Profitability Analysis

Different methods for economic evaluation of different proje

1 Rate of return or Return on Investment (ROI)

2 Payment Period/Payout Time
3 Discounted Cash Flow Rate of Return (DCFR)
4 Net Present Value and Present Value Index
Analysis

f different project are

 Rate of return or Return on Investment (R

ROI = avg Annual Profit

× 100
Total Capital Investment

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 =((∑24_𝑖^𝑛▒ 〖𝐴𝑛𝑛

𝑠〗 )/𝑛)/(𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡)×100

Q. A company wants to install a heater treater unit. There are two available units ina mark
requires a capital investment of 5m$. The life of two units are 8 and 10 years respectively
from the two units are given in the following table. Calculate the rate of return for both u

Projected Profit$
year
Unit-1 Unit-2
1 500,000 40,000
2 500,000 100,000
3 1,500,000 1,000,000
4 2,000,000 1,000,000
5 2,000,000 3,000,000
6 3,000,000 3,000,000
7 3,000,000 3,000,000
8 3,000,000 3,000,000
9 3,000,000
10 3,000,000
Total 15,500,000 20,140,000

Unit -1
Total Capital Investment = 5,000,000$
Average Annual Profit = 15,500,000/8
= 1,937,500 $

Average Rate of return = Average Annual Profit/Total Capital Investment

= (1,937,500 /5,000,000)*100
= 38.75%
n Investment (ROI)

24_𝑖^𝑛▒ 〖𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡

𝑚𝑒𝑛𝑡)×100

available units ina market and each of them

and 10 years respectively. The projected earning
e rate of return for both units.

Unit-2
Total Capital Investment =5,000,000$
Average Annual Profit = 20,140,100/10
= 2,014,010$

nvestment Average Rate of return = Average Annual Profit/Total Capital Investment

= (2,014,010 /5,000,000)*100
= 40.28%
 Payback Period/ Payback Time
Payback period is defined as the time required to recover the total depreciable capital in
in the terms of cash flow of the project.

𝑷𝑷=(𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒑𝒓𝒊𝒄𝒊𝒂𝒃𝒍𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕)/(𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉 𝑭𝒍𝒐

Cash Flow = Total Income (After Tax)+ Depreciation

Q. Calculate the Pay out period for the two alternatives of capital expenditures involving an
each for a sulfur removal plant, as given in the following table. The life of project 1 and pr
respectively. Also give reason for selection one and no the other.

Cash Flow ($)

YearProject 1 Project 2
1 1,000,000 200,000
2 500,000 200,000
3 400,000 400,000
4 350,000 400,000
5 250,000 400,000
6 200,000 400,000
7 100,000 400,000
8 400,000
9 400,000
10 400,000

Project-1 Project -2

Total Cash Flow = 2,800,000 3,600,000

Avg. Annual Cash Flow = 2,8000,000/7 3600000/10

= 400000 360000

𝑷𝑷=(𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒑𝒓𝒊𝒄𝒊𝒂𝒃𝒍𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕)/(𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘

Pay Out Period = 2,000,000/400,000 2,000,000/360,000
= 5 5.55555555555556
k Time
preciable capital investment

𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘 )

ditures involving an investment of 2m$

e of project 1 and project is 7 and 10 year

Capital Investment for = 2,000,000 $

Both Plant

$
$

𝒖𝒂𝒍 𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘 )

years