Metin Atmaca 030080007 9th week definitions part 2

3. Payback Period Method (Managerial Accounting):

Previous Definition:

The payback period method represents an extension of the cost and accounting rate of return methods. This method determines the period of time that it takes for the original capital investment to be returned completely in the form of revenues, thus making it possible to roughly evaluate the risk of various investment objects. An individual investment object is favorable if its playback period is shorter than the investor's target specification. when comparing alternatives, the alternative that has the shortest playback period is the one that should be selected.

(Factory Planning Manual, Michael Schenk, Siegfried Wirth, Egon Müller, p.302)

New Definition (Better):

The payback period is one of the simplest and most frequently used methods of measuring the economic value of an investment. The payback period is defined as the length of time required for the stream of cash proceeds produced by an investment to equal the original cash outlay required by the investment. If an investment is expected to produce a stream of cash proceeds that is constant from year to year, the payback period can be determined by dividing the total original cash outlay by the amount of the annual cash proceeds expected. Thus, if an investment required an original outlay of $300 and was expected to produce a stream of cash proceeds of $100 a year for five years, the payback period would be $300 divided by $100, or three years. If the stream of expected proceeds is not constant from year to year, the payback period must be determined by adding up the proceeds expected in successive years until the total is equal to the original outlay.

Ordinarily, the administrator sets some maximum payback period and rejects all investment proposals for which the payback period is greater than this maximum. Investigators have reported that maximum payback periods of two, three, four, or five years are frequently used by industrial concerns. The relatively short periods mentioned suggest that different maximum payback periods are required for different types of investments because some kinds of investments (construction, for example) can seldom be expected to have a payback period as short as five years.

Assume that the payback period is also used to rank investment alternatives, with those having the shortest payback periods being given the highest ranking. The investments described in Table 4.1 are ranked by this method in Table 4.2. Let us check the reasonableness of the ranking given to the investments by the cash payback approach. Investments A and B are both ranked as 1 because they both have shorter payback periods than any of the other investments, namely, one year. But investment A earns total proceeds of $10,000, and this amount merely equals the cost of the investment. Investment B, which has the same rank as A, will earn not only $10,000 in the first year but also $1,100 in the next year. Obviously, investment B is superior to A. Any ranking procedure, such as the payback period, that fails to disclose this fact is deficient.

Consider investments C and D modified so as to cost $11,524. Both would be given identical rankings because both would return their original outlay by the end of the second year. The two investments are in fact similar, with the single exception that out of identical total returns, more proceeds are received in the first year and less in the second year from investment D than is the case with C. To the extent that earnings can be increased by having $2,000 available for reinvestment one year earlier, D is superior to investment C, but both would be given the same ranking by the payback period measure. Thus, the cash payback period measure has two weaknesses: (1) it fails to give any consideration to cash proceeds earned after the payback date, and (2) it fails to take into account the differences in the timing of proceeds earned prior to the payback date. These weaknesses disqualify the cash payback measure as a general method of ranking investments. Payback is useful as a general measure of risk (all things being equal, a 2-year payback is less risky than a 10-year payback).

(Bierman, H., An Introduction to Accounting and Managerial Finance, pp. 69-71)

4. Rate-of-return method (Managerial Accounting):

Previous Definition:

The rate of return method also called return-on-investment (ROI) method,goes slightly beyond the present worth (PW) and uniform annual cost (UAC) methods by actually calculating the rate of return that is provided by the investment.If the calculater rate is greater than the criterion rate of return,the investment is acceptable.
To determine the return on investment,an equation must be set up with the rate of return as the unknown.Either the PW method or the UAC method can be used to establish the equation.Then the value of the interest rate i that drives the aggregate PW of UAC to zero is determined.

(Groover M.,Automotion,Production Systems and CIM Practice Hall 1st edition,p. 50)

New Definition (Better):

Many different terms are used to define the internal rate of return concept. Among these terms are yield, interest rate of return, rate of return, return on investment, present value return on investment, discounted cash flow, investor’s method, timeadjusted rate of return, and marginal efficiency of capital. In this book, IRR and internal rate of return are used interchangeably.

The internal rate of return method utilizes present value concepts. The procedure is to find a rate of discount that will make the present value of the cash proceeds expected from an investment equal to the present value of the cash outlays required by the investment. Such a rate of discount may be found by trial and error. For example, with a conventional investment, if we know the cash proceeds and the cash outlays in each future year, we can start with any rate of discount and find for that rate the present value of the cash proceeds and the present value of the outlays. If the net present value of the cash flows is positive, then using some higher rate of discount would make them equal. By a process of trial and error, the correct approximate rate of discount can be determined. This rate of discount is referred to as the internal rate of return of the investment, or its IRR.

The IRR method is commonly used in security markets in evaluating bonds and other debt instruments. The yield to maturity of a bond is the rate of discount that makes the present value of the payments promised to the bondholder equal to the market price of the bond. The yield to maturity on a $1,000 bond having a coupon rate of 10 percent will be equal to 10 percent only if the current market value of the bond is $1,000. If the current market value is greater than $1,000, the IRR to maturity will be something less than the coupon rate; if the current market value is less than $1,000, the IRR will be greater than the coupon rate.

The internal rate of return may also be described as the rate of growth of an investment. This is more easily seen for an investment with one present outlay and one future benefit. For example, assume that an investment with an outlay of $1,000 today will return $1,331 three years from now. 

