CH9 Process Engineering Economics - James R. Couper

CH9 Process Engineering Economics - James R. Couper - 9...

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9 Estimate of Profitability In a free enterprise system, companies are in business to make a profit. If profits aren’t maintained, a company’s growth is stifled because retained earnings are derived from profits. A part or all these earnings may be used for new investments to enhance a company’s growth. A company is continually confronted with investment decisions. Management has the responsibility of investing in ventures that are financially attractive by increasing the earnings, providing attractive rates of return, and increasing economic value added. Every viable business has limitations on the capital available for investment purposes; therefore, it will invest in the most economically attractive ventures. The objectives and goals of a company are primary in considering what projects are to be funded. Corporate objectives change as the economy changes. A company that retains static objectives in this rapidly changing world will surely reach economic stagnation. The goal of a company may not be to maximize profit alone, because, if that were the case, then large capital investments might be undertaken that could easily yield a low return on capital. Also, the goal may not be to maximize the return on investment only without considering profit. If this were the case, then only the case that provided the highest return would be selected. In order to determine the worthiness of a venture, certain quantitative and qualitative measures of profitability are used. Although the term profitability is loosely used to measure a project’s value, it may not be a good measure. Peter Drucker [1] has said that “profitability is not a perfect measurement; no one has been able to define it, and yet it is a measurement, despite all its imperfections.” It used to be that only quantitative measures were of paramount importance but industry has taken a more responsible posture as a corporate citizen and
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qualitative factors have become equally important in the decision-making process. Both these measures will be considered in this chapter. 9.1 CORPORATE OBJECTIVES Corporate objectives might include one or several of the following: . Maximize the return on investment. . Maximize the return on stockholder’s equity. . Maximize aggregate earnings. . Maximize common stock prices. . Find outlets for a maximum of additional investment at returns greater than the minimum acceptable rate of return. . Increase market share. . Increase the economic value added. . Increase earnings per share of stock. . Increase the market value added. These objectives may not be the only ones but they are those that are most frequently listed by executives. 9.2 PROJECT CLASSIFICATION Any healthy, growing company has more requests for funding projects than funds available. In order to consider the requests for funds, a company will establish a priority or classification system. For example, projects may be classified as follows: . Necessity projects . Product improvement projects . Process improvement projects . Expansion projects . New ventures
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This note was uploaded on 10/28/2008 for the course N n taught by Professor N during the Spring '08 term at Punjab Engineering College.

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CH9 Process Engineering Economics - James R. Couper - 9...

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