Profitability, Alternative Investments, and Replacements

The word profitability is used as the general term for the measure of the amount of profit that can be obtained from a given situation. Profitability, therefore, is the common denominator for all business activities. 

Before capital is invested in a project or enterprise, it is necessary to know how much profit can be obtained and whether or not it might be more advantageous to invest the capital in another form of enterprise. Thus, the determination and analysis of profits obtainable from the investment of capital and the choice of the best investment among various alternatives are major goals of an economic analysis. 

There are many reasons why capital investments are made. Sometimes, the purpose is merely to supply a service which cannot possibly yield a monetary profit, such as the provision of recreation facilities for free use of employees. The profitability for this type of venture cannot be expressed on a positive numerical basis. The design engineer, however, usually deals with investments which are expected to yield a tangible profit. 

Because profits and costs are considered which will occur in the future, the possibilities of inflation or deflation affecting future profits and costs must be recognized. The strategy for handling effects of inflation or deflation is discussed in Chap. 11. 

Investments may be made for replacing or improving an existing property, for developing a completely new enterprise, or for other purposes wherein a 

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Profitability, Alternative Investments, and Replacements the profitability of an investment is a measure of the amount of profit... 

The subject of incremental costs is covered in detail in Chap. 10 (Profitability, Alternative Investments, and Replacements). Consideration of incremental costs shows that a final recommended design does not need to correspond to the optimum economic design, because the incremental return on the added investment may become unacceptable before the optimum point is reached. However, the optimum values can be used as a basis for starting the incremental-cost analyses. 

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