Profitability analysis annualized cost

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. 

Profitability- Analysis A document supplying information on the profit potential of the final plant. Several standard methods such as return on investment, venture profit, payback period, and annualized cost are used to calculate the expected profitability [957]. 

Chapter 17 Annual Costs, Earnings, and Profitability Analysis... 

When the appropriate specifications are made. Aspen IPE computes annual operating costs, as well as a complete profitability analysis, the results of which appear in this Investment Analysis spreadsheet. These notes discuss capital cost estimation only because the spreadsheet, Profitability Analysis-l. O.xls, which is discussed in Section 17.8 of the textbook, is used to compute operating costs, working capital, and profitability measures. 

The net income statement is used to compute the annual net income or deficit of a project. The statement differs from the cash fbw schedule because it shows incomes and costs and not revenues and expenditures by period. The accrual concept is used in which income from operations is associated with the costs needed to produce the income during the same period. In financial analysis for feasibility studies, it is usually assumed that inventories are the same at the beginning and end of each year. The derivation of costs, revenues, and investments are shown in Figure 21.2. The income statement is related to the balance sheet statement as shown in Figure 21.3 such that the annual profit (or loss) increases (or reduces) the net worth of the company. The balance sheet statement shows the accumulated wealth of a company (assets) and how these assets are financed fliabilities). By definition both sides are equal. 

The final part of the analysis (bottom of Figure 24.21 is the calculation of probable loss of property and loss of business if a fire or explosion were to occur. The area likely to be damaged is estimated from the F EI. The value of the equipment in this area ( 5 million in the exanple) is used to estimate the likely property loss, which is a function of loss control credits. The business interruption loss is estimated based on (1) probable days of outage and (2) annual fixed costs plus before-tax profit. 

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