Profitability plus interest

Before closing the deal your alternatives should also be considered. Some mutual funds have at times earned 12% annually. These are based on a portfolio of stocks and there is no guarantee that there will not be a loss instead of a profit. If 13,500 is invested at 12% per annum, after 7 years the value of the principal plus interest is 29,800. To request this amount from your roommate in return for financing his car would still be reasonable. Other alternatives would be municipal or government... 

Times interest earned Profit before taxes plus interest charges/interest charges 7.0-8.0... 

The total production cost (variable plus fixed operating costs, overheads and depreciation) when subtracted from the factory netback (total revenues less selling costs) leads to an operating profit, often called gross profit , but more correctly profit before interest and tax (PBIT). From this, then, is subtracted the annual interest paid on the loans... 

This is the ratio of income from ongoing operations plus interest expense to the average total sales. Therefore, it is a measure of the firm s abilify to effectively use ifs assefs to earn a profit. 

A company may get capital by selling a subsidiary or a portion of its business. In 1969 Monsanto decided that it would quit the low-density polyethylene business. It sold its plant at Texas City, Tex., plus its research findings and technology concerning low-density polyethylene to Northern Petrochemical.14 In the same year Atlantic Richfield paid 1800,000 for a 30% interest in a mining lease on about 8,560 acres of oilshale reserves in eastern Utah.15 W. R. Grace Co. sold its 53% interest in the Miller Brewing Company to Philip Morris for 130,000,000 and made an after-tax profit of 54,000,000.16 In 1969 it also sold its steamship business. 

The longer it takes to build a facility, the lower its rate of return. Formulate the ratio of total investment I divided by annual cash flow C (profit after taxes plus depreciation) in terms of 1-, 2-, and 3-year construction periods if i = interest rate, and n — life of facility (no salvage value). 

Yet Adam Smith put forward this fanciful dogma, which is still believed to this day... according to which the entire value of the social product resolves itself into revenue, i.e. into wages plus surplus-value, or as he expresses it, into wages plus profit (interest) plus rent. 

In small business establishments, it is usually quite easy to determine the exact source of all capital. Therefore, the interest costs can be obtained with little difficulty. For example, suppose that a young chemical engineer has 20,000 and decides to set up a small plant for producing antifreeze from available raw materials. For a working-capital plus fixed-capital investment of 20,000, the chemical engineer determines that the proposed plant can provide a total yearly profit of 8000 before income taxes. Since the investment was a personal one, interest obviously could not be included as a cost. If it has been necessary to borrow the 20,000 at an annual interest rate of 10 percent, interest would have been a cost, and the total profit would have been 8000 — (0.10) x ( 20,000) = 6000 per year. 

The method of approach for a profitability evaluation by discounted cash flow takes into account the time value of money and is based on the amount of the investment that is unretumed at the end of each year during the estimated life of the project. A trial-and-error procedure is used to establish a rate of return which can be applied to yearly cash flow so that the original investment is reduced to zero (or to salvage and land value plus working-capital investment) during the project life. Thus, the rate of return by this method is equivalent to the maximum interest rate (normally, after taxes) at which money could be borrowed to finance the project under conditions where the net cash flow to the project over its life would be just sufficient to pay all principal and interest accumulated on the outstanding principal. 

Working capital, which allows a company to carry on day-to-day operations, is determined by subtracting current liabilities from current assets. (See also item 20 in Section 16.3.4.2.) After-tax cashflow is defined as the net profit after taxes plus depreciation. It is essential to have adequate cash flow to operate the company. Earnings per share interests common stockholders and stockbrokers. It is found by dividing the net profit after taxes by the number of shares of common stock. 

The IRR is considerably more difficult to calculate than the NPV without the assistance of a computer, and it represents a sophisticated form of analysis. The IRR is defined as the discount rate that equates the present value of aU cash flows with the initial investment made in a project. The IRR consists essentially of the interest cost or borrowed capital plus any existing profit or loss margin. A project is financially more favorable when the positive difference between IRR and the interest rate charged for borrowing increases. Once all the cash flows have been accounted for over the life of a project, the IRR has to be computed by an iterative procedure. 

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