VII.3.

Profitability Analysis
The goal of this project is to analyze the proposed manufacturing plant of Langkuga
whether the proposed project is profitable or not. For process designers, profitability analysis is
an important tool to improve the design by identifying operations that are inefficient. This will
help the plant designers to evaluate the designed process and all decisions for any changes
with regards to how the project will run where it will be based from this analysis. For investors,
this will become their basis of their decision on whether to invest in the project or not.
To analyze the profitability of the project, economic evaluation will be done using the
following assumptions:
1. The land will be purchased at the start of the project which is at year 0.
2. The construction phase will take 2 years after purchasing the land.
3. The 60% of the Fixed Capital Investment (FCI) will be spent during year 1 and the
remaining 40% will be spent during year 2.
4. The plant operation will start by the end of year 2 with a working capital of PHP 32.06
Million.
5. The project life is 10 years after start-up.
6. The depreciation method that will be used is the straight-line method and it will be
over 5 years.
7. The tax rate that will be used is 30% and an internal discount rate of 10% p.a.
8. Equipment are well maintained and no replacement
9. 50% Mark-up is added to the product cost and Carbon Dioxide by-product will be sold
10. Working capital and Land will be recovered at the end of the project life
The project will be evaluated using the non-discounted and discounted profitability
criteria. For the non-discounted criteria, the cumulative cash position (CPP), cumulative cash
ratio (CCR), payback period (PBP) and the rate of return of investment will be determined. For
the discounted criteria, the net present value (NPV), net present value ratio (NPVR), payback
period (DPBP) and the discounted cash flow rate of return (DCFROR) will be determined.
Sensitivity and Monte-Carlo analysis will be employed as methods to quantify the risk in
putting up the project. The factors that will be considered in quantifying the risk are the sales
volume, product price and raw material availability and price with probable variation of -50 to
+150, -50 to +20 and -25 to +50, respectively.
In profitability analysis it is set that the plant operates at 75% capacity by the third year,
on the fourth year around 90% capacity, and on the fifth year onwards the plant already
operates at 100% capacity.
Total Capital Investment
This is the sum of the Fixed Capital Investment and the Working Capital shown in Table
VII.9.
Table VII.1. Total Capital Investment (in PHP millions)

Fixed Capital Investment ₱ 113.71

Working Capital ₱ 32.06
Total Capital Investment ₱ 145.76

Selling Price
The selling price of the product depends on the cost of manufacture and general
expenses of production. Considering the total production cost which is ₱ 73.45 million and the
annual production rate of 254,930 units of 750 mL wine bottles. Dividing the total production
cost by the annual production rate, it yielded to a base selling price of the product amounting ₱
288.12. Selling at the base price will not yield any profit, thus it is natural to add a mark-up of
50% to the base selling price to yield profit which makes the selling price of the product to ₱
432.18. This is summarized in Table VII.10.
Table VII.2. Product Selling Price

Total Production Cost ₱ 73.45 million

Annual Production 254,930 Bottles of 750 mL
Product Cost ₱ 288.12
Mark-Up 50%
Selling Price ₱ 432.18

By Product
The by-product accounted here is CO2. The amount of CO2 produced annually is
relatively large and can be captured and sold to other manufacturing industries that uses CO 2 as
a raw material. In addition, the selling price of the CO2 used is the cost per kilo of liquid CO2.
Table VII.3. By-product Income

Annual Production 28,795.52 kg

Cost of CO2 per kg ₱ 30.51
Annual Income ₱ 878,551.00
Non-Discounted Profitability Analysis
The Non-Discounted After-Tax Cash Flow is shown in Table VII.9.
Table VII.4. Non-Discounted After-Tax Cash Flow

