Profitability calculations are among pre-feasibility services provided by the experts at CTS Engtec to clients who contemplate investment options. The profitability of an investment and its sensitivity to different variables is evaluated before the final investment decision is made.
A key part of the pre-feasibility service is technical evaluation, which will result in a cost estimation. As the pre-feasibility study progresses, the investment evaluation is defined and completed. At the end, the client is given an analysis on which to base their decision.
At its most extensive, the investment profitability calculation could include the following:
- Expected return
- Investment options and models
- Cash flow prediction
- Profitability evaluation
- Sensitivity analysis
- Risk analysis
- Comparison of options
- Final report
The following facts should be considered in the profitability calculation:
- Investment taking into account depreciation
- Annual operating costs
- Taking into account working capital
- Starting curves and run times of the plant
In an industrial investment, the most keenly monitored indicators are internal rate of return (IRR), net present value (NPV) and payback time (PBT). The results depend on indicators that have been agreed with the client, such as sale price, cost of raw materials or production costs.
The sensitivity analysis observes the product’s predicted price development or depreciation, the project’s maximum profitability and the impact of increasing or decreasing costs. A critical indicator of contribution margin is the break-even point, at which total revenue equals fixed costs and investment remains above break-even point.
The basic fundamentals are set jointly with the client
The cost calculation is based on numeric values, technical studies and the client’s existing contracts. At the start of the analysis, we work closely with the client to establish the initial data. The cost calculation must take into account the product’s sale price per unit, labour costs, and operating costs such as energy costs.
Currency monitoring typically centres on euro/USD fluctuations.
The basic fundamentals are agreed upon at the start of the project, such as which discount rate should be used or whether social subsidies should be taken into account.
Among critical indicators of cost calculation are internal interest rates: how much of the investment is financed with borrowed capital, and what is the cost of borrowing. Inflation factor is one of the key predictable qualifiers of both cost and production. Sometimes the decision may be not to use the inflation factor.
The service can be used flexibly in projects of different sectors.
The experienced independent experts we place at our clients' disposal prepare profitability calculations and other analyses that are needed to back investment decisions.
Further information: Antti Lukka, MD, CTS Engtec Oy. Mob. + 358 40 5350 626