Hello everyone,
I am reading a book on quality management for enterprises. They make a lot of examples related to monetary benefits that can originate from the implementation of management strategies. Unfortunately I have never studied accounting so I am struggling a little bit.
In particular, I do not understand this exercise, in which they describe the potential savings originating from the integration of the management systems adopted by the company (eg. quality management systems, environmental management systems, health and safety management systems, etc.). It says:
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Integrated management system savings are 50% for implementation, 66% for maintenance, and 20% for third-party audits.
Assumptions:
Cost of implementation of three management system standards = $200,000 (one-time cost);
Maintenance costs = $90,000/year;
Auditing costs = $45,000 for three years.
Savings from implementation (one-time cost): $200,000 x .50 = $100,000. (I get this, of course)
Savings from maintenance: $90,000 x .66 = $60,000 per year (ok....); NPV at 10% would be $600,000 (NPV = Net Present Value? How do they get that result...$60,000 * 10? What is the meaning of this multiplication?)
Savings from audit costs: $1500 each year x .20 (I guess it is 15,000 each year x .20); NPV is $30,000 (again here I do not understand how to obtain this NPV)
Total savings $100,000 + $600,000 + $30,000 = $730,000.
----------------------
I read the theory related to NPV and I think I understood it, but still I can't understand what they did on the example and the meaning of it.
I hope this is the right place to ask for help, otherwise I am sorry. Thank you for reading!
Marco
I am reading a book on quality management for enterprises. They make a lot of examples related to monetary benefits that can originate from the implementation of management strategies. Unfortunately I have never studied accounting so I am struggling a little bit.
In particular, I do not understand this exercise, in which they describe the potential savings originating from the integration of the management systems adopted by the company (eg. quality management systems, environmental management systems, health and safety management systems, etc.). It says:
--------------------
Integrated management system savings are 50% for implementation, 66% for maintenance, and 20% for third-party audits.
Assumptions:
Cost of implementation of three management system standards = $200,000 (one-time cost);
Maintenance costs = $90,000/year;
Auditing costs = $45,000 for three years.
Savings from implementation (one-time cost): $200,000 x .50 = $100,000. (I get this, of course)
Savings from maintenance: $90,000 x .66 = $60,000 per year (ok....); NPV at 10% would be $600,000 (NPV = Net Present Value? How do they get that result...$60,000 * 10? What is the meaning of this multiplication?)
Savings from audit costs: $1500 each year x .20 (I guess it is 15,000 each year x .20); NPV is $30,000 (again here I do not understand how to obtain this NPV)
Total savings $100,000 + $600,000 + $30,000 = $730,000.
----------------------
I read the theory related to NPV and I think I understood it, but still I can't understand what they did on the example and the meaning of it.
I hope this is the right place to ask for help, otherwise I am sorry. Thank you for reading!
Marco