This is a 0.10 internal rate of return, and it is also a 0.10 growth rate per year:

The internal rate of return of a conventional investment has an interesting interpretation. It represents the highest rate of interest an investor could afford to pay, without losing money, if all the funds to finance the investment were borrowed and the loan (principal and accrued interest) was repaid by application of the cash proceeds from the investment as they were earned. We shall illustrate the internal rate of return calculation using the example of the previous section where the investment had a net present value of $886 using 0.10 as the discount rate.

We want to find the rate of discount that causes the sum of the present values of the cash flows to be equal to zero. Assume that our first choice (an arbitrary guess) is 0.10. In the preceding situation, we found that the net present value using 0.10 is a positive $886. We want to change the discount rate so that the present value is zero. Should we increase or decrease the rate of discount for our second estimate? Since the cash flows are conventional (negative followed by positive), to decrease the present value of the future cash flows, we should increase the rate of discount (thus causing the present value of the future cash flows that are positive to be smaller).

Let us try 0.20 as the rate of discount:

The net present value is negative, indicating that the 0.20 rate of discount is too large.We shall try a value between 0.10 and 0.20 for our next estimate.

Assume that we try 0.16:

The net present value is zero using 0.16 as the rate of discount, which by definition means that 0.16 is the internal rate of return of the investment. Although tables give only present value factors for select interest rates, calculators and computers can be used for any interest rate.

(Bierman, H., An Introduction to Accounting and Managerial Finance, pp. 66-68)

5. Side-by-Side Mills (in Roll Forming)

Previous Definition:

Mills with the side-by-side arrangement of the stands are commonly used as rail-and-structural steel and heavy-section mills.
The side-by-side mills are less costly, but have a substantial drawback. Roll speed is the same in all the stands; as strip length increases after each pass, the final stand becomes a bottleneck. Because of this, the rolling rate in these mills is quite low.(Iron and Steel Production, Bugayev, p.167)

New Definition (Better):

Tool changeover time can further be reduced by mounting more than one set of tooling on the mill shafts. The simplest arrangement for the narrow sections is to install two sets of rolls on common shafts (Figure 2.23). The uncoiler, the prepunched press (if required), and the cutoff press are in line with one set of rolls. When profile change is required, the mill bed is moved sideways to align the second set of rolls with the other equipment. The complete changeover takes less than 2 min. Depending on the length of the mill bed, two, three, or more pairs of supporting rolls (casters) are attached to the bottom of the mill bed.

FIGURE 2.23 Side-by-side rolls on a mill.

The rolls are moving on rails embedded into the floor. Brass slides or linear bearings are also used to move the mill sideways. The movement is accomplished by electrical motor driven screws or by other means (e.g., hydraulic cylinders). Moving the mill bed against positive stops assures proper alignment. Occasionally, the mill remains in position while the uncoiler and the press (hydraulic) are moved sideways.

The advantage of this “side-by-side” arrangement is the high up-time. The disadvantage is that setting and adjusting one section will at the same time change the setting of the other section. However, this shortcoming can be easily overcome by using one or two more extra stands. At the more frequently adjusted, critical passes, only rolls of one set are installed. At the critical passes of the other section, only rolls for the other section are installed. This arrangement ensures that adjusting one section will not influence the other section.

It should also be noted that both sets of rolls must have the same pitch diameter and that recutting one set of rolls will necessitate the recutting of the other. During setup, the rolls closer to the shaft shoulders (drive side) should be set and tested first, followed by the roll set at the operator side.

To keep the changeover time to a minimum, each set of rolls should have its own entry guide and straightener. If the product is curved (swept) after the operation, then two individual curving units are recommended for the sections. If the prepunching has a different pattern, then either quick-change die should be used or the dies should be capable of moving sideways. Either the complete cutoff die or the cutoff die inserts should also be of the quick-change type.

Considering the advantages of the quick changeover, some customers are requesting to install three sets of rolls on the same shaft. Obviously, the longer the shaft is, the more critical the shaft deflection will be. The recutting requirements (all sets have to be recut at the same time regardless of unequal wear) and the number of additional stands to allow individual adjustments should also be considered. Three sections with relatively loose tolerances may be tooled on common shafts, but the optimum is to have only two sets of rolls on the shafts. Occasionally, it is requested to install four, five, or six sets of rolls on the shafts. This arrangement is not recommended.

Special side-by-side rolls are used in the lines that roll form two products at the same time from one common strip. The common strip is slit into two at one point in the line. This system is used to increase productivity to make two identical, or one left and one right section with each cut.

If three, four, five, or more sections have to be roll formed, or if the sections are too wide to be placed economically side-by-side in one stand, then a “side-by-side stand” mill can provide the solution for quick changeover (Figure 2.24). In the side-by-side stand mill, the common drive is usually at the center of the mill bed. The drive to each side can be disconnected to avoid accidental start. Disconnect is usually automatic or mechanical, not manual. Using side-by-side stands, one set of tooling can form products, while the other (disconnected) stands can stay idle or the rolls can be changed. The changeover of the two sides is quick, taking only a few minutes.

If the sections are wide, then the two mill beds can be attached side-by-side. This arrangement can be taken a step further and the stands on both sides can be on rafts. Rafting will reduce the changeover time of the rolls. However, with such a complex arrangement, the cost-effectiveness should be checked. It is possible that two separate mills will provide better flexibility, productivity, and perhaps a lower overall cost.

(Halmos, G. T., Roll Forming Handbook, p. 2-13)