As we discovered this week from our readings and videos, not all cost-benefit decisions can be made from strictly financia
Week 8 DiscussionCOLLAPSE
Cost Benefit Analyisis
Option 1
As we discovered this week from our readings and video’s, not all cost-benefit decisions can be made from strictly financial data. Thinking about a project you have worked on or proposed, or a project which you feel is critical in your company or community, give an example of a non-financial metric which should be considered and why you think that non-financial metric should result in the approval of the project.
– OR –
Option 2
Your New Product Development initiative is at the stage where a Cost-Benefit Analysis is needed to prepare for the final presentation to management. There are multiples metrics you could use to quantify the benefit of your proposal (incremental sales, nominal payback, discounted payback, NPV and IRR). Choose the one that you feel is most crucial and would best help Management see the value in your proposal. Explain what the metric shows and then discuss how you would go about gathering the data and calculating this for your new initiative (and, if you have already done this in real life, share what you did and what response you got from Management).
Post your initial response by Wednesday, midnight of your time zone, and reply to at least 2 of your classmates' initial posts by Sunday, midnight of your time zone.
Cost-Benefit Analysis and Capital Budgeting
How do you know if your great idea is really worth the investment it will take to make it happen?Ensuring that potential investments will provide a positive economic payout is the first step in analyzing your options, selling your idea, and making strategic business decisions. This week we will focus on key Cost-Benefit Analysis – aka Capital Budgeting – concepts and tools, including: (1) time value of money; (2) return on investment; (3) discounted cash flow techniques; (4) payback period; and (5) internal rate of return. Every business leader must know how to use these tools to assess the potential return for any project they are considering investing in.This week you will:
- Learn key terms and concepts associated with Cost-Benefit Analysis
- Apply tools and analysis techniques such as Net Present Value, Internal Rate of Return, and Payback to assess contribution
!st person to respond to
Phi
Hello Professor/Classmates,
Option 1
In last week's DQ, I briefly mentioned one of my friends in response to another student's DQ. He recently started his own nonprofit, where I am an honorary advisor. The Atlanta Family Foundation is a charitable social enterprise supporting marginalized families in Atlanta by Providing Food, Shelter & Other Essentials (1).
Before starting the project, I engaged him on the "Why" of wanting to start the nonprofit. It could not be just a feel-good project; he had to put some effort and thought behind mission, vision, impact, and influence. According to the National Council of Non-Profits, "Charitable nonprofits embody the best of America," shapes our boldest dreams, highest ideals, and noblest causes (2). The primary non-financial metric was Goodwill and Legacy, having a more prominent presence in the local community. Realizing the organization's short- and long-term objectives tied into the Slogan of "Transforming Communities One Child at a time" (1).
Phil
References
1. Atlanta Family Foundation | Transforming Communities One Child at a Time
2. Nonprofit Impact in Communities | National Council of Nonprofits
JWI 530
The Mary Story
BACK ON TRACK
BACK ON TRACK
We caught a glimpse of Mary’s analytical skills at work. She was honored to learn of her Division’s record breaking sales in the most recent quarter – but she knew enough to look past the hype, and to get down to the “real” numbers.
It truly had been a great quarter – but a lot of the revenue increase could be attributed to pricing changes and other factors that might not be achievable quarter over quarter. Mary realized that in her role as a business leader, she had to study the numbers and the data with cool precision – candidly making judgments as to what aspects of that data represented sustainable progress vs. fleeting “feel good” moments.
In the wake of her most recent meeting with Andrea and some other staff members, Mary found herself sitting alone in her office. It was getting late in the day, and Mary’s head was beginning to swim. She had been agonizing over the launch of a new perfume, but the project financials were projecting a negative net present value (NPV). Mary knew this meant that the project was not showing a positive financial return.
The NPV at a 10% discount was showing a negative $23,000. She knew that Net Present Value is the net amount, in today’s dollars, of the cost and benefits of a project’s cash flows. Since it was currently less than zero, the company would be $23,000 in the red versus not doing the project. Further, since the NPV was less than zero when using a discount factor of 10%, she knew that the Internal Rate of Return must be less than 10%. Given the poor project financials, Mary knew there was no way that Jack, the CEO, would support this new project.
She decided to send a few IM’s to Andrea about this analysis. Andrea was leaving soon for some off-site appointments, but Mary was
determined to try to catch her before she left. Andrea was impressed with Mary’s understanding of NPV and IRR. But Andrea’s experience with project economics lead her to encourage Mary to alter her approach to the reports.
Mary assumed that the negative NPV would most likely doom the otherwise exciting project. However, Andrea encouraged her to look at it a different way. She impressed upon Mary the need to think positive, and use the NPV calculation not as a reason to give up, but rather as a catalyst to rally the team and get to work revising the negotiable elements of the project to make it work! In the long run, this could lead to a better NPV – and ultimately, a stronger product. She and Mary agreed that project economics are built on assumptions and choices. Each group presents data and choices based on their relative roles in the project.
For example, R&D had created the formula that they believed would best appeal to consumers. Purchasing had made choices regarding which suppliers needed to be contacted, and what needed to be purchased from those suppliers. Operations made choices based on product design from R&D. Marketing and finance made choices related to pricing and brand support.
Each of these choices had an impact on the financials of the project. However, each of these choices had alternatives. Both women knew that for any hope of management support, they needed a financially attractive proposition. They had to take a look at the assumptions and do some sensitivity analysis to determine which choices would have the most significant impact on the project NPV.
As they IM’d back and forth, Mary decided to make a list of things to consider changing. One item they discussed was the formulation of the perfume, which was a big overall cost driver. She wanted to ask R&D if it was possible to reformulate to a slightly less expensive design. She also planned to ask the operation manager if the product
launch proposal really needed that much inventory. She wanted to know what would happen to consumer demand if she increased the selling price by 5%. Finally, she wanted to know if that expensive, fluorescent purple bottle that purchasing had selected really was the best choice – especially in light of the fact that there were so many other viable, cost-effective alternatives available.
Yes, the NPV is based on a set of choices and assumptions. And Mary was even more aware of that after her IM volley with Andrea. Modifying the original plan anywhere along the way will lead to a different NPV. As they wrapped up their chat session, Mary spun around in her chair and grabbed the phone. She called her assistant and asked that a meeting be scheduled with the Perfume Division managers tomorrow at 11AM.
Inspired by her exchange with Andrea and some further review of the reports, Mary was as determined as ever to find a way to get the new perfume product back on track and out to market!
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