I.

Introduction

Establishment of a new project requires substantial capital fund known as investment

to operate and generate income. Yet, before an investment is made to a certain project, i

t is imperative to analyze and evaluate the profitability of the project. Profitability measu

re is very important since it is used to assess a business ability to generate earnings co

mpared to its expenses and other relevant costs incurred during a specific period. Moreo

ver, total profit is not an enough basis to justify whether the business to be established i

s profitable or not since the rate of return of investment is also a very significant factor

to be considered. In addition to this, profitability analysis gives a measure of how much

and how long the return of investment would be and determines the feasibility of the pr

oject. Profitability measurement is an analysis of expenses and revenues. Revenue is the

money generated from the activities of the business. Expenses are the cost of the resourc

es used up or consumed by the business activities.

There are various methods that can be used in evaluating the profitability of a busine

ss. These methods are divided into those that consider the time value of money and thos

e that do not consider that time value of money. Methods that do not consider the time

value of money include Rate of return on investment, Payback period, and Net return. T

he methods that consider the time value of money are discounted cash flow rate of retur

n, and Net present worth. In this study, the methods used in profitability are the rate of

return on investment and net present worth, break-even point analysis is also presented o

n this chapter.

There is no existing lactic acid plant in the Philippines at present time. The selling p

rice of the foreign product is considered to have precise economic evaluation of the proj

ect. Since the product is expected to be used locally in the Philippines, the price of the i
mported lactic acid is used in comparison. Profitability measurement, on its simplest app

roach, is an analysis of expenses and revenues. Revenue is the money generated from th

e activities of the business while expenses are the cost of the resources used up or cons

umed by the business activities. There are various methods that can be used in evaluatin

g the profitability of a business which are divided into whether they will consider the ti

me value of money or not. Methods that do not consider the time value of money includ

e: a.) Rate of Return on Investment (ROI) b.) Payback Period and c.) Net Return, where

as methods that consider the time value of money are a.) Discounted Cash Flow Rate of

Return and b.) Net Present Worth. The methods used in this design for profitability are

the rate of return on investment and net present worth. Break-even point analysis is also

presented on this chapter.

The total production cost and capital investment computed for the proposed

lactic acid manufacturing plant from sugarcane bagasse is PhP 251.54 per kilogram

and PhP 107,405,641.12. It was found out to be profitable and economically viable

since it has a rate of return on investment of 22.12%, which is more than 18

% of the minimum annual rate of return (MARR) provided by Bangko Sentral

ng Pilipinas. This ROI percentage indicates that it will take 4.52 years of o

peration in order to recover the cash investment. The proposed project yielded

a positive net present worth value PhP 81,746,467.56 which also indicates that

the earnings will exceed the costs. And lastly, the computed breakeven point

is 46.95% and the breakeven plant capacity that will cover the total fixed c

osts is 75,118.09 kg lactic acid per year proving that the proposed plant is f

easible, has the ability to generate the projected earnings and is highly profitable

.
 PURAC, Cargill and Henan Jindan Lactic Acid Technology Co., Ltd. are the world's

top three leading lactic acid manufacturers in the market at the present time. PURACs s

elling price of food grade lactic acid is ranging between 25 - 30 USD per kilogram, whi

ch when converted to Philippine peso,on an average, is about PhP 1,450 for every kilogr

am. Imported lactic acid have a 10 - 15% additional cost added to their price which will

cause to an increase in price amounting to PhP 1,800 per kilogram of lactic acid. The t

otal production cost of the proposed lactic acid plant, which is PhP 251.54 per kilogram,

is lower than the selling price of the lactic acid already in the market, thus, rendering t

he proposed plant highly profitable. Since the computed selling price of the locally prod

uced lactic acid from sugarcane bagasse is way lower than the competitor, it was made f

or the proposed selling price to be PhP 400 per kilogram of food/pharmaceutical grade l

actic acid.