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Discounted Cash Flow of Return

The document discusses different methods for evaluating project profitability, including rate of return (ROI), payback period, and discounted cash flow rate of return. It provides formulas for calculating ROI and payback period. For a case study comparing two heater treater units with different lifetimes, it calculates the ROI as 38.75% for Unit 1 and 40.28% for Unit 2, and the payback period as 5 years for Project 1 and 5.55555555555556 years for Project 2.

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81 views12 pages

Discounted Cash Flow of Return

The document discusses different methods for evaluating project profitability, including rate of return (ROI), payback period, and discounted cash flow rate of return. It provides formulas for calculating ROI and payback period. For a case study comparing two heater treater units with different lifetimes, it calculates the ROI as 38.75% for Unit 1 and 40.28% for Unit 2, and the payback period as 5 years for Project 1 and 5.55555555555556 years for Project 2.

Uploaded by

THE TERMINATOR
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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

ROI = avg Annual Profit


× 100
Total Capital Investment

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


𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡𝑠〗 )/𝑛)/(𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡)×100

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

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▒ 〖𝐴𝑛
𝑝𝑖𝑡𝑎𝑙

vailable units ina market and each of them


nd 10 years respectively. The projected earning
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 i
in the terms of cash flow of the project.

𝑷𝑷=(𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒑𝒓𝒊𝒄𝒊𝒂𝒃𝒍𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍


𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕)/(𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒏𝒏𝒖𝒂𝒍
𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘 )
Cash Flow = Total Income (After Tax)+ Depreciation

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

Cash Flow ($)


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

Project-1

Total Cash Flow = 2,800,000

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


= 400000

𝑷𝑷=(𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒑𝒓𝒊𝒄𝒊𝒂𝒃𝒍𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍


𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕)/(𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉
𝑭𝒍𝒐𝒘 )
𝑷𝑷=(𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒑𝒓𝒊𝒄𝒊𝒂𝒃𝒍𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍
𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕)/(𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉
𝑭𝒍𝒐𝒘 )
Pay Out Period = 2,000,000/400,000
= 5
Period/ Payback Time
red to recover the total depreciable capital investment

𝒍𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍
𝒈𝒆 𝑨𝒏𝒏𝒖𝒂𝒍

Tax)+ Depreciation

ernatives of capital expenditures involving an investment of 2m$


the following table. The life of project 1 and project is 7 and 10 year
one and no the other.

Cash Flow ($)


Project 2
200,000
200,000 Capital Investment for = 2,000,000 $
400,000 Both Plant
400,000
400,000
400,000
400,000
400,000
400,000
400,000

Project -2

3,600,000 $

3600000/10 $
360000 $

𝑪𝒂𝒑𝒊𝒕𝒂𝒍
𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉
𝑪𝒂𝒑𝒊𝒕𝒂𝒍
𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉

2,000,000/360,000
5.55555555555556 years

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