Return on investments

Historically the yardstick used to measure profitability has been the percent return on capital or percent return on investment. This is defined as 

The method and derived ratios are still widely used in basic accountancy, although they are being displaced by more up-to-date methods. This traditional method has the advantage of being simple and readily understood but is not very informative and can be misleading. 

The traditional ROI method of expressing profitability presents a single year snapshot of a process. No allowance is made for the often lengthy period when capital is being invested and no positive cash flow is generated. Distortions resulting from inflation and the effect of the time value of money are also ignored. 

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This is a sum of the production cost and return-on-investment (ROl) before taxes at 25%/yr of total capital costs. 

As a general rule, acquisitions are considered for estabHshed products with above-average growth potentials. Often, entry by acquisition is more timely and profitable than internal development and subsequent plant constmction. EoUowing the latter course might take 5 to 10 years, during which time the highest return on investment (ROI) is lost. 

Ca.pita.1 Investment ndReturns. Capital needs for commodity chemicals are usuaHy very high, hundreds of millions of doHars being needed for many petrochemical plants of economic size. Return on investment (ROI) and return on sales (ROS) vary widely. Capital needs of specialty products are usuaHy quite low, often about 50 to 600 per doHar of sales. ROI and ROS vary widely but are usuaHy higher than those for commodities. 

As can be seen from this analysis, the natural gas feedstock and capital charges amount to over 93% of the total production cost before return on investment. Therefore, energy consumption and capital investment are the key factors in determining ammonia production profitabiUty. 

Quahty-related expenses for quahty plant laboratories and corporate staff associated with control and improvement activities mn about 1—3% of sales (58). Thus, the control and improvement efforts represent the potential for a 10 1 return on investment. 

Capital investment, capital costs, operating costs, return on investment, and energy conservation have all been discussed (6). In the economic analysis, the speed of each type of pump considered is normalized to 1 m /s as a common basis. 

Option A has the lowest investment at risk, B has the highest rate of return on investment, and C has the highest return. In general, the objective would be to maximize either the rate of return or the return, within the limits of available investment funds. 

Capital Investment. Erom the viewpoint of a project, all of the capital that must be raised is external capital. Equity capital is the ownership capital, eg, common and preferred stocks or retained cash, whereas debt capital consists of bonds, mortgages, debentures, and loans. Nearly all investment involves a mixture of both types so as to maximize the return on investment (21). The debt ratio (debt/total capital) for the chemical industry is typically over 30%. Because financial details are not well known during the preliminary phases of project analysis, the investment is viewed simply as the total capital that must be expended to design and build the project. 

Net Return Rate. The NPV can be divided by the DTC to give a measure analogous to the net return on investment over the life of the venture. If this is divided by the venture life, the result is the annual net return on investment, called the net return rate (NRR) defined as (24) ... 

Return on investment (ROI) criteria can be defined by the general form ... 

Ethane feed gives the lowest cost of production and the lowest capital investment. As the feeds become successively heavier, cost of production increases as well as the capital investment required. Depending on the cost of feedstock and the value of the co-products, processing heavier feedstocks can lead to lower returns on investment. Table 13 shows the effect on capital investment for various feedstocks as well as for a range of capacities. 

To be successful, the scope of an expert system must be limited to a narrow group of common problems that are readily solved by conventional means, and where the return on investment is greatest. Widening the scope usually requires more complex methods and treats less common problems having lower return. 

It is also the responsibihty of management to estimate the probabilities for the success of individual projects after due consideration of all the data provided by the various departments. The rate of return on investment that is acceptable to management is a function of these responsibihties. Each industry has a reasonably well defined return on investment that reflects the degree of risk inherent in that industry. If management decisions are faulty, the company either will overspend or will miss opportunities. 

Seawater Evaporators The production of potable water from saline waters represents a large and growing field of application for evaporators. Extensive work done in this field to 1972 was summarized in the annual Saline Water Conversion Repoi ts of the Office of Sahne Water, U.S. Department of the Interior. Steam economies on the order of 10 kg evaporation/kg steam are usually justified because (1) unit production capacities are high, (2) fixed charges are low on capital used for pubhc works (i.e., they use long amortization periods and have low interest rates, with no other return on investment considered), (3) heat-transfer performance is comparable with that of pure water, and (4) properly treated seawater causes httle deterioration due to scahng or fouhng. 

Factors that enter into any economic analysis of handhng-warehousing systems are (1) expected mechanical and economic life of the system (2) annual maintenance cost (3) capital requirements and expected return on investment (4) building-construction cost and land v ue (5) detailed analysis of each work position (to determine trade-offs of labor and equipment expected future costs and availability of labor are important) (6) relation of system control and personnel used in system (trade-offs of people versus mechanical control) (7) type of information system (computerized or manual) and (8) expected changed in product, container, unit pallet loads, and customer preferences during the life of the system. 

Commercial or production reactors for heterogeneous catalytic processes are versions of the so-called integral reactors, so the fundamental process of design is integration. In particular, the necessary catalyst-filled reactor volume must be calculated that will give a desired production rate. This then includes finding conditions to achieve the desired production, at a certain selectivity and minimal operating costs and investment, to maximize the return on investment. 

Environmental Cost Accounting Project cost estimating principles Return on investment calculations Project cost estimating principles... 

Although numerous cases have been documented where petroleum refineries have simultaneously reduced pollution outputs and operating costs through pollution prevention techniques, there are often barriers to their im-plementation. The primary barrier to most pollution prevention projects is cost. Many pollution prevention options simply do not pay for themselves, or the economics often appear marginal. Corporate investments typically must earn an adequate return on invested capital for the shareholders and some pollution prevention options at some facilities may not meet the requirements set by company policies. 

This term is most familiar to people as the return on investment, or ROI. The ROI is defined as the interest rate that would result in a return on the invested capital equivalent to the project s return. For illustration, if we had an air abatement project where heat recovery was involved, and there was an overall ROI of 30 percent, that s financially equivalent to investing resources in the right stock and having its price go up 30 percent. This is called a Primitive ROI. ... 

Many companies apply a minimum rate of return, or hurdle rate, to express the opportunity-cost competition between investments. For example, if a firm can draw 10 percent interest on cash in the bank, then 10 percent would be a valid choice for the hurdle rate as it represents the company s cash opportunity cost. Then, in analyzing investment options under a return-on-investment criterion, not only would the highest returns be selected, but any project that pays the firm a return of less than the 10 percent hurdle rate would not be considered. 

There are various indicators to determine the measure of profit for a process. In the following, we describe two of these indicators return on investment and payout period. The rate of return on investment (ROI) may be calculated as follows ... 

Capital investments can also be selected on the basis of other measures of performance such as return on investment, internal rate of return, and benefit-cost ratio (or savings-to-investment ratio). Flowever, care must be taken in the application of these methods, as an incremental analysis is required to ensure consistent comparison of mutually exclusive alternatives. Also, rather than requiring a separate value to be calculated for each alternative, as in the case of the life-cycle cost method, these other methods incorporate the difference between two mutually exclusive alternatives within a single measure. For example, the net benefits measure directly pressures the degree to which one alternative is more economically desirable than another. 

Even after 10 years and nearly 700 projects, the two thousand employees continued to identify high-return projects. The contests in 1991, 1992, and 1993 each had in excess of 100 winners, with an average return on investment of 300 percent. Total energy savings to Dow from the projects of those three years exceeded 10 million, while productivity gains came to about 50 million. 

Various provisions m the federal income tax treat energy producers more or less favorably than other businesses. By changing the after-tax rate of return on investments in the energy sector, the Tax Code may alter the long-run supply of specific types of energy. 

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