Common Mistakes in a Capital Equipment Justification

Return on Investment Analysis (ROIA), sometimes referred to as Capital Equipment Justification, is the process of building and analyzing a financial model for the purpose of determining the net financial contribution of obtaining a major investment like a factory building or piece of production equipment.

ROIA is the link that connect the brilliant ideas of makers–the engineers, designers and builders—to the goals of the managers who hold organization’s purse strings. When thoroughly conducted, ROIA aligns the best estimates of the revenues and expenses related to a potential purchase with the years in which they will occur.

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What are the Best Reference Books for Quality Engineers?

In this age of infinite information at our fingertips, it seems that fewer people are finding reference books and investing in their own libraries. After all, googling whatever’s on your mind is free and easy. But books, especially reference books and textbooks, still have a necessary place in our information age. [Read more…]

Return on Investment Analysis for Engineering Managers

A commonly encountered fork in the career road for many successful engineers is to a) continue engineering or b) manage others who engineer. To continue engineering is an obvious choice, and an often desired one. [Read more…]

What is Depreciation?

Depreciation is one of the more poorly understood, yet commonly encountered terms in managerial accounting. In accounting lingo, depreciation is the systematic allocation of the cost of an asset across its useful life. That’s a mouthful. But breaking down the definition into simpler terms helps explain how its used and why it’s important when conducting Return on Investment Analysis. [Read more…]

The Net Present Value Method: Measuring the True Value of an Investment

In the previous three articles, we’ve examined the Break-even Analysis and Pay-back Period methods (Part 1 and Part 2) as means of evaluating capital investments. While these back-of-the-napkin methods are excellent starting points for analyzing investments, they’re both poor ending points. Neither provide a reliable basis for comparing investments side-by-side. And neither tell you how much value an investment is adding to your organization. [Read more…]

The Problems with Payback Period, Part 2

The problems with the payback period method as a means of analyzing and comparing potential investments extend beyond its problem with the time value of money. In fact, that problem can be corrected (but rarely is in practice) by using a method called the “Discounted Payback Period”, where the future expected cash flows are “discounted” to align them with the present value of the initial investment. But even with that correction, the Payback Period Method is still lacking as a primary return on investment (ROI) analysis tool. [Read more…]

The Problems with Payback Period, Part 1

If you’ve ever participated on a project team considering the purchase of a major piece of equipment, you’ve almost certainly heard of “Payback Period” – the length of time projected to recoup an initial investment through cost savings, increase profits, etc. It’s fairly simple to calculate: [Read more…]

Break-Even Analysis: To Paint or Not to Paint

As a teenager, my father was a house painter. He started out as a “brush and roller guy”, climbing ladders and cutting in windows. But as his business grew, he caught the attention of commercial developers with large jobs like grocery store ceilings and outfield fences. These can’t be completed with old school tools; they require a sprayer.

I remember my dad walking me through his logic of whether or not to buy a commercial sprayer. I didn’t recognize it then, but he was explaining to me “Break-Even Analysis”. [Read more…]