How to calculate financial impact? Project ROI calculator for managers, engineers, and controllers to quantify cost savings of improvement projects.
In business, an improvement project must be profitable to be considered valuable and worthwhile. This basic principles applies to growth initiatives, quality programs, productivity enhancements, and training sessions. But too many projects are kicked-off and money is spent without even quantifying financial benefits. And when benefits are unclear, it will be difficult to obtain commitment and funding. This lack of understanding invariably leads to poor investment decisions, missed opportunities, and project failure. We can do better! The Cost Savings Calculator and Project ROI Calculator helps you to quantify impact.
Calculating Cost-Benefit Is Critical to Project Success
When you want to propose a project, the first question that comes to mind is, “Is this project worth doing?” And if the answer is yes, you will ask yourself, “How can I maximize my chances of winning funding for the idea? If possible, I should convince my boss and team to allocate more funds to the project. To make sure you meet your project goals and to know if the investment of time and resources is worth it, a cost and return estimate is essential.
Calculate the Return on Investment for Projects in 8 Steps
- ROI = (Project-Benefit / Project-Cost) x 100
- Project-Benefit = Project-Gain – Project-Cost
- Project-Gain = Throughput-Gain + Savings-Gain
- Throughput-Gain = Increase in Sales-Units x Profit-Margin
- Savings-Gain = Reduction in Cost per Unit x Units
- Project-Cost = Depreciation-Cost + Operating-Cost
- Depreciation-Cost = Investment (Capex) / Useful-Life in Years
- Operating-Cost = Cost for Labor, Material, Energy, Services etc.
Case Study: Buy a New Coffee-Machine or Not?
A coffee-shop owner considers buying an additional coffee machine to serve more customers and reduce the cost per unit. A quick ROI estimation will tell if this investment makes sense. The owner desires a return of at least 150% to justify the investment and calculates ROI based on annualized figures:
- Investment (Capex): $20,000 for new machine with a useful life of 10 years, so the depreciation is $20,000/10years = $2,000
- Incremental operating cost (Opex): hire part-time employee to help our during peak hours + electricity + machine service: $8,000
- Incremental margin (Profits): selling more coffees from new machine: 100 units per day x 250 days x $1 margin per unit = 25,000
- Reduced cost (Savings): greater yield from new machine, consuming less raw material: $0.1 savings per unit x 25,000 units = -$2,500
- Project-Gain: $25,000 incremental margin + $2,500 material savings = $27,250
- Project-Cost: $8,000 operating cost + $2,000 depreciation = $10,000
- Return on Investment ROI = ((Project-Gain – Project Cost) / Project-Cost) x 100 = (($27,250 – 10,000) / $10,000) x 100 = 173% (rounded)
Conclusion: the project meets the hurdle rate and the coffee-shop owner goes ahead and places an order for the new machine.
Determine Cost Savings and Incremental Profits from Quality, Efficiency, Throughput Improvements
We developed three Cost Savings Calculators for managers and controllers to quantify improvement potentials, determine the feasibility of a project, and estimate the return on investment (ROI). With this Project ROI Calculator, you can accurately determine the financial impact of changes in quality, efficiency and throughput. And this information will help you to better justify investment requests (Capex) and develop more effective financial improvement projects.