It is really important to understand whether certain metrics used to justify expense-reducing capital projects are going to work for you or not. If a metric isn’t working for you, you need to ask yourself why.
Let’s say you don't feel comfortable with NPV. What if the CFO says, "Why did you use that particular discount rate?" Discount rate is something you need to be comfortable with so that you could field that question accurately and with confidence.
Years ago, a friend of mine asked a Catholic priest, “Could you raise a child to be a Catholic if you weren’t a Catholic yourself?”
The priest’s answer was, "Son, you cannot give a gift that you do not own."
I think the same thing is true when it comes to financial analysis. You need to feel thoroughly comfortable justifying the merits of expense-reducing capital projects. That’s one of the reasons we give our students live Excel versions of our financial analysis templates, so they can play with them on their own and do enough “what if” analyses to build intuition regarding which way the numbers would move if you change this or that.
Enter the cash inflows and outflows in the right places, then change the discount rate. Change the inflation rate. Change the reinvestment rate. Change the finance rate. You'll see what makes the financial metrics like NPV or SIR go up and down. With time and experimentation, you’ll own that material.
By the way, true sales professionals neutralize objections preemptively. They experiment with assumptions regarding project cost, savings, inflation, etc. so that they confidently answer a prospect’s question, such as, “What happens if the savings are less than you are projecting?”
