C & EN feature
PROfITABILITY MEASURES Return on original investment? Return on average investment? Payout time?
Which can help the decision most?
Payout time including interest?
Present worth? Interest rate of return? 94
C & ENS E PT. 25, 1961
A major objective of any manufacturing company is to provide the greatest possible long-term profit to its stockholders. This requires that its assets be used wisely and that they be increased in dollar value at the highest possible rate. The series of decisions made by management largely determines the profits realized by the corporation. Decisions, of course, vary greatly in -importance. But they also vary in the degree to which they commit the firm to future action and to future payment of costs. Choosing a man to serve in top management is extremely important, but the choice can be withdrawn with a great deal of speed if necessary. Investing in fixed facilities, on the other hand, involves long-term commitments. Here, a positive decision implies assuming the burden of continuing depreciation and other costs for a period of years. Moreover, it limits the fluidity of the company's action greatly, should a major technological advance make the company's facilities obsolete. For these reasons, capital investment decisions must be made with great care. Nothing is more important than a series of successful capital investments in establishing a record as a profitable growth company. Profita bility is not the whole story. An informed decision on new capital expenditures requires consideration of many other factors as well. Every project has intangibles associated with it that must be considered carefully. Its size relative to the company as a whole is important, and so is the availability of funds. Integration of the proposed product with the company's existing products and with the com-
They help in capital investment decisions. But tougher competition leads to tougher decisions, and tougher decisions call for finer measuring tools. Here are six of them compared.
JAMES B. WEAVER, Atlas Chemical Industries, Inc. pany's long-term objectives should be studied. The expected growth rate in the new product's market is also important. Furthermore, the availability of company personnel to take part in the proposed program must be taken into account. The investment's profitability is considered against a total background of many factors, including these. It is generally agreed, however, that profitability is one of the very important factors—and it is the only one to be discussed in this presentation. I intend to discuss various measures available for calculating profitability and to compare them with a nonexistent ideal profitability measure. Many forecasts concerning future investments, profits, etc., resulting from a capital outlay can be expressed in numbers, and the ideal profitability measure would include everything that can be quantified. The decision maker's problem is made easier by expressing all those forecasts as simply as possible. By reducing a myriad of numbers to a few simple indicators, it permits management to focus attention on the many intangibles also involved. No profitability measure is ideal. Attempts are still being made to in-
corporate additional quantitative information into available measures so as to assist in making the decision. Particularly is this true of certain elements of risk. At present, all measures merely include forecasts on a "best estimate" basis, although they can be supplemented by some indication of the answer's sensitivity to variations from best forecasts of the major factors. But I am ahead of my story. First let us review the steps in weighing a capital expenditure, as well as the future influences impinging on all capital investments. Three Evaluation
Stages
Evaluation of capital investment can be said to pass through three stages: • One must decide what factors or future influences will essentially determine each capital investment's profitability. The number of important factors is greater than usually believed. • One must obtain forecasts of these factors over the expected life of the product or equipment. In many cases, forecasts must be made of the situation not only where the company un-
dertakes the investment, but also if the investment is not made. The new investment should only be credited with the difference in profit. • A method must be at hand for combining these forecasts into a single understandable measure of profitability. This third phase is the only subject under detailed discussion here. Before leaving the factors that influence profitability, however, a couple of additional points should be made. These factors will influence the investment's future, whether or not detailed forecasts are made. Without the forecasts, some unrecognized assumptions must be replacing a conscious attempt to foresee the future. Forecasting is not easy; and naturally, the over-all forecast of profitability cannot be achieved if the errors in the individual forecasts are significant. Nevertheless, it seems useful to make conscious assumptions rather than unconscious ones. The other point concerns the importance of time in most factors to be considered. The investments are usually made largely in the near future, so that time is not so critical. Sales and other factors determining income, however, are subject to considerable change over the investment's operating life. The timing of such changes is critical. Four elements that deal SEPT. 2 5,
1961 C&EN
95
These influences determine the profitability of the company's investment Possible Accuracy of Forecast Installed Cost of Fixed Investment
good
Working Capital
fair
Usual Effect of Possible Error
major
Construction Period
good
minor
Initial Startup Expense
fair
intermediate
Sales Volume Forecast
poor
major
Product Price Forecast
poor
major
Cost Stream over the Project Life
good(direct) fair(overheads)
major
Economic Life
poor
intermediate
Depreciation Life
good
intermediate
Salvage Value
poor
minor
Depreciation Method
*
intermediate
Minimum Acceptable Rate of Return
*
*
Income Tax Rate
poor
major
Inflation Rates
poor
major
Risk
poor
major
General Business Conditions
fair
intermediate
* Policy choices, not forecasts.
