INVESTMENT AND OPERATING COSTS

Investment Decision

Probably the most important decision which any management has to take is the decision to invest, that is to incur an expenditure now in the hope of realizing benefits that are expected to occur over a reasonably long future period of time. In order to know whether an investment in a plant for production of fish meal is a worthwhile proposition or not, it is necessary to make a financial analysis of the plant for the period during which it is expected to be in service. For the calculation of the Internal Financial Return, which is the most common so-called discounted cash flow indicator used by the business community and development banks to measure the profitability of an investment project (Bierman, 1966), the following hypothetical case is shown in Table 7.
The Internal Financial Return by definition is that rate at which the present value of future operational cash flow equals the investment cost. The rate, 18.5% in the example given, indicates the project can bear a cost of capital (in the form of interest on borrowed money) of 18.5% without showing a net loss.

Investment Cost and Size of Fishmeal Plant

The same financial indicator, Internal Financial Return, used to measure the overall profitability of one investment project is also useful for making comparisons between different scales of a similar type of operation, that is, generally speaking, fishmeal plant A with a production capacity of X tons per day and an Internal Financial Return of 25%, is more profitable than an alternative plant B of Y-ton capacity and a return of 15%. The investment cost per ton of processing capacity for plants of different sizes is another method of determining the economics of scale. To give an idea of how these costs vary depending on the size of plant, Table 8 gives some figures based on 1984 prices. These and