Approximate Profitability Measures

Be able to compute approximate profitability measures, such as return on investment (ROI), payback period (PBP), venture profit (VP), and annualized cost (C ). These measures provide a snapshot view of the economic goodness, usually in the third year of operation. They do not include the time value of money, that is, compound interest. 

For use with approximate profitability measures, as applied here to the preliminary calculation of the annual manufacturing cost, depreciation, D, is estimated as a constant percentage of the total depreciable capital, This type of depreciation is referred to as... 

Table 17.4 Approximate Profitability Measures Time Value of Money Is Ignored and Straight-Line Depreciation Is Used (Details Presented in Section 17.4)...

In Example 17.15, approximate profitability measures, when applied to the MCB plant, are not favorable. However, one of the chemicals produced, MCB, is given a selling price of 0.52/lb, which is not well established by current competition. 

Compute approximate profitability measures, ROI, PBP, VP, and annualized cost. 

This section concludes with a presentation of the calculations to obtain several of the profitability measures. Normally, this includes one or more of the approximate measures, such as return on investment (ROI) and venture profit (VP), and one or more of the rigorous methods that involve cash flows, such as net present value (NPV) and investor s return on investment (IRR). The latter is also referred to as the discounted cash flow rate of return (DCFRR). In all cases, it is important to indicate clearly the depreciation schedule and, for the rigorous methods, to provide a table that shows the calculation of the annual cash flows, as shown in Example 17.29, as well as plots of cash flow of the type shown in the same example. Finally, the design team should present its judgment of the profitability of the proposed plant. 

Even when the foundations of a theory are rigorous, various approximations creep in by the time the theory is adapted to an interpretation of the experiments under consideration. Some approximations are nearly impossible to justify within the rigorous framework of the theory. Anyone who attempts to trace a linear path from theory to experiment or vice versa is likely to misunderstand how science actually progresses. In order to judge the merits and faults of an approximation in any area one must know the aims, which derive from an unwritten code of the investigators in that area. It is only partly correct to say that theory determines what we measure. Theory indicates the properties we can profitably measure, but it is equally true that experiments modify, or even mangle theory in the process of interpreting the results. 

Simplified Profitability Criteria. Approximate profitabihty criteria that do not require a detailed year-by-year financial analysis are sometimes employed as simple figure-of-merit measures. 

K/aki)1/bi. Since output is equal to the smaller of these two values, equality of the ratios implies no redundant inputs. Output is proportional to the vertical axis, since li/a, but the proportionality factor differs for each process. The exponent, b, is usually found to be approximately. 6 or. 7 if represents plant and equipment measured in dollars. Because of the increasing returns to when b < 1, it will generally not be profitable to produce output by using more than one process, so that many combinations of inputs will not be utilized when a small number of processes are available. 

The contractors used a new technique that adjusts accounting profits to obtain a closer approximation of IRRs. IRRs cannot be measured... 

An approximate measure of the profitability of a potential process that does take into account the size of the project is venture profit. It is used often for preliminary estimates when comparing alternative flowsheets during the process synthesis stage of process design. VP is the annual net earnings in excess of a minimum acceptable return on investment, Thus,... 

Net profit of SMEs will be measured by the survival level of companies with net profits from net income of approximately from less than 5 to 15 % and above as the researcher has defined, as the OSMEP (2013) set equations to predict the survival of SMEs in Thailand into 5 levels as follows ... 

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