Evaluating a purchase or project.
WHAT TO ESTABLISH
What it costs, in total What it produces Over what period What happens if it does not work
WHAT TOTAL COST INCLUDES
Purchase Installation Training Ongoing running and maintenance Financing cost, if borrowed
WHY TOTAL RATHER THAN PURCHASE
Ongoing costs frequently exceed the purchase.
WHAT TO CALCULATE
Payback period: how long before it repays itself.
HOW
Cost divided by the annual benefit.
WHAT MAKES A SHORT PAYBACK ATTRACTIVE
Less uncertainty, and cash returning sooner.
WHAT TO BE SCEPTICAL OF
Benefits that are difficult to measure Assumptions about increased sales Savings that depend on behaviour changing
WHAT TO PREFER
Benefits that are certain: a cost that disappears, a capacity constraint removed.
WHAT TO CONSIDER
What else the money could do.
WHY
Every investment excludes another.
WHAT TO ASK
Whether this is the best use of the cash available.
WHAT TO ESTABLISH ABOUT FINANCING
Whether to buy, finance or lease.
WHAT TO COMPARE
Total cost of each, and the effect on cash.
WHAT LEASING PROVIDES
Lower immediate cash cost, higher total cost.
WHAT TO DECIDE IN ADVANCE
How you will judge whether it worked.
WHAT TO REVIEW AFTERWARDS
Whether it did.
WHY
It improves the next decision.
