ROCE/ARR
- Average annual PBIT/Initial Capital Costs x 100
- Average annual PBIT/Average Capital Investment x 100
o Average capital investment = initial investment + residual value/2
ROCE/ARR Pros/Cons
- Only method that uses profit so easy to manipulate
o Profit = cashflow – depreciation
- Considers whole life of project
- Simple to understand
- Ignores time value of money
- Is a relative measure (%)
- Doesn’t consider cashflows
Future Value to Present Value
PV = Future Value x (1+r)^-n
Present Value to Future Value
FV = PV x (1+r)^n
EAC
EAC = PV of Costs/ Annuity factor for year n
- Year n is the length of the replacement period in years
Profitability Index
= NPV/Initial Investment
- Revenue per $ spent
- Divisible projects
- Rank best to worst
o Allocate money in this order
Sensitivity Analysis
= NPV/ PV of cashflows under consideration x 100
- Average annual PBIT/Initial Capital Costs x 100
- Average annual PBIT/Average Capital Investment x 100
o Average capital investment = initial investment + residual value/2
ROCE/ARR Pros/Cons
- Only method that uses profit so easy to manipulate
o Profit = cashflow – depreciation
- Considers whole life of project
- Simple to understand
- Ignores time value of money
- Is a relative measure (%)
- Doesn’t consider cashflows
Future Value to Present Value
PV = Future Value x (1+r)^-n
Present Value to Future Value
FV = PV x (1+r)^n
EAC
EAC = PV of Costs/ Annuity factor for year n
- Year n is the length of the replacement period in years
Profitability Index
= NPV/Initial Investment
- Revenue per $ spent
- Divisible projects
- Rank best to worst
o Allocate money in this order
Sensitivity Analysis
= NPV/ PV of cashflows under consideration x 100
