Plant summary Lec 7 ( Before Midterm )

Profitability is the common denominator for

all business activities.
Profitability used as the general term for the
measure of the amount of profit that can be
obtained from a given situation.
For example, the rate of return, rather than
the total amount of profit, is the important
profitability factor in determining if the
investment should be made
Methods for Profitability Evaluation:
1- Rate of return on investment
2- Pay-out period
3- Capitalized cost
4- Net present worth
5- Discounted cash flow based on full
life performance

Plant summary Lec 7 ( Before Midterm )
Preceding treatment of discounted cash
flow, the procedure has involved the
determination of an index or interest rate
which discounts the annual cash flows to a
zero present value when properly compared
to the initial investment.
Net present worth (or net present value or
venture worth): substitutes the cost of
capital at an interest rate i
the net present worth of the project
The difference between the present value of
the annual cash flows and the initial required
investment is:
Capitalized-cost profitability is useful for
comparing alternatives which exist as
possible investment choices within a single
overall project.
Plant summary Lec 7 ( Before Midterm )
For example, if a decision based on
profitability analysis were to be made as to
whether stainless steel or mild steel should
be used in a chemical reactor as one part of
a chemical plant, capitalized-cost
comparison would be a useful and
appropriate approach.

Payout period or payout time: minimum
length of time necessary to recover the
original capital investment in form of cash
flow to project based on total income minus
all cost except depreciation
Pay out period including interest: pay out
period takes the time value of money into
consideration