Flexible Automation and Integrated Manufacturing 1998

ISBN Print: 978-1-56700-118-1

USING "ECONOMIC VALUE ADDED" ANALYSIS IN THE COST JUSTIFICATION PROCESS OF ADVANCED MANUFACTURING TECHNOLOGY: A CASE IN POINT

DOI: 10.1615/FAIM1998.100
pages 107-116

Abstract

Cost justification of Advanced Manufacturing Technology (AMT) has traditionally been based on a set of factors which, in the final analysis, is both incomplete and misleading. Missing from such analysis is the true cost of capital (i.e., that cost component represented by the opportunity cost to an organization investing in the project). Further, acknowledge the fact that most traditional cost justifications of AMT rely on projected before-tax cash flows, knowing tax payments ultimately distort those projected cash flows, and we deduce our cost justification decisions are based on misleading data. What can we do then to eliminate distortion from our analysis and decision making processes? Consider "Economic Value AddecT" (EVA). EVA is a means which enables decision makers to evaluate project costs (purchasing AMT) using the true cost of capital on an after tax basis. In fact, EVA is now being used for cost justification of AMT at a major shipyard in the northeastern United States.