primarily with timing are construction period, depreciation life, economic life, and depreciation method. Obviously, a company will benefit more quickly from a project with a shorter construction period. The project's economic life likewise determines how long the profits will continue coming in, while the depreciation life and method determine certain tax allowances and their timing. It is apparent that the ideal profitability measure cannot be limited to consideration of total dollars. There must be a method of incorporating differences in the timing of receipt and expenditure of cash. First let us establish a concept of what to maximize—what we want the most of—in combining the forecasts. Why Return on Investment? Profit maximization alone is not enough. The true goal is to improve the "efficiency" of profit production from a dollar of investment in an enterprise or manufacturing facility. The efficiency ratio relating profits to in96
C&EN
S E P T . 25, 1961
vestments is known as "rate of return on investment," and unquestionably this is the proper sort of relationship for studying the economic success of an enterprise. The main question asked by any stockholder or investor is, "How much profit can I get per dollar of investment?" Indeed, the goal should not be to maximize the return on investment as a ratio. The ideal is to maximize the profits that return more to the investor than the cost of the money he is required to invest. "Return on sales"—the ratio of profit to sales—is often shown as if it were an important measure. On reflection, it should be obvious that it cannot be used to measure economic performance: a very high ratio would not be good if very high investment is needed to get the profit. Needless to say, much ambiguity in terms is apparent in the field. The return-on-investment measures to be discussed give answers that vary from each other by as much as two to one. It is not surprising, then, that profitability criteria that seem unattainable
appear in the literature. This is particularly so since return on investment can be reported either before or after taxes. Therefore, the statement in a news magazine that a company accepts nothing less than 40% return on investment might indicate merely that the company calculates return on average investment before taxes. A similar calculation by return on original investment after taxes would show a return of about 10%. In this article I shall discuss, within the text and in tabular form, six of the most popular methods for calculating return on investment: return on original investment, return on average investment, pay-out time, pay-out time including interest, present worth, and interest rate of return. With regard to the table, the essential elements for comparing these on a consistent basis are their abilities to handle completely the investment, the income, and the capital recoveries of the venture. Furthermore, the factors must be covered as to timing as well as to amount—cash is more useful to the company the sooner and the longer it is available. The tabular comparison, based as it is on usual practice, indicates that certain of the factors are "not considered," although there is no technical reason why they couldn't be used. In other cases the formula under discussion simply could not be altered easily to handle a given factor, and this I have indicated where appropriate. Ease of Cahufotions
Varies
The ease of calculating return on investment by the several methods varies quite a bit. The easiest can be done with a slide rule or a scrap of paper. The hardest takes perhaps five minutes at most for the complete calculation, so the difference in the actual arithmetic is not great. The most important differences among the methods concern their abilities to handle the key factors essential to the investment decision. The calculation itself is not a significant part of the expense involved. Once you are convinced that the more sophisticated methods require information that is useful to the decision, it will not take long to learn to use any of the methods I am about to discuss.
Return on Original Investment. Since this calculation is merely a ratio of annual profits to the original invest-
HARDWORKING JEFFERSON CHEMICALS
• THAN O LAM INKS
Or, as we would say it, "How to make a good shampoo". Shampoo, a word of Hindustani origin, means to rub gently or massage. We don't know how the early Hindus made shampoos, but are certain they didn't have the benefits of the excellent emulsifying properties, mild alkalinity, low toxicity and bland skin action provided by ethanolamines. Shampoos are based on a wide variety of anionic compounds. These are the reaction prod ucts of various fatty esters or oils, such as cocoanut or castor, with sulphuric acid. The sulfated derivatives obtained are then neutralized with mono- or triethanolamine or a combination of the two. Consumer acceptance of these gentle, fast·
HOUSTON • NEW YORK
» CHICAGO · CLEVELAND
CHARLOHE • 10S ANGELES • SAN FRANCISCO
MONO· DlTRI-
lathering shampoos has become so favorable that most shampoo preparations today contain some form of ethanolamine as the neutralizing agent. Your application may be in gas treating, tex tile processing, pharmaceutical syntheses or in the preparation of detergents and emulsifiers used in cosmetics, waxes, polishes and coatings, lubricant additives and agricultural formulations. You can obtain helpful and detailed technical information from your Jefferson representative. Or, call or write for this Technical Brochure on Ethanolamines . . . Jefferson Chemical Company, Inc., 1121 Walker Avenue, P. O. Box 303, Houston 1, Texas.
JEFFERSON CHEMICALS C & Ε Ν 97
Cash position charts show the realities A cumulative cash position chart can be used in profitability analysis to portray the realities of an investment. At any given time, it shows the project's cumulative cash effect on the company. With the help of the charts shown here, the fundamental concepts are presented. The upper chart includes most of the complexities of a normal project, except that equal annual profits and straight line depreciation are assumed for illustrative purposes. The first investment shown is that which has been made in land at a single point before time zero. This is followed by a gradual increase of fixed investment during construction. Working capital is shown as being added instantaneously at time zero— this is an approximation. Equal annual profits are assumed to start at time zero, bringing the cumulative cash position line upward at a constant slope throughout the life of the project. All of these elements can be clearly seen on the chart, and so can the construction period and economic life of the project. The value of the investment remaining on the company's accounting books can also be approximated (dash line). The introduction of compound interest increases the complexity of the chart. In order to keep the illustration as simple as possible, we will omit complicating factors such as construction period, working capital, salvage value, etc. (lower chart). The "obligation," which we defined as the changing sum that is brought about by continually adding the accumulated interest to the principal, is indicated by the dash line. Investment is increased regularly by interest on the one hand and, on the other hand, it is decreased by cash income in each time period to calculate the obligation that is shown. The lower dash line in the chart shows this obligation at the interest rate that will maintain some obligation throughout the life of the project, with the effect of reducing it to zero just at the end of the estimated economic life. The zero cash position occurs, then, at a point after the recovery of any working capital and of 98
C&EN SEPT. 2 5, 1961
any land or salvage value. This com pound interest is what we refer to as the interest rate of return, the interest rate paid by the project to the com pany for the use of company funds. All profits have been converted so as to be expressed as this interest rate. At the end of the project, the obliga tion of the project to the company, which has continued to be some real obligation throughout the project life, has been completely repaid. The dotted line indicates another reality of the calculation of future or terminal worth, equivalent to present worth. The procedure of discounting has been applied to the cash flows, but the discounting is not enough to reduce the total profit to zero at the end of the economic life of the proj ect. Rather than that, the discount rate is merely representative of the cost of capital (or minimum accept able rate of return) that must be earned before a project is considered worthy of further action. A project that did earn an interest rate of re turn that was equal to the cost of capital would show no profit after dis counting, and it would resemble the dash line. For projects earning more than the cost of capital, the profit line would still cross the zero cash position line as it does before the dis counting procedure. Except for the possibility of the recovery of land and working capital, this point in time corresponds to the payout time in cluding interest, which is one of the profitability methods shown in the comparative table. Applying interest rates in the posi tive-cash-position area is no longer a discounting procedure. The amount made available by this project after it has earned the cost of capital is as sumed to be invested in other projects at the cost of capital. The profits are compounded as in the illustration, so that the terminal cash position, after applying the cost of capital, may be greater than the final cash position before discounting if the project's economic life is long enough. The dot-dash line shows the relationship between this terminal worth and present worth discounted at the cost of capital.
