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Lesson 1 Financial Analysis - Time Value of Money

Course video 13 of 28

An important aspect of making the business case of change is to show the likely financial impact of the change. Ideally, we will find improvements that increase profits either by saving the company money or by increasing sales. To demonstrate these financial benefits we use a standard tool from financial analysis - Net Present Value analysis (NPV). The idea underlying Net Present Value analysis is that we estimate all the cash inflows and outlays associated with a project, then through a technique called discounting (or computing the present value) we shift all the cash flows into the present so they can be compared. You cannot compare an outlay made to day directly to a cash flow or profit to be received in two or three years. Combining the present value of the cash flows - adding the present value of benefits and subtracting the present value of outlays - gives us the Net Present Value. If the NPV is positive the benefits, adjusted for time, more than offset the costs and the project enhances the value of the company. If the NPV is negative then the monetary benefits do not more than offset the costs. But there may be non-monetary reasons for pursuing the project. This is where we begin to consider the reasons for companies becoming sustainable discussed in Week 2 of this module. The business case includes the financial impact and non-monetary sustainability impacts of the change.

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