrupt removal of several billion dollars in annual profits makes the maintenance of a strong research and development portfolio absolutely vital. Much has been written by equity analysts over the years about the relative strengths or weaknesses of companies ... 

The complete data are given in Ref. 79. The objective of the synthesis exercise is to find the designs that maximize the annual profit of the process for a minimum production rate of 400 kg/h of component R... 

Ranks Within This Company s Industry Group Ranks, within this firm s segment only, for annual sales and annual profits, with 1 being the highest rank. 

Annual Profits (2007 or the latest fiscal year available to the editors, plus up to four previous years) These are stated in thousands of dollars (add three zeros if you want the full number). This figure represents consolidated, after-tax net profit from all operations. 2007 figures may be estimates or may be for only part of the year—partial year figures are appropriately footnoted. 

Payback Period = Capital Invested Annual Profit... 

With a profit per tire of 0.45, his gross annual profit is 0.45 x 1 million tires = 450,000. Then the payback period on the 1 million facility is... 

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