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# Cost Based Analysis Tools By Derek Beebe

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This presentation shows some of the many quantitative cost based analysis tools used to make business decisions. It is meant as a guide for students and recent grads and is by no means a complete reference to the many quantitative tools and software available.

This presentation was given as a class project at Central Michigan University.

Published in: Business, Economy & Finance
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• Usually simple mathematic formulas are used for calculating Cost Based Analysis however the math can get extremely complicated such that sophisticated software tools must be implemented (but what if you are doing a Cost based analysis to determine the need for the Cost based analysis software?)
• The net present value method (NPV) of evaluating a major project allows you to consider the time value of money . Essentially, it helps you find the present value in &amp;quot;today&apos;s dollars&amp;quot; of the future net cash flow of a project. Then, you can compare that amount with the amount of money needed to implement the project. If the NPV is greater than the cost, the project will be profitable for you (assuming, of course, that your estimated cash flow is reasonably close to reality) Please Note that whenever you do time value of money calculations to find a present or future value (such as NPV), you&apos;ll need to specify an interest rate, known as the discount rate . Choosing the appropriate discount rate is a very important part of the process.
• Other software: Oracle, VBA scripts, SAP, MS Project,
• A Monte Carlo Simulation is an analytical technique used to numerically determine the expected value of a decision. A Monte Carlo Simulation works by running a decision model over and over again (for thousands of iterations) to take in to account all possible future scenarios that may happen. Most Monte Carlo Simulations are run by starting with an Excel-based decision model and then utilizing simulation add-in software. The software keeps track of relevant objective values and produces the resulting distributions. Brings together NPV, Probability, and other types of quantitative tools to show results in multiple dimensions.
• Bayes Theorem - The theorem expresses the posterior probability (i.e. after evidence E is observed) of a hypothesis H in terms of the prior probabilities of H and E, and the probability of E given H. It implies that evidence has a stronger confirming effect if it was more unlikely before being observed. [
• ### Cost Based Analysis Tools By Derek Beebe

1. 1. Quantitative Cost Based Analysis Tools Mathematics schematics… Arithmetic, logarithmic, and geometric return Quantitative Cost Based Tools? 1. Net Present Value (NPV) 2.ROR/ROI 3. Cost Based Analysis Ratios 4.Monte Carlo Simulation 5.Probability Studies
2. 2. Quantitative Cost Based Analysis Tools http://www.12manage.com/methods_npv.html Net Present Value
3. 3. Quantitative Cost Based Analysis Tools Microsoft excel templates = Free downloads Net Present Value
4. 4. Quantitative Cost Based Analysis Tools ROR and ROI Calculating the Rate of Return on Investments Say you invest \$100 in an automotive company’s stock, which is your capital. One year later your investment yields \$110. Calculate with the following formula. ((Return – Capital) / Capital) x 100% = ROI ((\$110 - \$100) / \$100) x 100% = 10% ROI of 10%
5. 5. Quantitative Cost Based Analysis Tools Cost Based Analysis Ratios (Cost < Benefit = Potential Profit) (Cost > Benefit = Potential Loss) Benefits / Cost = Ratio
6. 6. Quantitative Cost Based Analysis Tools Monte Carlo Simulations
7. 7. Probability Studies Bayes Theorem Standard Deviation Z scores Venn Diagrams Quantitative Cost Based Analysis Tools
8. 8. References Damato, K. Doing the Math: Tech Investors' Road to Recovery is Long. Wall Street Journal, pp.C1-C19, May 18, 2001