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AutoQuiz: What Are the NPV and IRR Methods for Evaluating Industrial Automation System Capital Investments?

 

AutoQuiz is edited by Joel Don, ISA's social media community manager.

 

This automation industry quiz question comes from the ISA Certified Automation Professional (CAP) certification program. ISA CAP certification provides a non-biased, third-party, objective assessment and confirmation of an automation professional's skills. The CAP exam is focused on direction, definition, design, development/application, deployment, documentation, and support of systems, software, and equipment used in control systems, manufacturing information systems, systems integration, and operational consulting. Click this link for more information about the CAP program.

 

Which statement accurately characterizes both the NPV and IRR methods for evaluating automation system capital investments?

a) both provide a high degree of reliability in decision making to accept/reject a project
b) the final computations of both yield a dollar figure for individual projects
c) multiple projects can be added and averaged to evaluate any combination of capital investments
d) they both adjust cash flows over time for the time value of money
e) none of the above

 

The common concept between NPV and internal rate of return (IRR) is that both of these financial measures adjust cash flows over time to account for the time value of money (interest rate or cost of capital). It is the “time value” of money over the duration of the project that can help engineers determine the best project alternative or the viability of a single project through calculations such as IRR.

The correct answer is D, “They both adjust cash flows over time for the time value of money.” Net present value (NPV) by itself is not a good indicator of the viability of a project or a good differentiator between two competing projects, except to identify clearly nonviable projects (negative NPV).

ReferenceNicholas Sands, P.E., CAP and Ian Verhappen, P.Eng., CAP.A Guide to the Automation Body of Knowledge. To read a brief Q&A with the authors, plus download a free 116-page excerpt from the book, click this link.

 

About the Editor
Joel Don is the community manager for ISA and is an independent content marketing, social media and public relations consultant. Prior to his work in marketing and PR, Joel served as an editor for regional newspapers and national magazines throughout the U.S. He earned a master's degree from the Medill School at Northwestern University with a focus on science, engineering and biomedical marketing communications, and a bachelor of science degree from UC San Diego.

 

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Joel Don
Joel Don
Joel Don is an independent content marketing, social media and public relations consultant. Prior to his work in marketing and PR, Joel served as an editor for regional newspapers and national magazines throughout the U.S. He earned a master's degree from the Medill School at Northwestern University with a focus on science, engineering and biomedical marketing communications, and a bachelor of science degree from UC San Diego.

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