ment, it can be done with great ease. I£ profits differ in different years, the return can be calculated for several significant years during the life of the investment. It can also be figured as the average for the investment's en tire economic life. The only problems encountered may be those introduced by fixed- or work ing-capital investments that are made after the time of original investment. It is not then clear whether calcula tions should be based on original or on total investment.
Return on Average Investment. This calculation is much like the one for return on original investment. Only the denominator is* different. One meets the same limitations and compli cations. Introducing accelerated de preciation brings an added complica tion into the calculation. The book investment reduces more rapidly when accelerated depreciation is used, and the "average investment" can no longer be assumed to be working capital plus one half the fixed investment. Pay-out Time. This is figured by a year-by-year cumulation of the sum of profits plus depreciation for the proj ect's initial years. The intent is to find out during which year the total of profits and depreciation surpasses the amount of original depreciable in vestment. A pay-out including a frac tional year—e.g. 3τ/2 years—can be calculated by indicating the point dur ing the year at which the profits and depreciation completely offset depreci able investment. Payout Time Including Interest. The calculation for this measure is very similar to the one for pay-out time. It differs in that profits are reduced by discounting those not gained until later years, using an appropriate in terest rate that has been chosen as the minimum acceptable rate of return. This reflects the time-value of money. It tends to increase the pay-out time, to represent the earning of the mini mum rate of return, and the measure reflects a real benefit for projects that earn most of their profits early in their lives. Continuous interest tables, which show present value factors for determining zero-time values for cash flows occurring at other than zero time, are valuable in using this method. Present Worth. Continuous interest tables are also used in the present
worth method. Present value factors in the tables are used to compound or discount all cash flows to their equiv alent value at time zero. Time zero can be chosen arbitrarily, but the start of operations is usually used. Since, for this method, the minimum ac ceptable rate of return is known in advance, multipliers for incomes or investments occurring at other than time zero can be taken directly from the table. One usually sums all cash incomes separately from all cash outlays, using discounted values, to show both sums as of time zero. Present worth is the excess of the present value of incomes over the present value of investments. It is usually shown as the difference between the two, but it can also be shown as a ratio. Interest Rate of Return. A trial and error solution is required to calculate interest rate of return, since no dis counting rate is available before the calculation. The cash flows are set forth before discounting, in columns showing all cash flows, much as in the present worth method. These cover the period from the start of construc tion to the recovery of land and work ing capital after the project is shut down. Discount rates are then ap plied to get the closest approximation to the whole percentage point which makes the present value of earnings equal to the present value of invest ments when it is used as the actual discounting rate. Note that the interest rate of return is earned neither on the original nor on the total amount of investment. In Text continued on page 102 (Comparison table on next page)
SUGGESTED READING Bierman, H., and Smidt, S., "The Capital Budgeting Decision," Macmillan, New York (1960). Gregory, J. C , "Interest Tables for De termining Rate of Return," Phila delphia, Penna., The Atlantic Refining Co. (1946). Ind. Eng. Chem., Monthly "Costs" fea ture, 1958 to date. Swalm, R. O., The Engineering Econo mist, 5, 45+ (Fall, 1959); 57+ (Winter, 1960); 77+ (Spring, 1960). Interest tables. Weaver, J. B., Ind. Eng. Chem., 50, 43A (March, 1958). Factors influencing investment. Weaver, J. B., and Reilly, R. J., Chem. Eng. Progr., 52, 405-12 (Correction 448), (1956). Use of interest tables. SEPT. 25, 1961 C&EN
99
Profitability measures have different capabilities Return on Original Investment
Name of Method
Return on Average Investment
Payout Time
Other Titles
Engineer's method, du Pont method, operator's method, and capitalized earning rate.
Return on book investment, accountant's method.
Pay-off period (time), cash recovery period, pay-back period (time), payout period.
Statement of Intent
A
A
Years required to recover original de preciable investment from profits and depreciation accruals.
Algebraic Description
Average yearly profit during earning life only Original fixed investment + working capital
percentage comparison of average annual profits over the earning life to the initial total fixed and working capital investment.
percentage comparison of average annual profits over the earning life to the average book investment including working capital.
Average yearly profit during earning
X100
Jifeonly
χ
m
Average fixed investment - f working capital
Original depreciable fixed investment Profit + yearly average depreci ation over the period
X100
Geometric Description
Avg. annual profit, earning life
Avg. annual profit, earning life
„ J Avg. investment X Book investment
y Recovery value ^ of fixed plus working capital
Handling of Investment Amount
Considers total amount.
Considers a definite fraction of original investment; fraction depends on de preciation method.
Considers depreciable investment only.
Handling of Investment Timing
Cannot consider construction period or later fixed or working capital invest ments.
