Incremental investments

Z = Fractional annual rate of return on incremental investment q = Flow rate, ftVsec... 

The strategy of increasing the number of workstations is widely applied since a relatively minor incremental investment is required for each addition, which in theory results in a twofold increase in throughput for that particular assay. Perhaps four or five workstations are required for each overall twofold increase for all assays. Although not a 1 1 ratio, additional personnel is required to man the extra workstations. For a time this approach to scaling up works, however with the anticipated increases for ADME/Tox screening one can expect to see a limit reached relatively soon with the number of additional workstations and personnel that the facility can handle. 

The risk involved in the incremental investment of S5 million was too high until development drilling could confirm additional reserves, thus causing a project delay... 

The incremental investment and operating expenses for two 12,000-B/D modules in lieu of one... 

The rate of return on the 1,200,000 unit is 20 percent, and that for the alternative addition is 15 percent. Both of these returns exceed the minimum required value, and it might appear that the 2 million investment should be recommended because it yields the greater amount of profit per year. However, a comparison of the incremental investment between the two proposals shows that the extra investment of 800,000 gives a profit of only 60,000, or an incremental return of 7.5 percent. Therefore, if the company has 2 million to invest, it would be more profitable to accept the 1,200,000 proposal and put the other 800,000 in another investment at the indicated 14 percent return. 

Because annual saving is greatest for design No. 2, this would be the recommended alternative which is the same result as was obtained by the direct analysis based on return on incremental investment. 

The point of maximum net savings, as indicated by 0 in Fig. 10-5, represents a classical optimum condition. However, the last incremental investment before this maximum point is attained is at essentially a zero percent return. On the basis of alternative investment comparisons, therefore, some investment less than that for maximum net savings should be recommended. 

The exact investment where the incremental return is a given value occurs at the point where the slope of the curve of net savings versus investment equals the required return. Thus, a straight line with a slope equal to the necessary return is tangent to the net-savings-versus-investment curve at the point representing the recommended investment. Such a line for an annual return on incremental investment of 20 percent is shown in Fig. 10-5, and the recommended investment for this case is indicated by RI. If an analytical expression... 

In comparing a pair of alternatives, the base time is chosen as the longer of the two service lines. For the case of the investment with the shorter life, it is assumed that the accumulated amount at the end of its life can be invested at the minimum acceptable rate for the remaining time to equalize the two lives. The rate of return on the incremental investment can then be determined. 

Therefore, a gain of 785,000 — 398,000 = 387,000 is made in 7 years by an added investment of 70,000 if investment No. 2 is made instead of investment No, 1. The discounted-cash-flow rate of return for this incremental investment is... 

Z = fractional rate of return (or cost of capital before taxes) on incremental investment... 

Problem 17. Incremental Investment Comparison for Two Conversions for a Dicyanobutene Reactor System ... 

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