3 Learning Activity: Is your great idea worth it? 4 Activity: You and your team came up with a plan to automate the very time-consuming process of manual welding by using robotic welders. First, compute how this would increase productivity. Productivity Tip: To calculate the "productivity," we need to divide the output, over all of our investment (all labor + capital). Like seen in the formula below!! 5 6 7 Year 1 Year 2 8 Output (sales, in $million) $ 120 $ 9 Labor (payroll, in $million) $ 32 10 Capital (expenses, in $million) $ 11 One-time capital investment ($million) $ 45 $ 10 SSSS 160 26 45 12 Productivity Productivity 13 14 15 16 Year 1 1.56 Year 2 2.25 17 18 Change in Productivity= 0.70% 19 20 21 Next, using just the first year benefits (no amortization/depreciation), what is the ROI for this investment? Change in sales from Year 1 to Year 2 = ##### Change in labor cost from Year 1 to Year 2 = $ 6,000,000 22 Change in capital cost from Year 1 to Year 2 = $ 23 Investment required to create this change ### 24 ROI= 25 Based on these results, is this project a good idea or not? 26 27 8 9 0 1 ROI Tip: The ROI, or Return on Investment, calculation here is already set-up for you. The formula 2 3 4 looks at values in the Year 1, Year 2 and Annual Inflation columns. When answering the question if this project is a good idea or not, remember that a value of greater than 1, implies you do make money on your investment (i.e. you have a positive ROI). 5 Productivity output capital + labor Change in Productivity Tip: Change in productivity has us look at what (if any) change do we see year over year. As this is a %, we should subtract the next year, from the previous year, then divide that by the previous year. That way we can see the change, as a %. Change in Productivity next year - previous year previous year ROI Tip: The ROI is the Return on Investment. Your formula will look at values in the Year 1, Year 2 and Annual Inflation columns. When answering the question if this project is a good idea or not, remember that a value of greater than 1, implies you do make money on your investment (i.e. you have a positive ROI). ROI Formula Tip: M 0 Net Return on Investment (Net return is the output - labor-capital. Net is the change from Year 1 to Year 2.) ROI = Cost of Investment (Include only those costs unique to the investment)