Cannot consider construction period or later fixed or working capital invest ments.
Cannot consider land or working capital or any investments beyond payout period; could, but usually does not consider construction period.
Handling of Income
Considers average of income over earning life only. Cannot consider yearly differ ences; can be calculated for various fractions of capacity, or for various in dividual years, to show effect of operat ing level.
Considers average of income over earning life only. Cannot consider yearly differ ences; can be calculated for various fractions of capacity, or for various in dividual years, to show effect of operat ing level.
Considers income only up to end of pay out time.
Handling of Income Timing
Not considered; could not be utilized.
Not considered; could not be utilized.
Properly considered in early years; can not consider at all from then on.
Handling of Capital Recovery Amount
Not considered; could not be utilized.
Not considered except depreciation in directly as establishing investment base.
Properly considered for early years; can not consider later or terminal recoveries.
Handling of Capital Recovery Timing
Not considered; could not be utilized.
Not considered; could not be utilized.
Properly considered up to the end of the payout time; not afterward.
Handling of Other Elements
Often used either before or after income tax. Cannot consider economic life. Result must be compared with minimum acceptable rate of return on the same basis.
Often used either before or after income tax. Cannot consider economic life. Result must be compared with minimum acceptable rate of return on the same basis.
Taxes properly considered. Cannot consider economic life beyond payout time. Result must be compared with a maximum acceptable payout time.
Variants of System
Major variants in common use include calculation before and after income tax, with and without working capital. Martin adds depreciation to profits to give a ratio of cash generation to invest ment which is equivalent to the re ciprocal of payout time.
Major variants in common use include calculation before and after income tax, with and without working capital. Average book investment is different with sum of the years-digits deprecia tion, but many consider return on average investment should be calculated on one-half the initial fixed investment independent of depreciation method.
In some cases, depreciation is not added to profits so that this is essentially the reciprocal of return on original invest ment. Although working capital is assumed to be always recoverable and so is not usually included in the invest ment base for payout time, it is not really recoverable until the project is shut down. Therefore, in some cases, a cash recovery period may be called for which includes the restoration of work ing capital and land investments made by the company.
Major Shortcomings of System
Cannot consider timing of cash flows. Averaging of profits permits laxity in forecasting. Does not consider capital recoveries.
Cannot consider timing of cash flows. Averaging of profits permits laxity in forecasting. Does not consider capital recoveries.
Ignores later years of project on all counts. Cannot consider investments in working capital or land.
References for Further
Aries, R. S., Newton, R. D., "Chemical Engineering Cost Estimation," McGrawHill, New York, 1955. Chem. Eng. News, 33, 3676-9 (Sept. 5, 1955).
Stiles, K.. J. Accountancy, [102, 37-9 (Sept., 1956). Moller, G., Controller, 26, 107 (March,
Yanagisawa, E., Chem. Eng., 62, 185-6 (January, 1955). Aries, R. S., Newton, R. D., "Chemical Engineering Cost Estimation," McGrawHill, New York, 1955.
100
C&EN
SEPT.
2 5,
1961
1958).
Name of Method
Payout Time, Including Interest
Present Worth
Interest Rate of Return
OtherTitles
Cash recovery period.
Venture worth, incremental present worth.
Profitability index, discounted cash flow, internal rate of return, investor's method.
Statement of Intent
Years to recover original depreciable in vestment and a minimum acceptable rate of return from profit plus deprecia tion accruals.
Comparison, by difference or ratio, of the (discounted) present value of all cash flows to the project with all investments in the project.
Calculates the interest rate at which the company's outstanding investment is repaid by proceeds from the project— the maximum rate at which callable preferred stock could be issued for financing the investment in the proposed project and have it paid off in full at the end of the project's expected life.
Algebraic Description
Original depreciable fixed investment + interest* X100 Profit + yearly average de preciation over the period
Present worth of project earnings — (original fixed investment + working capital)
Average yearly profit during construction and earning life Average fixed investment + working capital - f interest*
X100
Geometric Description
"jt"Avg. obligation Recovery of land ^ v and working capital Investment with cost of capital
** Investment \ & proceeds with cost of capital
"^—"Obligation"; investment with interest rate of return
Handling of Investment Amount
Considers depreciable investment only.
Considers all investment amounts.
Considers all investment amounts.
Handling of Investment Timing
Cannot consider land or working capital or any investments beyond period; could, but usually does not, consider construction period.
Properly considered, including construc tion period and working capital.
Properly considered, including construc tion period and working capital.
Handling of Income Amount
Properly considered up to end of calculated period; cannot consider later income.
Properly considered.
Properly considered.
Handling of Income Timing
Properly considers up to end of calculated period ; cannot consider later.
Properly considered.
Properly considered.
Handling of Capital Recovery Amount
Properly considered up to end of calculated period; cannot consider later or. terminal recoveries.
Properly considered.
Properly considered.
Handling of Capital Recovery Timing
Properly considered up to end of calculated period; cannot consider later or terminal recoveries.
Properly considered.
Properly considered.
Handling of Other Elements
Taxes properly considered. Cannot con sider full economic life, but may be use ful for comparison with economic life since minimum acceptable rate of re turn has already been earned. Requires determination of minimum acceptable rate of return before calculation.
Taxes properly considered. Considers total economic life. Requires deter mination of minimum acceptable rate of return on the same basis before calcula tion.
Taxes properly considered. Considers total economic life. Must be compared against minimum acceptable rate of return on the same basis.
Variants of System
Cost of capital may be substituted for minimum acceptable rate of return as discounting rate.
