Thursday, August 28, 2008

A hypothetical question on profit margins

Suppose for a moment that you are the CEO of a major multinational corporation. Your company has a long term project, a project that is potentially very rewarding. But that project was going to take a minimum of 13 years to develop, and cost an estimated $5 Billion dollars before you make a single dollar back in return. And this is not the only project of this type that your company has in process, if perhaps not quite it's size or scope. None of these projects are assured to ultimately be profitable, some may not be, or will not be as profitable as originally thought. Your company's future depends on the profits that these projects will bring in. Your current profitable projects have a finite lifespan and you must replace them regularly. How much profit margin do you think you should make on your product in order to finance these long term prospects? 20%? 15%? 10%? Try 7-1/2%!

Compare that to a few other large multinational corporations:
General Electric 12%
Microsoft 29%
Halliburton 16%
Toyota 5.8%

I'm really having a hard time grasping the concept of "windfall profits" here.

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