Dk COM (in ATI (in NDCF (in CNDCF

I (PHP R (PHP
YEAR (PHP Million Million Million (in Million
Million) Million)
Million) pesos) pesos) pesos) pesos)
0 (1.80) - - - - (1.80) (1.80)
1 (68.2) - - - - (68.2) (70.0)
2 (77.5) - - - - (77.5) (148)
3 - 22.7 83.4 36.5 39.6 39.6 (108)
4 - 22.7 99.9 43.8 46.1 46.1 (61.8)
5 - 22.7 111 48.6 50.5 50.5 (11.3)
6 - 22.7 111 48.6 50.5 50.5 39.2
7 - 22.7 111 48.6 50.5 50.5 89.7
8 - - 111 48.6 43.7 43.7 133
9 - - 111 48.6 43.7 43.7 177
10 - - 111 48.6 43.7 43.7 221
11 - - 111 48.6 43.7 43.7 264
12 33.9 - 111 48.6 43.7 77.5 342
I – Investment
R – Revenue
Dk – Depreciation
COM – Cost of Manufacture
ATI – Annual Taxed Income
NDCF – Non-Discounted Cash Flow
CNDCF – Cumulative Non-Discounted Cash Flow

For non-discounted profitability analysis where time value of money is not accounted but
shows that the project is profitable. The Net Present Value or NPV of the project is ₱ 342
million and the Rate of Return of Investment or ROROI of the project is 30%. The non-
discounted payback period of the project is 2.55 years after start-up. The non-discounted cash
flow diagram is shown in Figure VII.2
Figure VII.1. Cumulative Cash Flow Diagram for Non-Discounted After-Tax Cash Flow

Discounted Cash Profitability Analysis

The Discounted Cash Flow is shown in Table VII.13.
Table VII.5. Discounted Cash Flow

NDCF (in Million DCF (in Million CDCF (in Million

Year
pesos) pesos) pesos)
0 (1.80) (1.80) (1.80)
1 (68.2) (62.0) (63.8)
2 (77.5) (64.1) (128)
3 39.6 29.8 (98.2)
4 46.2 31.5 (66.6)
5 50.5 31.4 (35.3)
6 50.5 28.5 (6.8)
7 50.5 25.9 19.2
8 43.7 20.4 39.6
9 43.7 18.5 58.1
10 43.7 16.9 74.9
11 43.7 15.3 90.2
12 77.6 24.7 115
DCF – Discounted Cash Flow
CDCF – Cumulative Discounted Cash Flow

For discounted profitability analysis where the time value of money is accounted shows
that the project is profitable. The discounted net present value of the project is ₱ 114.95 million
and the discounted cash flow rate of return is 25%. The analysis shows it is profitable the
resulting discounted payback period is 3.24 years after start-up. The Discounted Cash Flow
Diagram is shown in Figure VII.3.

Figure VII.2. Cumulative Cash Flow Diagram for Discounted After-Tax Cash Flow

VII.4. Sensitivity Analysis

Sensitivity analysis is a tool used to demine the effects of uncertainties that can occur or
forecasting the possible uncertainties on the sustainability of the project. The Net Present Value
(NPV) is used as to measure the profitability of the project. The factors or parameters that will
be considered in quantifying the profitability by calculating their NPVs corresponding to different
percent changes are the sales volume (S), product price (P) and raw material price (M 1 – Rice,
M2 – Tapay, M3 – Sugar, M4 – Water). These are tabulated in Table VII.14 and the sensitivity
curves are shown in Figure VII.4.

Table VII.6. Net Present Values of different factors in different percent change

% NPV (P, NPV (S, NPV (M1, NPV (M2, NPV (M3, NPV (M4,
CIP PHP PHP PHP PHP PHP PHP
millions) millions) millions) millions) millions) millions)
 -6 15.08 15.08 38.97 38.61 38.77 39.82
-4 22.92 22.92 38.84 38.60 38.71 39.41
-2 30.75 30.75 38.71 38.59 38.64 38.99
0 38.58 38.58 38.58 38.58 38.58 38.58
2 46.42 46.42 38.45 38.57 38.52 38.17
4 54.25 54.25 38.33 38.57 38.46 37.76
6 62.08 62.08 38.20 38.56 38.40 37.35