Cost of capital may be substituted for minimum acceptable rate of return as a discounting interest rate. Present worth is usual y expressed as the difference remaining when present value of invest ments is subtracted from the present value of all cash generations. Ratio of cash flow to investment is also suggested as a criterion. The combination can give some idea of the total magnitude of the project.
Present worth is itself considered a variant of this system by some. System as described by some does not include consideration of land, working capital, construction period.
Major Shortcomings of System
Not as informative an answer as present worth, interest rate of return. Ranking with limited funds by this method would not maximize future worth of company. Cannot consider working capital or land.
Result does not indicate magnitude of project. Most generally suitable of systems presented. Choosing projects with highest present worth will maxi mize future worth of company if as sumptions hold.
Multiple answers can be obtained for certain unusual cash flow patterns. Does not properly compare projects of differing project lives. Does not indicate total magnitude of project. Adequate for evaluations not involving competi tion for funds.
References for Further Detail
Scheuble, P. Α., Harvard Business Re view, 33,81-94 (Sept.-Oct., 1955). Happel, J., Chem. Eng. 58, 146-8 (Oct., 1951).
Happel, J., Chem. Eng. Progr., 51, 533-9 (December, 1955). Winn, F. W., Petroleum Refiner, 35, 199-
Weaver, J. B., and Reilly, R. J., Chem. Eng. Prog., 52, 405-12 (Correction 448) (1956). Dean, J., Harvard Business Review, 32, 120-130 (Jan.-Feb., 1954).
210 (July, 1956).
Interest charged on both fixed and working capital to reflect time value of money. SEPT.
2 5, 1 9 6 1 C & E N
101
Continued from page 99 efiFect, the discounting procedure alters the principal invested in the project by the amount of interest. Interest accumulated over each compounding period is added to the principal that existed at the start of that period to obtain the new principal for the following period. The term "obligation" has been used frequently to refer to this changing sum and avoid confusion with the original principal sum.
Obligation denotes the total indebtedness of the project to the investor, including all capital outlays and accrued interest at a given time. Cumulative Cash Position A chart of cumulative cash position is an excellent tool for associating the realities of an investment's status relative to the company with the various mathematical models for estimating its
profitability. As the name implies, it also shows the cumulative cash efiFect of the project on the company. This chart uses time as the horizontal scale and cash position as the vertical scale. Zero on the ordinate scale is the line of zero cash position, indicating a balance of funds between the company and the project, no investment and no profit. Points in the "negative cash position" area, below the zero line, indicate investment by
Continuous interest tables* give more realistic picture to task position (Factors for determining zero-time values for cash flows which occur at other than zero time.) Compounding of Cash Flows which Occur: A. In an Instant V2 year before 1 " " 17s" " 2 " " 3 " " B. Uniformly until Zero Time From y 2 year before to 0 time 11
11 it
1
"
" "" "
lVi "
"
" " "
O
it
U
11 It
« q
"
"
" " «
11
1%
5%
10%
1.005 1.010 1.015 1.020 1.030
1.025 1.051 1.078 1.105 1.162
1.051 1.105 1.162 1.221 1.350
1.002 1.013 1.025 1.005 1.025 1.052 1.008 1.038 1.079 1.010 1.052 1.107 1.015 1.079 1.166
90% 100%
80%
35%
40%
50%
60%
70%
80%
1.078 1.105 1.133 1.162 1.221 1.284 1.252 1.350 1.455 1.350 1.492 1.649 1.568 1.822 2.117
1.162' 1.350 1.568 1.822 2.460
1.191 1.221 1.419 1.492 1.690 1.822 2.014 2.226 2.858 3.320
1.284 1.649 2.117 2.718 4.482
1.350 1.822 2.460 3.320 6.050
1.419 2.014 2.858 4.055 8.166
1 .492 2 .226 3 .320 4 .953 11 .023
1.568 2.460 3.857 6.050 14.880
1.649 2.718 4.482 7.389 20.086
1.038 1.052 1.065 1.079 1.107 1.136 1.121 1.166 1.213 1.166 1.230 1.297 1.263 1.370 1.489
1.079 1.093 1.107 1.166 1.197 1.230 1.263 1.315 1.370 1.370 1.448 1.532 1.622 1.769 1.933
1.136 1.166 1.197 1.297 1.370 1.448 1.489 1.622 1.769 1.718 1.933 2.182 2.321 2.805 3.412
1 .230 1 .532 1 933 2 471 4 176
1.263 1.622 2.117 2.805 5.141
1.297 1.718 2.321 3.194 6.362
.497 .247 .122 .061 .030 .001
449 202 091 041 018
.407 .165 .067 .027 .011
.368 .135 .050 .018 .007
...
..
... ...
...
.659 .268 .109 .044 .018 .007 .003 .001
.632 .232 .086 .032 .012 .004 .002 .001
15%
20%
25%
Discounting of Cash Flows which Occur: . C. In an Instant 1 year later
.951 .905 .861 .819 .779 .606 .472 .368 .286
.905 .819 .741 .670 .606 .368 .223 .135 .082
.861 .741 .638 .549 .472 .223 .105 .050 .024
.819 .670 .549 .449 .368 .135 .050 .018 .007
.779 .606 .472 .368 .286 .082 .024 .007 .002
.741 .549 .407 .301 .223 .050 .011 .002 .001
.705 .497 .350 .247 .174 .030 .005 .001
.670 .449 .301 .202 .135 .018 .002
...
...
