Production and Operation Management
Both launching new product first time or diversified the product line involve investment. Basic objective of every investment is to maximise the profit. Hence the scarce capital should be invested in those opportunities which could give the maximum return on capital employed (profit).
Tools for investment analysis:
NPV, IRR, Payback Period, ARR, Benefit cost Ratio.
Technique of ratio analysis and capital budgeting have been used as most important tool of investment analysis. Investment analysis deals with the interpretation of the data incorporated in the Performa financial statement of a project and presentation of data in the form in which it can be utilised for comparative appraisal of the projects
Ratio analysis established arthimetical relationship between two relavant figures.normally it is expressed in percentage.
Return on proprietor’s fund( Equity)
Net Profit after tax and interest / Proprietors fund x 100
Objectives of investment is to earn maximum profit whether investment to be worth making in terms of return compared to risk.
Return on Capital Employed
(Net profit before interest and tax / Capital Employed) x 100
Equity Capital = 5 lakhs, Loan = 3 lakhs, Rs. 80,000 net profit before tax and interest.
80,000/8,00,000 X100 = 10% (compare with other industry)
Return on Total Investment
Net Profit after interest and tax/ Total Asset x100 = Overall profitability of business.
Involves investment decision balancing the sources and uses of funds for acquiring fixed assets like plant and machinery. Investment in fixed asset implies the choice of a particular project. The project selection is made on certain techniques.
Techniques of Capital Budgeting.
Pay Back or Payout Period
How long he / she to wait before the invested capital is recovered. Cash flow start coming and accumulate after certain period of time, the accumulated amount equal to the original investment made.
Average rate of return
Accounting rate of return is a reverse of payback period method. Pay back based on cash flow. Average rate of return based upon principles of accounting. It does not consider the time period. The average rate of return is calculated by dividing the average net income after taxes by the average investment over the life of the project.
ARR = Average net income after tax/ Average investment over the life of the project. X 100
It ignore time value of money.
During the course of technical arrangement of various facilities such as machinery, equipment etc., it is very necessary to give considerable emphasis on a proper plant layout to achieving their optimum utilization.
Some important aspects while deciding the plant layout. There are
1. Production technology and production mix.
2. Efficiency, economic and uninterrupted flow of men and material
3. Adequate space for maintenance work
4. Scope for future expansion and diversification of the project
5. Health conducive layout of the plant
6. Proper lighting and ventilation.