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AutoQuiz: What is the Risk in Using Standard ROI Ratios to Invest in an Automation System?

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.

A return on investment (ROI) ratio is used to evaluate the purchase price for an automation system and all other initial costs associated with the project against the accumulated cash inflows.

What is the primary pitfall in using this ROI ratio to make a decision as to whether or not to invest in an automation project?

a) it fails to capture the qualitative benefits derived from automation systems
b) it relies on vendor estimates of useful life
c) it ignores equipment reliability and system maintainability costs
d) it ignores the time value of money
e) none of the above

ROI can be quantified by:

 

where,
IC = initial cost
CFi = operating cash flow, year i
n = project operating lifetime, years
In the above equation, qualitative benefits derived from the automation system (answer A) less maintenance costs (answer C) are included in the operating cash flow (CFi). The vendor’s estimate of useful life (answer B) is taken into account by the project operating lifetime (n).

This leaves answer D, which is the time value of money. The ROI equation does not include a term to account for the lost opportunity to collect investment interest on the money that is being diverted to fund the automation project or the cost of borrowing the same amount of money from a lender (time value of money).

The correct answer is D, “It ignores the time value of money.”

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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