Automations projects – justification


The traditional financial capital-budgeting techniques such as payback period, net present value, internal rate of return and the like have been used to evaluate and decide upon investment in new capital projects. These techniques have tended to lead managers to expand present facilities with existing technology. The managers were not considering build new facilities with new production technology. Carrying this approach to its extreme, companies end up with huge unwieldy, highly centralized production facilities based on outdated production technology.

The current position shall be decisions on new projects should not be based on conventional appraisal techniques. Investing in new technology must be seen as a long-term strategic choice for the company. These choices like other major strategic business decisions cannot be based solely on a simple payback formula. Returns on investment will continue to be an important criterion for new investment decisions.

The term return should take extended meaning:

Improved product quality, faster delivery of customer orders, increased manufacturing flexibility, reduced production costs, increased market share and other advantages. These will have to be factored into the future a capital budgeting decisions. Investment in new technology must be seen as a way of changing the factory into a competitive weapon that assists the corporation in achieving its strategic objectives.

Deciding among Automation Alternatives

Three approaches that are commonly used in the industry today are economic analysis, rating scale approach and relative aggregate scores approach:

1. Economic analysis involves cost comparisons of processing alternatives, the concept of operating leverage, break-even analysis and financial.

2. Rating scale approach. Important factors that must be considered are,

· Economic factors which provide with some idea of the direct impact of automation alternative on profitability. The focus is on cash flows, annual fixed costs, variable cost per unit, average production cost per unit or total annual production costs at the forecasted production levels but the intention is to determine the direct impact on profitability. Break –even analysis and financial analysis are frequently used.
· Effect on Market share.
· Effect on product quality.
· Effect on manufacturing flexibility.
· Effect on labor relations.
· Amount of time required for implementation.
· Effect of automation on on-going production.
· Amount of capital required.

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However, as with most strategic decisions, the issue is more complex than it first appears.