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Re: Financial Analysis



I'll expand a little on Tim's comments:
P2 financial analysis is essentially the same as any other financial 
analysis of a capital investment. Most finance textbooks can show you 
how to set up an analysis in the first chapter.
P2 does offer some twists:
The cost inventory being considered is a lot larger than the typical 
analysis, since good P2 drags all the hidden costs out of overhead and 
includes them in the analysis.
In many cases pending or exsiting legislation makes it clear that an 
existing process will have to be changed several years from now to 
comply with the new rules. Thus a P2 capital investment analysis needs 
to have a longer time horizon than most others, like 5 to 10 years, in 
order to capture the future costs that can be predicted with some 
reliability (at least you may know WHEN the big hit will come and can 
factor it in).
Most importantly, P2 usually REDUCES RISK. Now in determining discount 
rates for a net present value analysis, higher risk projects have higher 
discount rates. If P2 reduces risk compared to a current process, then 
there are two ways to incorporate this: 
1) apply a different, LOWER discount rate to the P2 process 
alternative's cash flows compared to the current, more risky process.
2) Include in the p2 savings some estimate of the equivalent costs of 
insurance premiums saved. The idea is that you can set up an analysis 
where risks are equal for all alternatives, to do so you need to buy 
insurance to reduce the financial risks of some of the alternatives, so 
the risks are equal. 
For example, if I am now using solvents for cleaning, I can insure 
myself against future risks and liabilities from this process, so I have 
no or reasonable risk. But if I switch to solvent-free process 
(assuming all else is equal which it never really is of course), then I 
don't have to buy insurance to have no or reasonable risk. So the 
avoided premiums should count as savings from a P2 investment, which 
makes it look more attractive. Or, just reduce the discount rate being 
used to evalauate the p2 process, which makes its future savings larger 
in the net present value summation.
Every finance type I have discussed this with agrees with the logic, 
then they say "But I am not allowed to use anything but the approved 
corprate rate, and we are not going to buy insurance for our existing 
process anyway." 
Once again sound P2 theory founders on the rocks of corporate 
bureaucracy! 
There are some case studies out there where companies did get lower 
insurance premiums from switching to P2, so don't forget to look for 
such savings.
Anyway, start with a primer on NPV and discounted cash flow analysis. 
NEWMOA has a primer, AIPP has a primer, ECAM has a primer, P2 Finance 
has a primer.
Don't you hate it when people tell you to read the manual? Sorry.
Burt Hamner