Figure VII.3. Sensitivity Curve of Changes in Parameter

Monte-Carlo Analysis
Monte-Carlo Analysis is a tool that simulates the estimation of the risks and uncertainties
in the financial aspect of the project. The analysis uses probabilistic approach in quantifying
risks in order to create various outcomes based from assumptions and ranges of estimates.
With the aid of MS Excel, making a Monte-Carlo analysis is possible. The parameters used
were the same in the Sensitivity Analysis. The parameters are summarized in Table VII.16.
Table VII.7. Monte-Carlo Analysis Values

Profitability
Parameter Minimum Value Most Likely Value Maximum Value
Variation
Product Price -50 to +20 % ₱ 216.09/bottle ₱ 432.18/bottle ₱ 518.62/bottle
Sales Volume -25 to +50 % 127,465 bottles/yr. 254,930 bottles/yr. 637,325 bottles/yr.
Rice Price -25 to +50 % ₱ 37.50/kg ₱ 50.00/kg ₱ 75.00/kg
Tapay Price -25 to +50 % ₱ 510.00/kg ₱ 680.00/kg ₱ 1,020.00/kg
Sugar Price -25 to +50 % ₱ 24.75/kg ₱ 33.00/kg ₱ 49.50/kg
Water Price -50 to +150 % ₱ 15.21/m3 ₱ 20.28/m3 ₱ 30.42/m3

The major discounted profitability criterion in this analysis is the NPV. This requires a
formula for the NPV. This is shown in Equation VII.1.
FCI WC Equation VII.1
NPV =−L− − +5.078154633 z
1.1 1.21

where:
z FCI FCI
[ SP−( M 1 x 1 + M 2 x 2+ M 3 x 3+ M 4 x 4 +Y )−
10]× 0.70+
10
Y COM – cost of raw materials
COM PHP 48.64 million
Cost of raw materials PHP 3.12 million
Y PHP 45.52 million
x1 36,000 kg Rice
x2 182 kg Tapay
x3 26,550 kg Sugar
x4 285,575 m3 Water
S Sales Volume, no. of bottles sold
P Product Price, PHP
M1 Price of Rice, PHP 50.00/kg
M2 Price of Tapay, PHP 680.00/kg
M3 Price of Sugar, PHP 33.00/kg
M4 Price of Water, PHP 20.28/m3
 To do the analysis, the steps outlined by Turton et. al. [CITATION Tur18 \p 343-348 \n \t \l
1033 ] were followed. The result of the Monte-Carlo analysis is shown in Figure VII.5.

Figure VII.4. Cumulative Probability Curve from Monte-Carlo Analysis

Summary and Discussion

Profitability Analysis
For non-discounted profitability analysis, the project after 10 years operating after start-
up is considered profitable and the worth of the project at the end amounting to ₱ 342 million. It
only takes approximately 3 years to recover back the Fixed Capital Investment. The rate of
return resulted to 30% which is already acceptable.
The discounted profitability analysis still resulted to a profitable outcome. The cumulative
discounted cash position at the end of the project resulted a positive value with the amount of ₱
115 million. In addition, the discounted payback period resulted to approximately 3 years. A
payback period of 3.24 years means that after 3.24 years the fixed capital investment is already
recovered. Furthermore, the DCFROR or the discounted cash flow rate of return is 25% which
15% higher than the internal discount rate of 10% which makes the project efficiently utilizes
money thus, making it profitable. The profitability analysis shows that the project is potentially
profitable. This is summarized in Table VII.16.
Table VII.8. Non-Discounted Profitability Analysis Results

Profitability Non
Remarks Discounted Remarks
Parameter Discounted
positive value;
positive value;
NPV ₱ 342 million ₱ 115 million profitable
profitable
greater than the
internal discount
ROR 30% profitable 25%
rate p.a

within typical within typical range;

PBP 2.55 years 3.24 years
range; acceptable acceptable

Not accounting the time value of money, the project after 10 years operating after start-
up is considered profitable and the worth of the project amounting to ₱ 109,314,625.70. It only
takes approximately 3 years to recover back the Fixed Capital Investment. A Cumulative Cash
Ratio greater than 1 means the project is potentially profitable.

