A capital investment approach to price formulae/determination

Abstract

In an analysis of ten widely used price-control formulae it was shown that the formulae took into consideration a variety of different stipulations such as the calculation of funds employed, the definition of profit and the profitability rate allowed. Furthermore it is maintained that the commonly used intuitive and/or conventional methods of evaluation are subject to various shortcomings. Therefore, it can be inferred that it is virtually impossible to compare different price formulae in isolation. To overcome this problem a simulation model, based on certain assumptions, has been developed. The model compares and evaluates the adequacy of various price formulae over time (dynamically) in different ways, i.e. several ratios and criteria are calculated with the internal rate of return being the primary one. In the remaining three articles, the simulation model will be applied to the two formulae presented in this article.