Accounting Ver14. “Investment Evaluation Depends on Scenario Accuracy × Calculation Accuracy”
- Shigenori Tanaka
- 4 日前
- 読了時間: 4分
Jun 10, 2026
Thank you for reading.
In this article, I will outline the essential requirements for successful investment evaluation.
In many companies, capital investments of tens or hundreds of millions of JPY are still judged based on “payback period” or the intuition of the person in charge.
However, the outcome of an investment depends heavily on which returns you choose to include in the scenario and how accurately those returns are converted into present value.
Even for the same project:
If the scenario is too optimistic → the investment will be over‑evaluated
If the calculation is too pessimistic → the investment will be under‑evaluated
Both lead to incorrect decisions.
This article organizes the essential concept of “Scenario Accuracy × Calculation Accuracy” required for investment evaluation in manufacturing, and explains how to correctly capture investment returns using CM/VC as the analytical foundation.
Ultimately, investment evaluation is nothing more than the combination of:
Which returns you include (scenario accuracy)
How you quantify them and convert them into present value (calculation accuracy)
Only when both are accurate can an investment decision be trusted.
1. Investment Amount: External Payments + Internal Labor (Opportunity Cost)
The investment amount represents the initial cash outflow.
External payments: equipment, software, outsourced development, etc.
Internal labor: normally excluded. However, if allocating internal labor to the investment reduces other value‑creating activities, it must be counted as an opportunity cost.
"Internal Labor Investment = Hours x Internal Standard Rate"
2. Basic Return Structure: CM and VC (but only the “baseline”)
What CM and VC mean
CM (Contribution Margin) = Sales − Variable Cost
= the profit to cover fixed costs
VC (Variable Cost) = costs that vary in direct proportion to sales volume
** For more details on CM/VC, please find the following Blog:
Revenue‑expansion investments (growth‑oriented)
"Product CM (Contribution Margin = Sales - Variable Cost)"×"Expected annual incremental volume"
Revenue expansion is only an expectation, and how much to include depends on the scenario.
Efficiency‑improvement investments (cost‑reduction‑oriented)
"Product VC (Variable Cost) reduction "×"Annual volume"
However, CM/VC alone cannot capture all investment effects. Additional returns must be incorporated as explicit scenarios.
3. Labor‑hour reduction is not “cash‑out reduction”
Even if manufacturing labor hours decrease per product:
Personnel costs do not decrease unless headcount decreases
Overtime costs do not decrease unless structural overtime decreases
Therefore:
Labor‑hour reduction should not be included as a basic return.
(If capacity expansion enables additional returns—such as reducing outsourcing costs through insourcing—these should be treated as separate return scenarios.)
4. Additional Investment Effects Not Captured by CM/VC
Examples:
① Reduction in maintenance parts and service fees (fixed‑cost reduction)
If equipment renewal reduces annual maintenance parts or service fees, count it as an annual fixed‑cost reduction.
② Energy‑efficiency improvements
In industries such as foundry, where electricity/gas is treated as a variable cost
→ count as VC (Variable Cost) reduction per unit
In industries where energy is treated as a fixed cost
→ count as annual fixed‑cost reduction
5. Capturing Lost Orders Due to Capacity Constraints (“Opportunity Loss Recovery”)
This is not an “expected” revenue expansion. It is the recovery of actual lost business.
"Product CM (Contribution Margin = Sales - Variable Cost)"×"Expected annual incremental volume"
This must be included as a return on the efficiency‑improvement side, not as a growth scenario.
6. After‑tax Cash Inflows and Discount Rate
(Expected Rate of Return = Opportunity Cost of Capital = Cost of Capital = Discount Rate)
Investment evaluation must be based on cash, not accounting profit.
① Convert returns into after‑tax cash
Assuming a corporate tax rate of 30%:
② Discount future cash flows to Present Value (PV)
Example: if a profit of 100,000 yen is expected in year 5:
However, 70,000 yen five years from now is not equal to 70,000 yen today.
PV (Present Value) = future returns converted into today’s value
Expected Rate of Return = Opportunity Cost of Capital = Discount Rate
**The Discount Rate r (%) represents the return you could earn by investing your free cash with virtually no risk—for example, the yield on Japanese government bonds.
- If you do not invest in the project, you can earn this return safely
- It represents the minimum required return (opportunity cost of capital)
- It is the benchmark for converting future cash flows into present value
7. Final Decision Using NPV (Net Present Value)
Sum all PVs and compare them with the investment amount:
Decision rule:
NPV > 0 → Investment acceptable
NPV < 0 → Investment not acceptable
Regardless of the evaluation method, discounting future returns to PV and incorporating corporate tax are mandatory.
Calculation Example:
【Assumptions】
Investment amount: 30,000,000 JPY
VC reduction effect: 80 JPY per unit
Annual production volume: 200,000 units
Fixed cost reduction: 1,200,000 JPY per year
Corporate tax rate: 30%
Discount rate (r): 2%
Evaluation period: 5 years
① Annual Cash Flow (After Tax)
VC reduction 80 JPY × 200,000 units = 16,000,000 JPY
Fixed cost reduction 1,200,000 JPY
Total 17,200,000 JPY
After‑tax cash flow 17,200,000 × (1 − 0.3) = 12,040,000 JPY per year
② Present Value (PV)
PV = 12,040,000 ÷ (1 + 0.02) ^t
Total PV over 5 years = 55,000,000 JPY (approx.)
③ Net Present Value (NPV)
NPV = Total PV − Investment amount = 55,000,000 − 30,000,000
= +25,000,000 JPY > 0
→ Investment should be executed
8. Conclusion: Scenario Accuracy × Calculation Accuracy
Scenario accuracy
Revenue‑expansion investments are “expectations”; define clearly how much to include
For efficiency‑improvement investments, include:
VC (Variable Cost) reduction
Fixed‑cost reduction
Recovery of lost orders due to capacity constraints
Calculation accuracy
Returns must be after‑tax cash
Future cash flows must be discounted using the cost of capital
Compare investment amount and total PV to calculate NPV (Net Present Value) and judge based on NPV > 0
Product‑level VC/CM × volume is the baseline, but insufficient on its own. The key is which returns you include as scenarios, and how accurately you convert them into after‑tax present value.
For investments of tens of millions or hundreds of millions of yen, the quality of the scenario × the quality of the calculation determines the quality of the decision.
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