Scribd
Upload
81 views3 pages

SC/Tetra: It's Not Like I'm My Boss' Favorite or Something, I Just Know How He Thinks

1) The document discusses how to build a business case to justify investing in computational fluid dynamics (CFD) software. It explains that managers prioritize opportunities based on whether they make good business sense and their internal rate of return (IRR). 2) It provides an example business case for adopting CFD software that estimates initial and ongoing costs. It calculates that an IRR of 30% could be achieved after 5 years if CFD helps save or increase revenues by $50,000 per year. 3) The document notes that adopting the lower-cost SC/Tetra CFD software could help meet the IRR target by reducing investment and ongoing costs compared to traditional general purpose CFD software.

Uploaded by

kglorstad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
81 views3 pages

SC/Tetra: It's Not Like I'm My Boss' Favorite or Something, I Just Know How He Thinks

1) The document discusses how to build a business case to justify investing in computational fluid dynamics (CFD) software. It explains that managers prioritize opportunities based on whether they make good business sense and their internal rate of return (IRR). 2) It provides an example business case for adopting CFD software that estimates initial and ongoing costs. It calculates that an IRR of 30% could be achieved after 5 years if CFD helps save or increase revenues by $50,000 per year. 3) The document notes that adopting the lower-cost SC/Tetra CFD software could help meet the IRR target by reducing investment and ongoing costs compared to traditional general purpose CFD software.

Uploaded by

kglorstad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

April 2006 Page 1 of 3

SC/Tetra an Innovative CFD-ware


SYSTEM
HOME PRE-PROCESSOR SOLVER POST-PROCESSOR CONTACT US
REQUIREMENTS

It’s Not Like I’m My Boss’ Favorite or


Something, I Just Know How He Thinks
The “Business Case” is the single biggest factor influencing my Boss’
decisions. He's accepted more of my proposals, including the one that
got us started doing CFD, once I learned how to think in terms of the
“Business Case”.

Engineers will pursue great ideas just because


they’re novel, slick, original, and have
technical merit. But most of our managers
aren’t like this. They have a different view of
the enterprise and business needs. Good
managers will appreciate technical merit, but
their views will be balanced by whether
pursuit of a new technology makes good
business sense.

Our managers must determine whether the


investment of the company’s resources
(manpower and money) in a new technology
will help increase the company’s profitability.
In addition, if a manager is evaluating several
new technology opportunities, he/she must
prioritize them to determine which
opportunities should be pursued with the
available resources.

The “Business Case” is a fundamental study that compares the financial


benefits of an opportunity with the investment cost of that opportunity. A good
business case explores and quantifies all the costs and benefits associated with
an opportunity. Sometimes we’ll oversimplify the business case by only
considering the obvious costs. But there can be many other benefits and costs
associated with an opportunity that may not be so obvious. Understanding
these financial measurables may require the assistance of a financial analyst.
While all this may sound tedious, performing this study will help you develop a
greater appreciation of your business. In addition, this exercise will enable you
to more clearly identify where the real business opportunities are for your
company.

A Number that Reminds You of Your Stockbroker

A numerical value that quantifies the business potential of an opportunity is the


Internal Rate of Return (IRR). Some people call this the Time Adjusted Rate of
Return (TARR). The IRR (or TARR) is expressed as a percentage (%) and
describes the amount of interest an investment could generate if the business
opportunity was strictly an investment opportunity. In other words, the IRR for
a new technology opportunity is the amount of return the company could
generate if it invested that same money in a financial portfolio with the same
rate of return.

http://www.sctetra.com/articles/Article%205/ 09/03/2009
April 2006 Page 2 of 3

The IRR is calculated by comparing the cost of pursuing an opportunity ($)


versus the financial benefits ($) of the opportunity. The financial benefits
come from reduced costs and/or increased revenues. The IRR is more useful
than calculating the payback period of an investment because the IRR
expresses the profitability of an opportunity long after the initial investment
cost has been paid off. The IRR is also useful for prioritizing several different
project proposals. IRR can be calculated using the Excel function IRR(values,
guess).

