Profitability calculation

Profitability calculation is a static method of investment calculation, which usually measures the average rate of return over time on an investment project using the return on investment (ROI) indicator. The ROI is defined as the quotient of the additional (expected) average project profit (before and / or after taxes) or, in the case of rationalization or replacement investments with non-attributable income from relative cost savings and average capital employed. According to the criterion of static profitability, an investment project is considered advantageous if the ROI is not less than a predetermined minimum profitability; From several (permissible) investment alternatives, the one with the highest profitability is to be chosen.
How the terms average project profit or relative cost savings and average capital employed are to be appropriately defined cannot be universally defined. From the point of view of investment controlling, however, the following must be taken into account:

It does not make sense to relate the ROI to the originally invested capital, as this only corresponds to the profitability of the first year, but not the desired average profitability of an investment project.

It is inexpedient to subtract the imputed interest in relation to the equity when determining the project profit, as otherwise only the profitability is measured that goes beyond the imputed interest rate.

Interest on borrowed capital is also not deducted if the profitability (in terms of total return on capital) is initially to be assessed without taking into account financing aspects.

Zur Ermittlung der durchschnittlichen Kapitalbindung kann eine kontinuierliche Amortization des gebundenen Kapitals (durch die Umsatzerlöse) während der Projektdauer unterstellt werden: Es sind dann für den Fall abnutzbarer Gegenstände des Anlagevermögens durchschnittlich 50% der ursprünglichen Anschaffungswerte (Anschaffungsauszahlungen), ggf. unter zusätzlicher Berücksichtigung eines erwarteten Liquidationserlöses, gebunden.
If the controller from the logistics area knows what average inventory levels are to be expected due to the additional investment project, this capital commitment must also be taken into account in the current assets, eg in the amount of the planned average reserve inventory ("iron inventory").

The assessment of the relative advantageousness of investment projects with the help of the profitability calculation can lead to wrong decisions, since it implicitly assumes that the profitability of the project can always be achieved with the lower capital investment based on the difference in the tied capital. For this reason, in order to avoid wrong decisions by investment controlling, it must be ensured that information about the interest rate to be achieved on the capital difference, e.g. in the form of a financial investment from the financing area, is explicitly taken into account in the investment calculation or the profitability of the differential investment (internal interest rate Method) determined and ver with the given minimum profitability
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