Profitability Analysis-II
Chapter 8 & 9 in T&S
CH EN 5253
Terry A. Ring
Measures of Profitability
• Return on Investment (ROI)
– ROI=annual earnings/capital investment
– ROI > cost of capital (commercial interest rate, i)
•
•
•
•
•
Payback period (PBP)
Annualized Cost (CA)
Venture profit (VP)
Same
Investor’s Rate of Return (IRR)
Discounted Cash Flow Rate of Return (DCFR)
• Hard work to get this all together
Definitions of Profitability Measures
How to determine ROI
• Sales revenue minus Costs
– Cost of feedstocks
– Cost of Utilities
– Cost of Labor and Maintenance
– Cost of Overhead
– Cost of Taxes and Insurance
– Cost of Depreciation
– Cost of sales force, R&D, Admin.,
Management Incentives
Utilities
•
•
•
•
Steam
Electricity
Cooling Water
Process Water
– Boiler Water
– Feed Stock water/Steam
• Refrigeration
• Fuels
– Natural Gas
– Fuel Oil
– Coal
• Waste Treatment
– Stack Gas Cleanup
– Waste Water Treatment
• Land fill cost for solid waste
Costs
Depreciation
• Straight-line Depreciation
– Equipment Lifetime – Plant = 12 yr
– Constant % each year so that plant is totally
written off at end of life time
• 8% of Total Depreciable Capital, CTDC
– What would be the depreciation % for 20 yr
lifetime?
• Other types of depreciation
–
–
–
–
–
Accelerated Cost Recovery System (ARCS)
Modified Accelerated Cost Recovery System (MARCS) for Taxes
Declining-Balance Method (DB)
Double Declining-Balance Method (DDB)
Others
More On Depreciation
• Declining Balance Method (no salvage value)
– d= range from 1/n to 2/n, typically use 1.5/n
• Double Declining Balance Method (no salvage
value)
– d=2/n
• Depreciation amount for year t, Dt=B*d*(1-d)t-1
• Book Value after year t, BVt-1 =B(1-d)t-1
– B=basis = CTDC
– n= service life
– t=year
More On Depreciation
• ACRS – Federal Tax Law 1982 – 1986
• MACRS - Federal Tax Law in 1987
Accelerated
Cost Recovery
System
More on Depletion (of natural
resource)
• Cost Depletion = Units
recovered this
year*Unit value
– Unit Value =
Cost to acquire
resource/estimate of
recoverable units
• Percentage Depletion
Taxes
• Property Taxes
– Based upon the value of the property
• Used in Cost of Manufacturing
• Severance Tax = 12.5% of extracted
mineral’s net value
• State Taxes
– Very between states, UT = 6.2%
• Federal Income Tax for Business
– Typically taken to be 34% of gross earnings
Total Production Cost, C
• Cost of Manufacturing minus general
expenses
• C=COM-General Expenses
• General Expenses (see slide 6)
– Selling expenses, R&D, Admin. (top
management), Management Incentive
Package
Cost of Manufacturing (COM)
• Direct manufacturing costs
– Feedstocks, Utilities, labor related to
operations, maintenance
• Operating overhead
• Fixed costs
– Property Tax, Insurance, Depreciation
Pre-tax (Gross) Earnings
• Gross Earnings = Sales (S) – Total Production Cost (C)
• Net Earnings(Profit) = (1-t) Gross Earnings
– Tax (t) = State (UT=6.2%) + Federal taxes (34%)
Working Capital, CWC
Typically 15 % CTCI
More Accurate Working Capital Calculation
CWC=Cash Reserves+Inventory+accounts receivableaccounts payable
• Cash reserves - 30 days of raw materials, utilities,
operations, Maintenance, operating overhead, property
taxes, insurance and depreciation 8.33% of COM
• Inventories = 7 days of products at sales prices
• Accounts receivable - 30 days at sales price 8.33% of
annual sales
• Accounts payable – 30 days of feedstocks at purchase
price, 8.33% of annual feed stock costs
Table 23.1 Components of Total Capital Investment, CTCI. Modified from Sieder, et. al.,
2004.
