Profit VP

In this example, values of both ROI and PBP are sufficient to merit some interest in the project, but they are not sufficient to attract a high degree of interest unless the process is of very low risk and only less-profitable ventures are under consideration.  

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, 

Sometimes, for crude comparisons of flowsheets with different arrangements of process units, the total capital investment in Eq. (17.9) is estimated as the sum of the hare-module costs, or even the sum of the purchase costs and annual production cost, C, includes only the cost of the raw materials, the utilities, and the labor-related operations. The return on investment, is that desired by the company. Here, we take i = 0.20 (20%). 

A measure of economic goodness, which does not involve sales revenues for products and is also used for preliminary estimates when comparing alternative flowsheets during process synthesis, is the annualized cost. It is the sum of the production cost and a reasonable return on the original capital investment where, again, the reasonable return on investment, i i , is taken here as 0.2. Thus, 

This criterion is also useful for comparing alternative items of equipment in a process or alternative replacements for existing equipment. 

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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. 

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. 

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... 

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 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... 

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. 

Because the sunk costs do not count any more, the VP in your example has increased to a value of about k 1800 (Figure 16-14), making it even more attractive to finish the project. This is not because we have already spent so much , but because you expect to earn 1.8 million more when you go on than when you stop. This does not mean that the profit of the project increases - you have already spent k 600. 

If the sales volume exceeds the annual production rate by 10 percent and the inventory is valued at the sales price, then Eq. (9-153) shows that the profit margin is (A]vp/As)100 = 0 percent. If the inventory is valued at the total variable cost, then the profit margin (A]vp/As)100 = (0.1)(1 -0.7) (100) = 3 percent. Hence, the value of the inventory is of vital importance. 

Of course, the main reason companies use DSS is to reduce cost and increase service level. Indeed, reducing cost in the supply chain is a key challenge because, as observed by Rick L. Adams, VP Logistics, Grainger Industrial Supply, A 5% cost decrease has the same impact on profit as a 30% increase in sales. ... 

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

Option Vp. The retailer does not adopt the quantity discount proposed by the wholesaler. When the retailer chooses this option, she/he purchases the products from the wholesaler at an initial price in the absence of the discount, and she/he determines her/himself an optimal order quantity, which maximizes her/his own total profit per unit of time. 

The answer to the above example is summarized in Table 1. Under a WP contract with a wholesale price w, q (w) and P/(w) denote, respectively, the associated Pareto-optimal order quantity and the retailer s maximal probability of achieving her profit target. The Pareto-optimal wholesale price is given by vP = 22. Note that under a feasible WP contract with a wholesale price w, the supplier s profit is deterministic and F (w) = 1 always holds. 

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