1Chapter 8

Lecture # 1-3

• Overview of Chapter 8

• A Typical CFD for Evaluation of a New Project

• Profitability Criteria for Project Evaluation

2Overview of Chapter 8

Title: Title: Profitability Analysis Analysis

Topics:Topics:

• A Typical CFD for Evaluation of a New Project

• Profitability Criteria for Project Evaluation

• Comparing Several Large Projects

• Comparing Investment Alternatives

• The Concept of Risk

• Evaluation of Equipment Alternatives

• Profit Margin

3A Typical CFD for Evaluation of a New Project

4Profitability Criteria for Project Evaluation

3 Bases for Evaluation of Profitability

Time

Cash

Interest Rate

5Profitability Criteria for Project Evaluation

ProfitabilityProfitabilityCriteriaCriteria

DiscountedDiscounted NonNon--DiscountedDiscounted

Non-discounted methods do not consider the time-value of money.

Not recommended for evaluating new, large projects

6Profitability Criteria for Project Evaluation

NonNon--Discounted Profitability CriteriaDiscounted Profitability Criteria

Time Criterion.

The shorter the PBP, the better.

Payback Period (PBP)

PBP = Time required, after start-up, to recover the fixed capital investment, FCIL, for the project

7Profitability Criteria for Project Evaluation

NonNon--Discounted Profitability CriteriaDiscounted Profitability Criteria

Cash Criterion.

Cumulative Cash Position (CCP)

CCP = Worth of the project at the end of its life

Cumulative Cash Ratio (CCR)

CCR > 1 implies that the project is potentially profitable.

Cumulative Cash Position (CCP)

CCP = Worth of the project at the end of its life

Cumulative Cash Ratio (CCR)

CCR > 1 implies that the project is potentially profitable.

8Profitability Criteria for Project Evaluation

NonNon--Discounted Profitability CriteriaDiscounted Profitability Criteria

Interest Rate Criterion.

Rate of Return on Investment (ROROI)

The higher the value of ROROI, the better.

Rate of Return on Investment (ROROI)

The higher the value of ROROI, the better.

9Profitability Criteria for Project Evaluation

10Profitability Criteria for Project Evaluation

11Profitability Criteria for Project Evaluation

12Profitability Criteria for Project Evaluation

13Profitability Criteria for Project Evaluation

14Profitability Criteria for Project Evaluation

15Profitability Criteria for Project Evaluation

Discounted Profitability CriteriaDiscounted Profitability Criteria

Time CriterionTime Criterion.

The project with the shortest DPBP is the most desirable.

Discounted Payback Period (PBP)

DPBP = Time required, after start-up, to recover the fixed capital investment, FCIL, required for the project with all cash-flows discounted back totime zero.

16Profitability Criteria for Project Evaluation

NonNon--Discounted Profitability CriteriaDiscounted Profitability Criteria

Cash CriterionCash Criterion.

Net Present Value (NPV)

NPV = Cumulative discounted cash position at the endof the project.

Present Value Ratio (PVR)

PVR > 1 implies that the project is potentially profitable.

17Profitability Criteria for Project Evaluation

NonNon--Discounted Profitability CriteriaDiscounted Profitability Criteria

Interest Rate Criterion.Interest Rate Criterion.

Discounted Cash Flow Rate of Return (DCFROR)

If DCFROR is higher than the internal discount rate,then the project is considered profitable .

18Profitability Criteria for Project Evaluation

19Profitability Criteria for Project Evaluation

20Profitability Criteria for Project Evaluation

21Profitability Criteria for Project Evaluation

22Profitability Criteria for Project Evaluation

23Profitability Criteria for Project Evaluation

24Profitability Criteria for Project Evaluation