What is the best way to calculate project profitability for profitability analysis?
It is a crucial step to calculate expected profit for the project. What are the best possible ways to calculate project profitability when the resource utilization is less than say 50% or when the resource is shared across the projects?
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Oct 20, 2015
You need to do the following. 1) calculate financial ratios. This will give you an idea of how and where the project will go from a point X. 2. Compare the currently available details of similar project with that of your project.
Sep 8, 2015
ABC actiity based costing...Know the difference between OOPC out of pocket costs & fixed/overhead costs
Sep 8, 2015
Regardless of the resources utilization level a specific project valuation has to be based on the required resources and on a stand alone basis. If these are 30% of the company existing resources level it doesn't matter as far as the valuation of the project's economics is concerned.
Concerning the profitability analysis assuming that you do not compare competing development, what I would recommed is to calculate your company WACC (Weighted Average Cost of Capital) or if you are not a listed company you can calculate the net cost of borrowed capital (that does not consider volatility Beta ) but should consider the fact that interests on loans are generally tax deductible as opposed to the principal.
You can then calculate the IRR using the actualized cash flow, that results in an NPV = 0, and verify that the IRR % exceeds the cost of capital. By how much it is a matter of corporate criteria.
There are other indicators of profitability among them ROE or ROI, and ROCE if it is a capital intensive project.
Sep 8, 2015
Normally, costs are allocated by the driver of the resource but...I'd be careful. Standard Cost and its analogs can mislead. For example, if the driving resource, as you describe, is not fully utilized, allocating its cost(s) to project may mean you are allocating under-utilized overheads. This is the most common complaint from divisions subject to corporate HQ cost allocations.
Good luck!