1. Chapter 7 Financial Measures

2. Objectives Define and use financial measures: Revenue Growth Market Share Margin Cost of Quality (COQ) Net Present Value (NPV) Return on Investment (ROI) Cost Benefit Analysis

3. Common Financial Measures Financial aspects usually dominate the benefits section of a project report. Revenue Growth is the projected increase in income that will result from the project. Market share is an organization’s percentage of dollar value that is sold relative to the total dollar value sold by all organizations in a given market. Margin refers to the difference between income and cost.

4. Return on Investment (ROI) ROI = (Income / Cost ) * 100% ROI measures the effectiveness of an organization’s ability to use its resources to generate income. Payback Period: is the number of months for the organization to recover the cost of the project.

5. Net Present Value (NPV) NPV = A / (1 + i) n where A = amount to be received n years from now and i = annual interest rate expressed as a decimal. For example the net present value of $2500 that will be available in 4 years, assuming an annual interest rate of 8% is: NPV = 2500/(1 +.08) 4 = 1837.57

6. Cost of Quality Total cost of quality: 1. Appraisal costs: Expense involved in the inspection process. 2. Prevention Costs: Cost of all activities to prevent failures. 3. Internal failure costs: Costs of all in house failures. 4. External failure costs: Cost of failures when the customer owns the product. Cost of quality calculations have been successfully used to justify proposed improvements.

7. Summary Revenue Growth is the projected increase in income that will result from the project. Market share is an organization’s percentage of dollar value that is sold relative to the total dollar value sold by all organizations in a given market. Margin refers to the difference between income and cost. ROI measures the effectiveness of an organization’s ability to use its resources to generate income. Payback Period: is the number of months for the organization to recover the cost of the project. Cost of quality calculations have been successfully used to justify proposed improvements.

8. Home Work 1. Define the financial measure revenue growth? 2. Define margin? 3. What does ROI measure? 4. What 4 items make up the total cost of quality?