D. Uniformly over Individual Years 1st year 2nd " 3rd " 4th " 5th " 6th " 7th " 8th " 9th " 10th "
.995 .985 .975 .966 .956 .946 .937 .928 .918 .909
.975 .928 .883 .840 .799 .760 .723 .687 .654 .622
.952 .861 .779 .705 .638 .577 .522 .473 .428 .387
.929 .799 .688 .592 .510 .439 .378 .325 .280 .241
.906 .742 .608 .497 .407 .333 .273 .224 .183 .150
.885 .689 .537 .418 .326 .254 .197 .154 .120 .093
.864 .640 .474 .351 .260 .193 .143 .106 .078 .058
.844 .595 .419 .295 .208 .147 .103 .073 .051 .036
E. Uniformly over 5 Year Periods 1st five years 6th thru 10th year 11th thru 15th year 16th thru 20th year 21st thru 25th year
.975 .928 .883 .840 .799
.885 .689 .537 .418 .326
.787 .477 .290 .176 .106
.704 .332 .157 .074 .035
.632 .232 .086 .032 .012
.571 .164 .047 .013 .004
.518 .116 .026 .006 .001
F. Declining to Nothing at Constant Rate 1st 5 years .983 11 .968 10 " 11 .952 15 " 11 20 " .936 11 .922 25 "
.922 .852 .791 .736 .687
.852 .736 .643 .568 .506
.791 .643 .536 .456 .394
.736 .568 .456 .377 .320
.687 .506 .394 .320 .269
.643 .456 .347 .278
CNJ
.990 .980 .970 .961 .951 .905 .861 .819 .779
3 4 5 10 15 20 25
" « " " " " "
* Condensed
102
" « " " " " "
from tables compiled
C&EN
SEPT.
2 5,
by J. C . Greg*ory9 The Atlantic
1961
I .231
Refining
.606 .368 .223 .135 .082 .007 .001
.549 .301 .165 .091 .050 .002
...
...
.824 .552 .370 .248 .166 .112 .075 .050 .034 .022
.787 .477 .290 .176 .106 .065 .039 .024 .014 .009
.752 .413 .226 .124 .068 .037 .020 .011 .006 .003
.719 .357 .177 .088 .044 .022 .011 .005 .003 .001
688 309 139 062 028 013 006 002 001
.472 .082 .014 .002
.432 .058 .008 .001
.367 .030 .002
.317 .016 .001
.277 .008
245 004
.603 .413 .309 .245 .203
.568 .506 .377 1 .320 .278 .231 .219 .180 .180 1 .147
Co,
...
.. .220 .002
.199 .001
... ... .456 .278 .198 .153 .124
.413 .245 .172 .133
.108 1
.377 .219 .153 .117 .095
.347 .198 .137 .105 .085
.320 .180 .124 .095 .077
IF ODOR OR COLOR ARE IMPORTANT TO YOUR PRODUCT, IT BELONGS IN THIS PICTURE!
Shown here is a microscopically small sampling of the many and varied products that are improved through the pigment carrying and odor adsorbing properties of Foremost Lactose, ^w
This
nontoxic pure sugar of milk disperses colors quickly and uniformly in all kinds of products from Easter egg dyes to printing inks. And it preserves the sales-producing aromas of countless products, espe cially those derived from aldehydes, ketones and alcohols.
^&
Only Western produces all grades of Lactose in a full range of controlled mesh sizes. Strict chemical and bacteriological specifi cations and a rigid quality control program assure highest quality. ^ 0
Other properties of Lactose: FREE FLOWING · ANTI-
CAKING · SOLUBLE, UNIFORM · BLAND, ALMOST TASTELESS • FERMENTATION AGENT. Take a good look at Lactose. One of its unique characteristics may solve a problem you are working on right now. 4y
For complete details and samples, get in touch
with Western, world's largest producer of Lactose.
Western Condensing Company Appleton, Wisconsin Division of Foremost Dairies, Inc.
SHOULD YOUR P R O D U C T BE HERE?
Distributed Nationally b y Chemical Department McKESSON & R0BBIN8, INC.
new!
W E S T E R N CONDENSING COMPANY · Appleton, W i s . Please send me free Lactose Technical Bulletin L-l.
Fact-filled folder about Lactose and its many valuable uses in the chemical field.
Send for yours TODAY!
171
Name Company-
-Title-
Address— I
City
_Zone_
-State-
C & ΕΝ
103
ANALYTICAL RESEARCH CHEMISTS We have key positions open in our Analytical Research Lab oratory engaged in internal and client problems. The work is mainly in practical problem solving of a short term nature. We desire versatile, self-starting, ingenious, selfreliant scientists who will be in charge of work in a specific area but must be capable ex perimentalists themselves.
Prerequisites: Ph.D. or MS with considerable practical experience in method development, preferably with organic material. Proficiency in theory and practice in one or more of the following fields:
INFRARED SPECTROSCOPY ELECTROANALYTICAL CHEMISTRY X-RAY DIFFRACTION AND FLUORESCENCE CLASSICAL GRAVIMETRIC, VOLUMETRIC TECHNIQUES AND SPECTROPHOTOMETRY For further information, send a brief description of your education and prof essional experience to: Donald F. Sweet
Arthur Β Jltttle Jnc. 35 ACORN PARK CAMBRIDGE 40, MASSACHUSETTS 'An equal opportunity employer*
104
C&EN
SEPT. 25, 1961
the company in the project. Points of "positive cash position," above the zero line, indicate a profit position has been reached; i.e., no residual invest ment by the company in the project. Zero on the horizontal time scale is usually chosen as the start of produc tion. The zero cash position between the project and the company usually occurs somewhat before this time as investment in the project starts. The company's cumulative cash position relative to the project starts out as zero. A single line then shows the project's cumulative cash status at each time indicated throughout the con struction period and economic life. As investment occurs before time zero, the line slopes downward from the zero cash position toward increasing negative cash position. After income starts the investment of the company is gradually reduced to zero. ( Except for the effect of recoveries of land, working capital, etc., the crossing of the zero line represents payout time.) As profits continue to come in, a net profit has been realized over the life, and the slope continues upward into increasingly positive cash position. At the project's end, the recovery of land and working capital adds a final por tion of cash to establish the final cash position.
