Elementary Profitability Measures

A company wants to make the largest profit it can from the money it invests. It wants to be able to compare the prospective earnings it may get from different ventures. Two of the simplest measures are the return on investment and the payout time. 

The return on investment is the expected profit divided by the total capital invested. This is the percentage return that an investor may expect to eventually earn on his money. Since the federal corporate income tax rate is around 48% on all profits, it must be stated whether the profit is the before- or after-tax earnings. 

Example 10-1 shows how to determine the minimum selling price for a product, assuming a 30% pretax R.O.I. If the product does not have an excellent chance of selling at that price or better, the project should be terminated. 

The investment cost for a 120,000,000 lb/yr plant is estimated at 15,000,000. The working capital is 3,000,000. From the unit ratio material balance, the energy balance, and an estimation of the labor, the following costs per pound of product were determined  

Waste treatment none (pollution included in capital 

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