The IRR that a company considers acceptable varies with each company and
can also vary depending on the company’s financial condition. In addition, a
company may inflate the target IRR (they won’t fund an opportunity if it’s
below their designated target) to compensate for the “optimism” of their
engineers. For example, some large companies use a target IRR of 25-30%
during good times. This can increase to 100% during tough times when the
company has less money to spend on new technologies. Even a 25% IRR
means the company will achieve a 25% rate of return on their money if the
opportunity produces as many benefits as the engineers predict. You’ll have a
hard time finding a financial investment as good as this.

How to Justify Doing CFD: The CFD Business Case

As an example of developing a business case, let’s suppose your company is


thinking about getting into CFD. You begin developing the business case by
quantifying the costs associated with getting started with CFD. In general,
determining the costs is pretty simple. For the following analysis we’ll assume
one of your existing engineers (could be you) will be doing the CFD.
Consequently, engineering salaries are not included in this example.

First Year Costs (Traditional general purpose CFD software)

UNIX computer workstation $ 15,000 CFD


Software (1 License) $ 25,000 3rd Party
Mesh Software (1 License) $ 10,000

Total Initial Investment Cost $ 50,000

Subsequent Year Costs

CFD Software license $ 25,000 3rd


Party Mesh Software maintenance $ 2,000

Year-to-Year Costs $ 27,000

Calculating the benefits (savings and increased revenues) associated with


doing CFD is more difficult because they are specific to your business. For
example, doing CFD may help you save prototype testing costs. These costs
can include test time and the manpower needed to run the tests. Maybe CFD
will give your product a more competitive position in the marketplace and
you’ll expect your market share to increase (along with increased revenues). If
you’re in manufacturing, using CFD may help you eliminate problems during
the new product launch process. Having fewer problems to solve during the
launch process will save your company money. The primary point here is that
you’ll need to understand the links between CFD and savings and revenues that
result from doing CFD in order to estimate the benefits you’ll achieve.

In this example, we can achieve a 30% IRR after five years if CFD helps save
and/or increase revenues by $ 50,000/year. I used Excel to calculate the IRR.
This assumes that in the first year you won’t achieve any financial benefits
(savings or increased revenues) because you’re learning during this time. But
in years 2-5 CFD helps you save $ 50,000 per year or increases your revenues
by $ 50,000 per year (or any combination of the two). If the benefits drop to
$ 40,000 per year, the IRR after 5 years is only 2%. This suggests the IRR is
pretty sensitive and you'll need to do a good job estimating the benefits.

http://www.sctetra.com/articles/Article%205/ 09/03/2009
April 2006 Page 3 of 3

If you need a 30% IRR (after 5 years) to get approval to invest in CFD, but
don’t think you can achieve $ 50,000 per year in increased savings or
revenues, the only other way you can achieve the IRR target is to reduce the
investment and/or on-going costs. We can perform this exercise by exploring
the option of licensing SC/Tetra CFD software. SC/Tetra is full general purpose
CFD software that offers equal or greater functionality than its competitors,
such as FLUENT or STAR-CD, but at much lower cost. Because SC/Tetra is PC
Windows based, it will run on a lower cost PC instead of an expensive UNIX
workstation. In addition, because SC/Tetra has built in mesh diagnostics and
repair functions, 3rd party software is not needed to perform these operations.

First Year Costs (SC/Tetra CFD Software)

PC Computer (SC/Tetra runs on a PC) $ 5,000


SC/Tetra CFD software license $ 15,000
________

Total Initial Investment Cost $ 20,000

Year-to-Year Cost (Software license) $ 15,000

Traditional General SC/Tetra CFD


Purpose CFD Software
Software
Initial Investment Cost $ 50,000 $ 20,000
Year-to-Year Cost $ 27,000 $ 15,000
Savings or Increased
Revenues to produce $ 50,000 $ 24,250
30% IRR after 5 years

In this example, we can substantially reduce the amount of benefits required to


achieve a 30% IRR by using SC/Tetra software rather than a traditional CFD
software package.

This exercise shows you how to create a business case. As you can see, this is
not a trivial exercise but it will help you better understand the nuts and bolts of
your business. This isn’t always something highly technical engineers want to
do. However, if you can learn to think in terms of the “Business Case” your
value and success within your company will surely rise. Try it and see if your
boss isn’t impressed.

http://www.sctetra.com/articles/Article%205/ 09/03/2009

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy