Profitability measures

Finding the best solution when a large number of variables are involved is a fundamental engineering activity. The optimal solution is with respect to some critical resource, most often the cost (or profit) measured in doUars. For some problems, the optimum may be defined as, eg, minimum solvent recovery. The calculated variable that is maximized or minimized is called the objective or the objective function. 

RATE OF RETURN-ANOTHER GOOD PROFITABILITY MEASURE... 

ANALYSIS OF ADVANTAGES AND DISADVANTAGES OF VARIOUS PROFITABILITY MEASURES FOR COMPARING ALTERNATIVES... 

It is quite possible to compare a series of alternative investments by each of the profitability measures outlined in the early part of this chapter and find that different alternatives would be recommended depending on the evaluation technique used. If there is any question as to which method should be used for a final determination, net present worth should be chosen, as this will be the most likely to maximize the future worth of the company. 

First, accounting profits are poor measures of true IRRs. Revenues and costs recognized in accounting statements don t correspond very well to actual cash flows. And, because profits are computed over a limited period, they don t adjust properly for the time profile of cash flows from various investments made in previous times or for payoffs that won t occur until after the profit measurement period. 

Baber and Kang submitted a second draft of their contract report to OTA in January 1991, based on the criticisms raised at the workshop. OTA contracted with two of the country s foremost experts on profit measurement, Franklin Fisher (Massachusetts Institute of Technology) and Gerald Salamon (Indiana University), as well as the panel chairman, to provide a thorough review and critique of the second draft. These two reviews formed the basis for a third revised draft of the profit study in March 1991, which was then submitted for further review not only to the Advisory Panel but also to Professors Fisher and Salamon and a... 

For some time, we have used the definition of successful marketing as the creation and satisfaction of a demand at a satisfactory profit. Measured against that definition, many of the heavy inorganic chemicals are not being successfully marketed. 

Finally, the Economic Evaluation should be oriented from the beginning to profitability analysis, by identifying the design elements that have impact on the profitability measures. 

The economic evaluation of the project should be oriented to profitability analysis, as explained in Chapter 14. The estimation of capital investment and operation costs is necessary, but the figures are only intermediate steps to profitability measures. These should be compared with similar processes, or other industrial projects, on a longer-term vision based on a lifecycle analysis. The economic analysis can be done at best with a spreadsheet. 

Before entering into the subject it is worthy to review the definition of the terms in the computation of cash flow and profitability measures (Table 15.12). The profitability measures should be calculated on after-tax basis (net values) to ensure a consistent comparison. A typical tax rate is 35%. 

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