Profit comparison method

In developing profitability comparisons, the method of allocating costs to products that are made in the same equipment or location poses problems. 

The interfacial rheologic properties are extremely sensitive parameters toward the chemical composition of immiscible formation liquids [1053]. Therefore comparison and interpretation of the interfacial rheologic properties may contribute significantly to extension of the spectrum of the reservoir characterization, better understanding of the displacement mechanism, development of more profitable enhanced and improved oil-recovery methods, intensification of the surface technologies, optimization of the pipe line transportation, and improvement of the refinery operations [1056]. 

Finally, we are in the business to produce products and profits. Broadly, if a product is made in 3-4 reaction steps in the batch-manufacturing environment, the market value should be 10 times the materials. If market value is only twice the raw material cost, the project should be redefined or stopped. In a 10-step process, it is not uncommon that materials are 1/20 of the selling price. A comparison of a two reaction step product using discounted cash flow methods (11) showed that a process with a market value 4 times the materials was greatly preferred over one at 3 times materials. 

Methods for including the cost of capital in economic analyses have been discussed in Chap. 7. Although the management and stockholders of each company must establish the company s characteristic cost of capital, the simplest approach is to assume that investment of capital is made at a hypothetical cost or rate of return equivalent to the total profit or rate of return over the full expected life of the particular project. This method has the advantage of putting the profitability analysis of all alternative investments on an equal basis, thereby permitting a clear comparison of risk factors. This method is particularly useful for preliminary estimates, but it may need to be refined further to take care of income-tax effects for final evaluation. 

The basic aim of a profitability analysis is to give a measure of the attractiveness of the project for comparison to other possible courses of action. It is, therefore, veiy important to consider the exact purpose of a profitability analysis before f c standard reference or base case is chosen. If the purpose is merely to present the total profitability of a given project, a simple statement of total profit per year or annual rate of return may be satisfactoiy. On the other hand, if the purpose is to permit comparison of several different projects in which capital might be invested, the method of analysis should be such that all cases are on the same basis so that direct comparison can be made among the appropriate alternatives. 

Example 5 Comparison of alternative investments by different profitability methods. A company has three alternative investments which are being considered. Because all three investments are for the same type of unit and yield the same service, only one of the investments can be accepted. The risk factors are the same for all three cases. Company policies, based on the current economic situation, dictate that a minimum annual return on the original investment of 15 percent after taxes must be predicted for any unnecessary investment with interest on investment not included as a cost. (This may be assumed to mean that other equally sound investments yielding a 15 percent return after taxes are available.) Company policies also dictate that, where applicable, straight-line depreciation is used and, for time-value of money interpretations, end-of-year cost and profit analysis is used. Land value and prestartup costs can be ignored. 

A convenient basis for comparison consists in determining the minimum profitable selling prices by setting a value of the POT (five years for example) or of the internal rate of return. In the latter case, an approximate method for linear depreciation of the fadlities over ten years and an internal rate of return of 15 per cent, consists in applying the following expression ... 

Three research studies compared adjusted pharmaceutical industry profits with similarly adjusted profits in other industries. Table 4-8 summarizes the methods and results of these studies. Once again, these studies include a small number of pharmaceutical and nonpharmaceuti-cal firms, virtually all successful, and examine a short time period. Nevertheless, these studies show that adjusting accounting rates of return for investments in R D and advertising does not completely erase differences in computed profits between pharmaceuticals and the comparison industries. 

It is interesting to note that the required pretreatments and product value follow almost reverse orders. However, many other factors should be included for an adequate comparison of these alternatives the possibility of carrying out the treatment in existing or new facilities, minimum size of the industrial plants needed to be profitable, required investment, plant location, etc. Hofmann and Gebauer19 have identified the main problems involved in several of the feedstock recycling methods ... 

In reality, of course, atoms obey quantum mechanics rather than classical mechanics. As you will discover in other chapters in this book, great advances have been made recently in the quantum mechanical treatment of molecular systems. However, one should realize just how much care has to go into the selection of correct coordinates and the necessity to choose appropriate systems for quantum mechanical study. For arbitrarily large systems, or for systems containing several heavy atoms, quantum methods are not yet readily applicable. It is in such cases that classical mechanical approaches can be utilized with profit. Furthermore, even in systems for which quantum mechanical treatments are now feasible, comparisons with classical data often help researchers to isolate those phenomena which arise solely in the quantum mechanics, yielding fundamental insight into the two different dynamics. In the classical approach, the motion of each atom is calculated by numerically solving the classical differential equations of motion (1), either second order with respect to time in the positions, x (Newton s law), or,... 

Project Present Worth Method. This method recognizes the time value of money and is more widely used by economists and accountants in presenting profitability reports to management, particularly when two processes require close comparison. Engineers should have an understanding of this method. 

Physical man has himself become the object of a separate science, anatomy, which in its ordinary meaning includes physiology, that science which had been retarded by a superstitious respect for the dead, profited from the general enfeeblement of prejudice and successfully undermined the support that it received from powerful men who were interested in its preservation. Its progress seems somehow to have come to a stop, and to await the discovery of improved instruments and new methods. And it now seems to be almost reduced to the study of the comparisons between the parts of animals and those of men, the organs common to different species, and the manner in which similar functions are exercised, in its search for those truths which are at the moment not open to human observation. Almost everything which the eye of the observer has been able to discover with the aid of a microscope is already unveiled. The future development of anatomy seems to depend on the possibility of experiment which has proved so useful to the progress of other sciences. But this necessary means of improvement has been denied to anatomy by the very nature of its subject. 

A financial analysis procedure specifically devised by Mossman (1989) for comparison of OTEC price estimates with other energy somces allows a valid comparison to be made of the relative commercial attractiveness of energy production methods. It establishes uniform guidelines to estimate the sales price that would return an acceptable profit for investors in alternative energy production systems. The Mossman procedure eliminates distortions and misunderstandings caused by failure to include the effects of government subsidies or hidden costs that differ widely among the various options. 

The economic contribution that OTEC will make to the solution of the nation s energy problems depends on whether its virtues relative to existing and alternative sorrrces of energy and fuels are recognized, and whether it can elicit funding for commercialization. By using the Mossman financial analysis method to estimate the prices that must be charged for profitable operation, a decision to fund OTEC commercialization can be based on an unbiased comparison of prices of OTEC fuel or electricity, with prices... 

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