Risk Analysis
The linear equations obtained from the Sensitivity curve shows different relationships
from every change of the parameters. For the product price and sales volume, a unit increase
from these parameters results to 391.64 unit increase of NPV. The change in product price and
sales volume results a directly proportional relationship with its NPV. On the other hand, a unit
increase for Rice, Tapay, Sugar, and Water which are raw materials to produce Langkuga
results an inversely proportional relationship. For a unit increase in the price of rice will results a
6.40 decrease of NPV. A unit increase for the price of tapay results a 0.44 decrease of NPV. A
unit increase in the price of sugar results to a 3.11 decrease in NPV. Lastly, a unit increase in
the price of water results to a 20.59 decrease of NPV. Based from the result of the sensitivity
analysis the water has relative larger impact towards the NPV compared to other raw materials.
This is summarized in Table VII.17

Table VII.9. Sensitivity Analysis Result

Parameter Value Remarks

an increase of 391.64 NPV in
NPV (Product Price) 391.64 every unit increase

an increase of 391.64 NPV in

NPV (Sales Volume) 391.64 every unit increase
 a decrease of 6.40 NPV in every
NPV (Rice Price) (6.40) unit increase

a decrease of 0.44 NPV in every

NPV (Tapay Price) (0.44) unit increase

a decrease of 3.11 NPV in every

NPV (Sugar Price) (3.11) unit increase

a decrease of 20.59 NPV in

NPV (Water Price) (20.59)
every unit increase

Figure VII.5 shows that the smallest net positive value is ₱ 1.8 million which is clearly
way below the minimum value, thus at 20 % probability the project will fail or will not be
profitable. In addition, 69 % probability of the values of NPV that lie above ₱ 111 million, which
is the NPV calculated for the base case using the most likely values of the Product Price, Sales
Volume, and Raw Material Prices for rice, tapay, sugar, and water. With low chances for the
plant that will not be profitable and relative high chance for the project or plant that will be
profitable, therefore the proposed project or plant should be established. This is summarized in
Table VII.18.

Table VII.10. Monte-Carlo Analysis Results

Parameters Value Remarks

Cumulative Probability 20% probability of project failure
Cumulative Probability 58% probability above the calculated base NPV

I. CONCLUSION AND RECOMMENDATIONS

The designed plant is expected to produce 254,930 of 750mL annually. Based from the
total product cost, the selling price of the Langkuga was obtained. Each bottle of the product will
be sold for ₱ 432.18. The computed IRR was 30% which is greater than the internal discount
rate of 10%. This means that this project is potentially profitable. the expected payback period
for the non-discounted and discounted cash flows are 2.55 and 3.24, respectively. This means
that if the discount rate was not considered, 2.55 years after the start-up, the FCI for the project
will be recovered. On the other hand, if the discount rate was considered, the FCI will be
recovered 3.24 years after start-up. The discounted and non-discounted cash flow shows that
after the project’s life, the plant will have a cumulative cash flow of ₱342 Million and a net
present value of ₱115 Million, respectively.
It is recommended to explore new and existing technologies and incorporate it to the
design to make the process efficient and possible lessen the cost of manufacturing of the
product. Automated equipment for cooling the rice substrate and mixing the tapay can be
employed to make the process efficient, reduce the human intervention in the process and
avoid sources of contamination in the product. Innovation of the product itself is highly
recommended to create new and much more competitive product in the market, aside from
creating new product through innovation will help improve the organoleptic properties of the
Langkuga. The designers also recommend conducting a market study to determine the actual
demand of the product and will become the basis of the future design of this production
process.