Profitability Analysis

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Profitability Analysis

• NMSU Chemical EngineeringCh E 452

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Engineering Economy (Ch E 451)

• Money, when invested, makes money.
• A buck today is not worth a buck in the future.
• When cash flows occur at different points in
  time, each must be brought to the same point in
  time before a comparision is made.
• Capital investment can only be depreciated in
  accordance with current tax law.

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Steady-StateCashFlow
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CumulativeCash Position
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Profitability Criteria

• Non-Discounted methods do not account for the
  time value of money, and are of little value in
  comparing alternatives, except in the case of
  equal project lives.
• Needed for project evaluation
• Time (discounted payback period)
• Cash (discounted cumulative cash position, net
  present value NPV, or net present worth)
• Interest rate (discounted cash flow rate of
  return on investment, DCFROR)
• Discount rate for which the NPV is zero

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Alternatives

• When only one alternative is to be selected from
  multiple alternatives, the alternatives are said
  to be mutually exclusive.
• When comparing mutually exclusive investment
  alternatives, (1) establish the minimum
  acceptable ROROI, (2) calculate the NPV for each,
  (3) eliminate any projects with negative NPVs,
  then (4) chose the alternative with the greatest
  positive NPV.

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Cash Flow Analysis (? 10-6)
net present value (NPV)
discounted cash flow rate of return (DCFROR)
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CumulativeCash Position