Conclusion Although the concept of return on investment is reasonably well accepted in the chemical industry, there is much less agreement on the method of cal culating return on investment. Those who first saw the importance of the general concept started fairly simple calculating procedures within their own companies. The companies have been eminently successful, using the simple measures such as return on original investment. Possibly because of their success, or because of some resistance to change and the difficulty of explaining the more sophisticated methods, many still use the very simple return on investment relationships for profitability evaluation. Other companies have converted recently to techniques that will con sider more of the essential variables in comparing alternatives. Perhaps this is a result of their desire to do still better than their already-success ful competitors. More likely, how ever, it has become clear to manage ment that the period of easy growth in the chemical industry may be be
hind us. With hearty competition on all sides, there has naturally been a great increase in emphasis on cost and profitability estimation of all sorts. The general feeling is that better tech niques can lead to better decisions and enable a company to do better at charting a profitable future for itself. To make good decisions, we must not fail to consider all the significant vari ables.
James B. Weaver is director of Atlas Chemical Industries' development ap praisal depart ment, charged with the com pany's economic evaluation, long range forecasting, op erations research, and marketing re search. He received his B.S. and M.S. in chemical engineering from MIT in 1944 and 1947, respectively. He was associated with Godfrey L. Cabot, Inc. from 1945-50 as assistant to the director of research and development. This was followed by four years at Olin Industries, first as a technoeconomist and then as section chief of staff services for the company's re search department. In 1954 he joined Atlas Powder Co., and has held his present position since 1958. Mr. Weaver is author or coauthor of many publications and has been a contributing editor on "Costs" for In dustrial & Engineering Chemistry since 1958. Besides being a registered pro fessional engineer in Delaware and a member of ACS, he is a fellow in AIC and a member of AIChE, ASEE, AFS, AACE, and NSPE. He also be longs to Phi Gamma Delta, Alpha Chi Sigma, and Sigma XL
REPRINTS... . . . of this feature article on profit ability measures are available at the following prices: One to nine copies—75 cents each 10 to 49 copies—15% discount 50 to 99 copies—20% discount Prices for larger quantities on request Address orders to Reprint Depart ment, ACS Applied Publications, 1155 16th St., N.W., Washington 6, D.C.
DIRECTORY
EQUIPMENT MART
This section includes: CHEM ICALS EXCHANGE—Chemicals, Resins, Gums, Oils, Waxes, Pig ments, etc.; EQUIPMENT MART —New and Used Equipment, Instru ments; Facilities for Plant and Lab oratory; TECHNICAL SERVICES —Consultants ; Engineering, Testing, Professional Services.
ASCO
EQUIPMENT
MART
VACUUM RECORDER
STAINLESS STEEL TANKS
for use with A S C O Pirani-type Vacuum Gauge only.
O x y g e n cylinders, J - 1 , size 2 4 " χ 4 8 " . G - l , 1 2 " χ 2 4 " . F - 1 , oVi " χ 1 8 " . A - 4 , 5Vi" xo". T y p e 3 0 4 . 4 0 0 P.S.I. A i r Force surplus. Big values. FREE FOLDER.
The smallest and simplest strip chart recorder on the Only! U O market, it provides true rec tilinear recording free from inconvenient distortion. Operating at one inch per hour, a 63-foot chart roll records for 31 days. A galvanometer pointer swings free for maximum ac curacy, being clamped for marking briefly once every 2 seconds, generating a continuous line of many small dots. Scale length—25/i6". For portable use or panel mounting. 35/8 " wide χ 55/8 " high χ Wi" deep. Range—.1 to 5000 microns Hg.
Illinois Mfg. & Supply Co.
Advertising Rates : Space rate is $40 per inch. Lower rates available on contract basis. An "inch" advertise ment measures 7 /s" deep on one column. Additional space in even lineal inch units. Maximum space —4" per Directory per issue. Set ads due 21 days in advance of pub lication: complete plates, 17 days.
CHEMICALS
EXCHANGE
rNETER
DEAE - ECTEOL A - CM
Commercially Available Also Custom Cellulose Derivatives BROWN COMPANY, CHEMICAL PRODUCTS DIV. Berlin, New Hampshire
ANY LIQUID/
4 8 3 GETTY AVENUE, PATERSON.N. J.
Bench-Type
VACUUM FILTER _ '''^-r^;-.
porcelain
Write for listing of other fine organic chemicals.
EASTERN CHEMICAL CORPORATION COBALT BROMIDE, ANHYDROUS COBALT IODIDE, ANHYDROUS COBALT SELENATE Some of the many special chemicals we manufacture. ^ - ^ Write for our list of rare chemicals,
II
I
CITY CHEMICAL CORP.
% J 132 W . 82nd S t
New York 1 1 , Ν . Y.
AVAILABLE IN BULK
STONEWARE A K R O N 9, O H I O
34-N SPRING STREET N E W A R K 4 , N. J.
Γ'
mC\
U.S.