Category
Symbol and Definition
Total Bare-module Cost for Fabricated
CFE= sum of costs for all fabricated
Equipment
equipment
Total Bare-module Cost for Process
CPM= sum of costs for all process
Machinery
machinery
Total Bare-module Cost for Spares
Cspares= sum of costs for all spares
Total Bare-module Cost for Storage and Cstorage= sum of costs for all tanks
Surge Tanks
Total Cost for Initial Catalyst Charges
Ccatalyst= sum of costs for all catalysts
Total Bare Module Investment (TBM)
CTBM= CFE+ CPM + Cspares + Cstorage+ Ccatalyst
Cost of Site Preparation
Csite= 10-20% of CTBM
Cost of Service Facilities
Cserv=20% of CTBM
Allocated Costs for Utility Plants and
Calloc= sum of costs listed below
Related Facilities
Capital Cost
Steam
$50/(lb/hr)
Electricity
$203/kW
Cooling Water
$58/gpm
Process Water
$347/gpm
Refrigeration
$1,330/ton
Liquid Waste Disposal
$3/1,000 gpy
gpy=gallons/yr
Total Direct Permanent Investment (DPI)
CDPI=CTBM+Csite+Cserv+Calloc
Cost for Contingencies and Contractor
Ccont=18% of CTDC
Fees
Total Depreciable Capital (TDC)
CTDC=CDPI+Ccont
Cost of Land
Cland=2% of CTDC
Cost of Royalties for Intellectual
Croyal=1-5% of Sales (S)
Property
or 2% of CTDC+3% of Sales (S)
Cost of Plant Startup
Cstartup=2-10% of CTDC
Total Permanent Investment (TPI)
CTPI= FISF(CTDC+Cland+Croyal+Cstartup)
Working Capital
CWC=0.0833*COM+0.0192*S
+0.0833*S+0.0833*Cfeedstocks
or 0.15*CTCI
Total Capital Investment (TCI)
CTCI = CTPI+CWC
Notes: FISF is Investment Site Factor , a factor of 1.15 was used for Utah and 1.25 used
for Alaska
Definitions of Profitability Measures
Cost Analysis
Emission
Equipment
Venture Profit Comparison
VP=(1-t)*(S-C)*i*C_TCI
Taxes, t
interest, i
0.4
0.05
Old Emissions Equipment
Assume 1 calibration failure per day
Extra Work for
Operator
Hours/ye Salary
ar
($/hr)
Cost
82.5
35 $ 2,887.50
OH Total Cost
2.5 $
7,218.75
Instrument Technician
Hours/ye Salary
Time (hr)/failure
ar
($/hr)
Cost
1
330
32.5 $ 10,725.00
OH Total Cost
2.5 $
26,812.50
Time (hr)/failure
0.25
Environmental Engineer
Hours/ye Salary
Time (hr)/failure
ar
($/hr)
Cost
1
330
42.5 $ 14,025.00
Purchase Spare
Parts
OH Total Cost
2.5 $
35,062.50
$
DAQ Fines
10,000.00 $/yr
????
Impact on VP
Tota
lC $
$
79,093.75 $/yr
47,456.25 $/yr
New Emssion Equipment
Increase in C_TCI
C_TCI
Impact on VP
$
$
1,000,000.00
50,000.00 $/yr
Selling Price for Given ROI
• For a new product without an established market
• Sale price may very
– High Sales price
• Assume ROI say 40% (This is a home run!!)
• Back calculate the sales price.
– Low Sales price
• Set VP to Zero
• Back calculate the sales price
• (this is the same as ROI calc above when or imin is
20%)
ROI is not good enough for cash
poor companies
• They use annual Cash Flow for decisions
• Years of Plant construction
CF = -fCTDC-CWC-Cland
• Years of Plant Operation
CF = (1-t)(S-C)+D
• Depreciation D=fCTDC
• f= fraction of TDC which is depreciated
that year
Using Excel for Profitability
Analysis
• User name “student”
• Password “engineer”
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•
•
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Steps to get ready
Get Chemical Prices
Get Cost of Utilities
Run Aspen/ProMax
– Production Rates (kg/y)
– Utilities used (kg/y)
• Determine installed cost of equipment
• Only then are you ready to use this spread sheet