These are the various financial measures that we use with Six Sigma projects.

## Returns

**Return on Investment (ROI)** = Gain realized / Effort spent.

How efficient and profitable an endeavor (project, program, etc) is.

**Return on Assets (ROA)** = Net Income / Company’s assets.

A measure of how efficient management is in turning its holdings into earnings.

The ROA and ROI can help you decide if a project is worth doing.

## Cost-Benefit Analysis

A way of determining if a venture is worth doing. Will it cost more to do than it will yield in results? “Is the juice worth the squeeze?”

- Use financial terms to express the impacts of the project.
- Cost Analysis
- One time cost of design & implementation
- Ongoing needs: training, new equipment, software
- Resources needed, cost of capital,

- Benefit Analysis
- Use the sponsor’s terms
- Ex. A reduction in cycle time frees up resources at this $ per hour.
- Reduce rework by x%
- Cost of poor quality.

- Use the sponsor’s terms

- Cost Analysis
- Demonstrates value to those outside the project & gain their support.
- Helps to communicate the terms of the value statement of the while working through the project.

Additional cost benefit analysis notes here: http://www.dummies.com/how-to/content/performing-a-costbenefit-analysis.html

## Net Present Value (NPV)

The “difference amount” between the sums of discounted: cash inflows and cash outflows. It compares the present value of money today to the present value of money in the future, taking inflation and returns into account.

See net present value equations here.

http://www.mathsisfun.com/money/net-present-value.html

## Internal Rate of Return (IRR)

The interest rate where Net Present Value (NPV) is zero.

The IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the investment equals the net present value of the benefits (positive cash flows) of the investment.

IRR calculations are commonly used to evaluate the desirability of investments or projects. The higher a project’s IRR, the more desirable it is to undertake the project. Assuming all projects require the same amount of up-front investment, the project with the highest IRR would be considered the best and undertaken first.

- http://www.managementstudyguide.com/measuring-financial-benefits-of-six-sigma.htm
- http://www.mathsisfun.com/money/net-present-value.html (PV, FV and NPV)
- http://books.google.com/books?id=yL7MBbUbKQQC&pg=PA32&lpg=PA32&dq=financial+measures+roi+npv+margin+six+sigma&source=bl&ots=vc02tFvRED&sig=41AyTeGBGBLrcnVdJiVHqtV2KrE&hl=en&sa=X&ei=9vKoUe0LkajQAcaxgKAH&ved=0CDIQ6AEwAQ#v=onepage&q=financial%20measures%20roi%20npv%20margin%20six%20sigma&f=false
- https://elms.faa.gov/skillsoft/Content/oper_12_a02_bs_enusA1.htm#ExpectedDuration (ROI, PV, Cost Benefit, Margin, Revenue Growth, Revenue)
- http://www.mathsisfun.com/money/net-present-value.html (PV, FV and NPV)

## Six Sigma Black Belt Certification Financial Questions:

**Question:** A six sigma team has gathered data for a project proposal and is using the following notations:

I = Initial investment

C = Periodic maintenance cost

B = Benefits to be accrued

On the basis of the information above, which of the following is the criteria used to select a project? (Taken from ASQ sample Black Belt exam.)

(A) B / (I+C) > 0

(B) B / (I+C) > 1

(C) B / (I+C) <= 1

(D) B / (I+C) <= 0

**Answer: **I find it’s easiest to translate each of the options into actual English to answer this question.

(A) Benefits / (investment+cost) > 0

(B) Benefits / (investment+cost) > 1

(C) Benefits / (investment+cost) <= 1

(D) Benefits / (investment+cost) <= 0

It seems that it’s clearly an ROI question. We would reject c & d because we want the return to be positive – we don’t want to lose money here! Similarly, we know the ROI has to be greater than 1 for us to make money on the deal. Anything less than 1 means that the total costs outweigh the benefits, so the answer cannot be a. Option B is correct.

**Question:** A six sigma project to reduce billing statement expenses has shown the need to hire two additional mailroom clerks. Based on this information, which of the following metrics should be used to measure the financial benefits of the project? (Taken from ASQ sample Black Belt exam.)

(A) Cost of poor quality

(B) Return on investment

(C) Net present value

(D) Internal rate of return

**Answer:**(B) ROI. The problem states that there is a cost of our project – the additional headcount needed. We want to compare that against the project’s proposed savings before going forward.

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