Cost benefit analysis is not a single calculation. In this presentation, we will discuss a few of the possible calculations that might be part of a cost benefit analysis. You should understand these conceptually. We'll introduce some formulas and examples. But often, your financial experts will perform these calculations. The measures that we will discuss are return on investment, payback period, net present value and the internal rate of return. Return on investment is generally calculated for a specific period of time. Net profit is the financial gain that is expected from your improvement. Depending on your accounting practices, the gain could come from cost savings, cost avoidances, efficiency improvements and productivity gains. Perhaps you have an improvement that will provide expected gains of $50,000 in the first year. Implementing this improvement will cost $75,000. If we divide 50,000 by 75,000, we get 0.67. To get a percentage, we multiply the decimal by 100, so our ROI in the first year is 67%. Remember that a good cost benefit analysis will consider more than one calculation. Payback period is typically expressed in months or years. The formula is the total amount of your investment divided by how much you will gain per month or per year. Let's use our previous example and calculate the payback period in years. Our total investment was $75,000. Our gain for one year was $50,000. So if we divide our investment of $75,000 by our one year gain of 50,000, the result is 1.5, or one and half years is our payback period. As the time to recoup our investment gets longer, there's another consideration. A dollar that we might get back in three years will not be worth the same as a dollar we might spend today. Net present value allows us to compare dollars from different time periods. It does this by applying a discount rate over the necessary period of time. This is more than just the effects of inflation. It could reflect the costs of capital if you have to borrow the money, or it could include opportunity costs. What if we invested the money somewhere else? Organizations usually have a standard percentage for this discount rate and it’s called the internal rate of return. So the internal rate of return is the discount rate that an organization uses in calculating net present value. Again, these are just a few of the calculations your organization might use to do a cost benefit analysis. We showed you the formulas for ROI and payback period. And a team could do some initial calculations on these to get an idea of the viability of a project. The calculations for net present value may include all cash flows in and out over multiple periods using your internal rate of return. Your finance experts can easily calculate this for you. It's also relatively easy to put ROI and payback period calculations into Excel to make the calculations easier. There's also an Excel function for calculating net present value called NPV. A net present value that is greater than zero is acceptable, but the higher, the better.