Warning: This article includes a lot of old fashioned hard core financial data and formulas.

Did you ever wonder why your CEO's eyes glaze over whenever you talk incident rates and EMRs? Here's a hint: It's the same reason your eyes glaze over when he talks about Return on Investments (ROIs) and an Equivalent Uniform Annual Cost (EUAC).

$peaking the $ame language

To get upper management to spend money on safety, you must learn to speak the language that they do. You must make the case that spending money now will save money later. To make yourself understood, you'll need to build engineering economy principles such as present worth, future worth, depreciation, rate of return, replacement, retirement and cost-benefit analysis into your lexicon.

Here's a quick - and I hope, painless - lesson on each of these concepts.

Present Worth

The present worth of an asset is the sum of all discounted expected future cash inflows minus the sum of all cash outflows and discounted expected future cash outflows. For example, the value of a machine is the sum total of all the money you expect to make or save over the life of the asset minus present and future costs associated with that asset with everything adjusted for inflation, so that current monetary value is accurately reflected. This approach helps with project selection. Projects with a negative net present worth should be identified and eliminated in favor of projects with better return potentials. The formula for Present Worth is:

Where:

P = Sum of money at the present time
i = Interest rate for a given interest period
A = Payment or receipts at the end of an interest period in a series of n equal payments or receipts

This is a function of:

Future Worth

The future worth of an asset is its current value plus the compound interest on it. Future value is also a good check for the feasibility of a project. It can be discounted to present worth to compare the value of a product or project with the investment necessary to create it. If the value is less than the investment required, the project should be terminated in favor of more profitable projects. The formula for Future Worth is:

Where:

F = Future worth of a present sum of money after n interest periods, or the future worth of a series of equal payments
i = Interest rate for a given interest period
A = A payment or receipts at the end of an interest period in a series of n equal payments or receipts

This is a function of:

Depreciation

Depreciation is the process of allocating, in a systematic and rational manner, the expense of an asset to each period benefited by the asset. The cost of the asset is divided up, spread across and charged against the accounting periods of its estimated lifetime. This allows companies to charge the expenses associated with an asset against the profits it generates during the periods in which it's used. There are many methods to calculate depreciation, such as sum of year digits, declining-balance, group and composite depreciation and straight line. For the purpose of the example used we will focus on straight line depreciation. The formula for straight line depreciation is:

Where:

D = Annual depreciation
SV = Salvage values of the asset
n = Expected depreciable life of the asset

This is a function of:

Rate of Return

The rate of return, a measure that allows comparison between two alternatives, is a function of the ratio of the present value of the net income generated over time by the asset divided by the cost of the asset, usually expressed as a percentage. In other words, the amount of money generated by two alternative projects is translated into something resembling an interest rate. In this manner, the company can choose which project will yield the highest return. Many companies also have a minimum attractive rate of return, which is the lowest rate of return acceptable before a project will even be considered.

The formula for Rate of Return is:

Where:

R = Rate of Return
P_i = Net present value of all expected inflows
P_o = Net present value of all expected outflows

The Rate of Return is a function of:

Conclusion

Rats! I'm out of time. And I haven't even done Replacement, Retirement or Cost Benefit Analysis. This is also Part 4 and SafetyXChange articles aren't supposed to run longer than four parts. . . . So now what? . . .

Phone's ringing. "Hi, Glenn. . . Yes, I know I'm way over the limit. But can I please, please have just one more week to finish this up? . . . Yes, I promise I'll never do it again. . . Thanks, Glenn. You won't regret it, I promise."

That was Glenn Demby. He says SafetyXChange is going to let me go to Part 5. So I guess I'll see you all back here next week.

GAS PAINS

What's Behind the Price of Gas

By Glenn Demby

High gas prices affect all of us, including safety directors. As companies spend more on energy, selling safety will become that much harder. When you go to the pump and pay for a gallon of gas, what are you actually paying for? Here are the components of the retail price of gasoline:

Source: Energy Information Administration, U.S. Govt. (2005)

MEMBER REPLY

The Alexander Graham Bell homestead in Brantford, Ontario

Alexander Graham Bell

Your article (in Friday's SafetyXChange) about Alexander Graham Bell makes reference to Bell's buying a home in Ontario. In actual fact, his family bought the home in Brantford, Ontario, when the family doctor said they should move to Canada where the air would be better for Alexander. Bell made two long distance phone calls form the Brantford location: one to Mt. Pleasant, Ontario, about 2 miles away from the homestead and the second to Paris, Ontario, about 7 miles away.

Bell's Homestead is still open to visitors today in Brantford, Ontario overlooking the city from the east.

William (Bill) Shooter, Director,
Occupational Safety Division
United Safety Council
Orlando, FL

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