cost savings analysis
cost savings analysis
(OP)
I am dealing with a cost savings analysis in a SMT manufacturing plant. We are looking an automated routing system to replace our stand alone router. I did a simple cost savings (labor rate Vs router cost) and my boss asked my to include the dynamic effect of capital over time. He gave me a handbook to look over called "engineering economics", but it is not descriptive enough to fully explain what is wanted. If anyone has any idea as to what I should be doing with these formulas, please let me know.
Thanks!!
Thanks!!





RE: cost savings analysis
I am not familiar with the term but my assumption is to look at the actual and potential utilization of the equipment. This would entail looking at volume fluctuations in the product running across the equipment (historical and future forcast) and expected costs for major maintenance or upgrades.
My personal view is that if it cannot be justified based upon the "simple" method you originally used, then it is possibly not worth the purchase.
Regards
RE: cost savings analysis
RE: cost savings analysis
RE: cost savings analysis
This is a very simplistic approach but heregoes. If you have a 5% year on year Discount factor
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
DF 1 0.95 0.91 0.87 0.83 0.79
Now all you do is multiply (money in - money out) ie what you have spent - what you have saved for each year by the DF.
For example
year 0 you invest $10,000 DF 1 Return = -£10,000.
year 1 you save $2,000 DF0.95 Return = £1900
year 2 you save £2000 DF0.91 Return = £1820
etc
etc
etc
Add all these up and you get something called the Net Present Value ie real value of your return over a certain time period (when it goes into + you are in profit).
This is a method of costing different options to see which is most effective a set time period.
Your difficulty is estimating your potential savings.
Don't forget the don't do anything option may come out the best !!!!!
Hope this helps
gjb
RE: cost savings analysis
RE: cost savings analysis
The other key póint is to select the discount rate.
Gib1 mentioned 5% as an example, but you should use the cost of the money for your company