The profit comparison calculation is a static method of the investment calculation and is used to compare several investment alternatives. It represents an extension of the cost comparison calculation which, in contrast to this, includes revenues . There are two reasons for the different levels of income from two investment objects.
The first reason is the different quantitative capabilities of the investment objects. Therefore, with the same revenue per item, a higher revenue per period can be generated the more items are manufactured per period, provided that the sales market accepts the products at an unchanged price.
The second reason is the different qualitative capabilities of the investment objects. This makes it possible to achieve different revenue per item and a correspondingly different revenue per period.
By including the proceeds, the profitability of an investment can be better assessed. The profit of each alternative is determined and the profit-maximizing alternative is selected, because a low-cost investment does not necessarily have to generate profit.
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Within a company the following data is given for two mutually exclusive investment alternatives. One of the two alternatives should be selected using the profit comparison calculation.
Appendix I.
Appendix II
Plant data
Cost (€)
80,000.00
120,000.00
Useful life (years)
8th
8th
Liquidation proceeds at the end of useful life (€)
0, -
0, -
Capacity (LE / year) - is not included in the calculation
15,000
15,000
Assumed utilization (LE / year)
10,000
15,000
Discount rate (% / year)
10
10
Fixed costs (€ / year)
1,000.00
1,700.00
Variable costs (€ / year) with the above capacity
Wages and ancillary wage costs
16,000.00
8,000.00
Tools, supplies, etc. a.
3,800
4,000.00
Energy and other variable costs
1,900.00
2,700.00
proceeds
Sales price (€ / PU)
4.50
3.70
(LE = power unit)
Invoice for Annex I.
Invoice for Annex II
Annex II has a higher purchase price, but brings more profit.
criticism
The profit comparison calculation covers a broader range of applications than the cost comparison calculation, since it can also compare investments with different revenues. Another advantage, as with the cost comparison calculation, is the ease of use. However, the profit comparison calculation also has a number of disadvantages:
The consideration of the profit is period-related.
Short-term nature of the profit comparison.
It can be difficult to break down costs into fixed and variable costs.
Attribution of proceeds.
Not taking into account the capital employed.
In operational practice, the profit comparison calculation is used less often than the cost comparison calculation, although it can be judged more positively overall.
literature
Klaus Olfert and Christopher Reichel: Financing , 14th edition; Kiehl 2008.
Günter Wöhe , Introduction to General Business Administration , 23rd edition; Vahlen 2008
Klaus Olfert and Christoph Reichel: Investment , 10th edition; Kiehl 2006