# How to calculate the R 1000 guarantee

## Profitability calculation

The Return (= profitability) an investment is calculated as earnings before interest divided by the average capital employed.

Click here to expand (static) profitability: \$\$ \ r = {G + kZ \ over {A_0 + R_n \ over 2}} \$\$

It is G the Profitthat you can find in the Profit comparison calculation has calculated (after subtracting all imputed costs, also the imputed interest). If you add the imputed interest kZ again, the profit appears before the imputed interest is deducted. The average capital tied up is used in the denominator of the profitability formula. We assume a continuous release here.

### Example of profitability calculation

Calculate the returns of the alternatives in the example of Joelle GmbH. The sales price is € 12 for system 1 and € 14 for system 2.

 Relevant data Attachment 1 Annex 2 Acquisition costs (€) 160.000 240.000 Useful life (years) 8 8 imputed interest rate (%) 12 12 other fixed costs (€) 20.000 35.000 variable unit costs (€) 7 6 Liquidation proceeds (€) 40.000 40.000 Production quantity (ME / year) 10.000 10.000

### Attachment 1

First you calculate the Profit for system 1 from:
GA.= Revenues - costs
\$ = Revenue - (paid costs + imputed costs) \$
\$ = Price * quantity - (variable unit costs * quantity + paid fixed costs + imputed depreciation + imputed interest) \$
\$ = 12 * 10,000 - (7 * 10,000 + 20,000 + {acquisition costs - residual value at the end of \ over useful life} + interest * (average capital employed) \$
\$ = 120,000 - (70,000 + 20,000 + {160,000 - 40,000 \ over 8} + 0.12 * {160,000 + 40,000 \ over 2}) \$
\$= 120.000 - (70.000 + 20.000 + 15.000 + 12.000) \$
\$= 120.000 - 117.000\$
\$= 3.000 €.\$

For plant 1 you get the profitability as

\$ \ r_A = {3,000 + 12,000 \ over 100,000} = 0.15 = 15 \ \% \$

### Annex 2

Now you calculate that Profit for system 2:
GB. = Revenues - costs
\$ = Revenue - (paid costs + imputed costs) \$
\$ = Price * quantity - (variable unit costs * quantity + paid fixed costs + imputed depreciation + imputed interest) \$
\$ = 14 * 10,000 - (6 * 10,000 + 35,000 + {acquisition costs - residual value at the end of \ over useful life} + interest * (average capital employed) \$
\$ = 140,000 - (60,000 + 35,000 + {240,000 - 40,000 \ over 8} + 0.12 * {240,000 + 40,000 \ over 2}) \$
\$= 140.000 - (60.000 + 35.000 + 25.000 + 16.800) \$
\$= 140.000 - 136.800\$
\$= 3.200 €.\$

You get for plant 2 the profitability as

\$ \ r_B = {3,200 + 16,800 \ over 140,000} = 0.1429 = 14.28 \ \% \$

Machine plant 1 therefore has a higher Profitability as an investment 2.

The critical thing about the profitability calculation, however, is that the profit is not automatically maximized, as further capital may result in a further disproportionate increase in profit.