# ROI NPV HRV DIF or payback time? Ways to calculate cost benefit analysis

J

#### jessica

hello there,

can anyone out there tell me the differences between

IRR - internal rate return
ROI - return on investment
NPV - net present value
hrv - human resource value
dif analysis and payback time.

how do you calculate for each? i want to find out some of the ways to calculate cost benefit analysis for training?

J

#### Jim Biz

Wow!! - surley not in one sitting anyway - maybe there's a QA/cost accountant out there somewhere that could help?

T

#### Tuan

Jessica

Too big subject to be discussed in the forum. You had better take some books on finance or engineering economy and have a look. Any of them should discuss in details about your question.

Cheers,
Tuan

#### Marc

##### Hunkered Down for the Duration
Staff member
Any takers on any of them 1 at a time?

J

#### jessica

well i don't expect a very long explaination. just maybe the formula will do and some feedback on either one. it is amazing how so many ways can be used to quantify cost benefit analysis.

IRR and NPV is very seldom used, i think. don't hear much about it.

P

#### Paul Vragel

Short and sweet:

IRR, ROI and NPV all recognize the time value of money - a dollar received next year (for example, as savings from reduced errors) is worth less than a dollar today.

NPV is the net present value (the value today) of all those future savings - simplistically, \$1 today, +\$1*0.9 for next year's savings (at a 10% interest rate), continuing for all the years; and by the way applied as well to any investments made. Lots of different ways to do this calculation - see a finance book.

ROI is the rate of return on your investment-
again simplistically, if you invest a dollar now and in a year you have \$1.10, you've made 10% on your money. Again, lots of variations on ways to do this.

IRR (internal rate of return) is often used within corporations as a "hurdle rate" - for example, "we will only make investments that have an IRR of 13.5%". Used in this context, the ROI for a project is compared to the required IRR, to see if the project is acceptable.

Payback ignores the time value of money - if you invest \$10,000 in a training program, and save \$4000 per year from that effort, your payback is 10,000/4,000 = 2.5 years.

A finance book will give you more details on mechanics, but this should help you find what you are looking for.

------------------
Paul

J

#### jessica

dear mr vragel

thank you so much on your feedback. i came across this formula not long ago.

utility gain = TNdt SDy - NC

T = the number of years a training program has had an effect on performance

N= the number of employees trained

dt = the difference in job perfromance between the average trained and the average untrained in std deviation units.

SDy = the std deviation of job performance of the untrained group in pounds

C= the cost per head of training

i don't think it is such a popular method used. gosh there must be more ways out there. do you know which way is more preffered and why?

D

#### Dawn

Does anyone have info on percentage of quality employees as a ratio to how many employees altogether? Or any ideas on substantiating how many quality employees should be in a facility?

B

#### BWoods

Originally posted by Dawn:
Does anyone have info on percentage of quality employees as a ratio to how many employees altogether? Or any ideas on substantiating how many quality employees should be in a facility?
The old rule of thumb that I am used to is:

3-5% for consumer type QOS (like ISO)

5-7% for compliant type QOS (like QS/TS)

This is the old/new rule I am used to. I put it that way because not too many years ago I had 54 out of 350 = about 15%. But that was back when you had lots of inspectors and inspection "gates" all over the place.

Right now, for instance, I have about 3.5% in a compliant (QS) environment. That is difficult.

#### Marc

##### Hunkered Down for the Duration
Staff member

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