How to Evaluate an Investment for In Premise Enterprise Mobility Part 2
In simple terms if a review is undertaken it is a two step process evaluating the cost Vs the potential benefits.
This post is about some very simple maths models.
Not surprisingly this is the length of time needed to generate a return on investment. It is arrived at by dividing the total investment by the expected annual savings. The longer the payback period lasts the less profitable the investment. For example if your in premise enterprise mobility investment cost £100,000 and had an expected yield of £50,000 the period would be £100,000 divided by £50,000 or two years.
Of course the payback period can vary greatly between different companies and is always subjective. It relies on someone being able to access enough information to make the calculation in the first place. How the project is funded can also have an influence. Wiping out an IT budget by doing project A over Project B is ok as long as the knock on consequences of not doing Project B are understood. And be aware adoption is not such a great ROI measure.
The good news is that it is common for an in premise enterprise mobility project to have have a payback period of less than 24 months.
Net Present Value
Now for some maths! Clearly the cost of an investment is now but the savings are in the future and accrue over time. Net present value helps to answer the question:
Are the savings I expect to recover in the future greater in present terms than the immediate cost of the investment ?
In simple terms to make the calculation you need to know:
- Cost of Money – Interest/Discount rate
- Your annual projected savings.
- How many years the savings will continue.
Here is an example:
- You make an investment of £1,000 in year 1
- The interest rate is 10%
- You make savings of £110 in year 2
- You make savings of £1,200 in year 3
The NPV of the investment would be:
The year 1 cash flow is -£1,000
The PV of the year 2 cash flow = £110/1.10 = £100
The PV of the year 3 cash flow = £1,200/(1.10^2) = £1,200/1.21 = £991.74
The NPV is: -£1,000 + £100 + £991.74 = £91.74
A positive number means this would make the investment worth undertaking.
Calculating PV can be complicated. Some managers may consider the savings to be able to continue indefinitely which can be an issue worth addressing.
Next time we will go over the areas that can most commonly benefit from an investment in premise enterprise mobility. And illustrate how to quantify them.
Looking for an easier approach check out this calculator from Easycalculation.