CHEMICALS
"EASTERN" LABORATORY SPECIALTIES: Dithiol · Dulcitol · Inulin Φ Xylitol · Xanthene Lévulose · Maltose · Rhamnose · Xylose · " T M G " Imidazole · Octadecyl Bromide · Pentachloroethane a-Bromonaphthalene · p-Nitrophenyiphosphate, Disodium 2,4-Dinitrophenylhydrazine · n-Butylurea-Diphenylurea Thionalide · 2,3-Butylene Glycol · " T . H . Q . " p-Aminohippuric Acid · Chloralose · Malonic Acid
Tie/dim
chemical
PRODUCERS OF FINE ORGANIC
< ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ W V ¥ ¥ ¥ y ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ W ¥ V ¥ ¥ ¥ ^ ^ ^ V
FOR MEASURING TANK CONTENTS A N Y DISTANCE A W A Y
white
ARAPAHOE CHEMICALS, INC.
CROTONONITRILE p-NITRO BENZALDEHYDE o-AMINO BIPHENYL Write for Catalog #3 — Over 19,000 Compounds
KT&IK LABORATORIES, INC.
YOUR ANNOUNCEMENT in Chemicals Exchange can carry YOUR MESSAGE to the readers of the leading publi cation in the chemical proc ess industries. CHEMICAL & ENGINEERING NEWS Advertising Office 430 Park Avenue New York 22, Ν . Y.
SEPT.
2 5, 1 9 6 1 C & E N 105
DIRECTORY SECTION This section includes: CHEM ICALS EXCHANGE—Chemicals, Resins, Gums, Oils, Waxes, Pig ments, etc.; EQUIPMENT MART —New and Used Equipment, Instru ments ; Facilities for Plant and Lab oratory; TECHNICAL SERVICES —Consultants ; Engineering, Testing, Professional Services.
Advertising Rates: Space rate is $40 per inch. Lower rates available on contract basis. An "inch" ad vertisement measures Ve" deep on one column. Additional space in even lineal inch units. Maximum space—4" per Directory per issue. Set ads due 21 days in advance of publication; plated ads, 17 days.
BUYERS' GUIDE
TECHNICAL SERVICES SCHWARZKOPF MICROANALYTICAL LABORATORY Complete Analysis of Organic Compounds. Results within one week. Elements, Functional Groups, Molecular Weights, Physical Constants, Spectra. Analysis of Boro-Fluoro, and Silicon Compounds Trace Analysis
MICROANAL YTICAL RESEARCH
56-19 37th A v e . , Woodside 77, New York •
MADISON 1. WISCONSIN P. O . Box 1 1 7 5 Alpine 6-5581
•
H O U S T O N β, TEXAS 2 4 0 5 Norfolk Street JAckson 6 - 3 6 4 0
•
W A S H I N G T O N 6 , D. C. 1 7 0 0 Κ S t r e e t , N. W . STerling 3 - 6 5 1 0
Telephone: HAvemeyer 9-6248, 9-6223
R0BINETTE RESEARCH LABORATORIES, INC. Industrial Research : : Consultation Technical Surveys : : Product Development Textile, Ion Exchange Technology Chemical Market Research Berwyn, Pa. N i a g a r a 4-0601
Member American Council Independent Labs, Inc.
1 ORGANIC MICROANALYSES H. W. Galbraith, Ph.D. P. 0. Box 41S7
Knoxville 21, Tmn. Founded 1950
DEATHS Continued from page 90
Arthur D. Chambers Dr. Arthur D. Chambers, 91, for whom the Du Pont Chambers Works at Deepwater Point, N.J., was named, died Aug. 28. He was a native of Canada and was educated at Wood stock College and Columbia Univer sity, and had received his Ph.D. in chemistry from Johns Hopkins. He joined Du Pont as assistant r-perintendent of the Ashburn, Mo., d>jamite plant in 1897. In 1915 he was assigned to the miscellaneous manu facturing department in Wilmington and was there instrumental in the development of synthetic organic chemicals which freed the U.S. from dependence on Europe in this line. He joined the ACS in 1916. Merle B. Doty, superintendent, dry color factory, Sherwin-Williams, Chi cago, July 3. Charles C. Gates, 84, president of Gates Rubber Co., Denver, Aug. 29. 106
C&EN
SEPT.
2 5, 1 9 6 1
YOUR ANNOUNCEMENT in Technical Services can carry YOUR MESSAGE to the readers of the leading publication in the chemical process industries CHEMICAL & ENGINEERING NEWS Advertising Office 430 Park Avenue New York 22, N. Y.
Dr. Frank C. Gephart, 77, retired consulting chemist, Aug. 24, Yonkers, N.Y. Joined ACS in 1906. Dr. Renzo Giulini, 77, of Gebr. Giulini G.m.b.H., Ludwigshafen, Ger many, Aug. 9. Phillip D. Greene, research engi neer at Asbestos Textile Co., North Brookfield, Mass., May 2 1 . Joined ACS in 1918. Malcolm C. Moore, 60, manager of technical personnel development at Hercules Powder, Sept. 1, Wilmington.
finds research products fast! tells name, address and phone of seller. result:
80,000
Jacob Sigal, 64, chemist at Pitts burgh Testing Laboratory, Aug. 31.
scientists keep it handy, use it often.
Donald H. Stevenson, chief of process development section, Houdry Process, Marcus Hook, Pa., April 1.
Published separately every year in mid-April by Analytical Chemistry.
R. M. Naley, 60, v.p. of Aluminium, Ltd., Sales and long an employee of Aluminium, Ltd., Sept. 6, Centerport, N.Y. Dr. Evan C. Noonan, chief of physi cal chemistry division, chemical re search department at Naval Ordnance Laboratory, White Oak, Md., Aug. 23,
