ISA Certified Automation Professional (CAP) program

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Certified Automation Professionals (CAPs) are responsible for the direction, design, and deployment of systems and equipment for manufacturing and control systems.

CAP question

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.

CAP Answer

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

Reference: Trevathan, Vernon L., A Guide to the Automation Body of Knowledge, Second Edition, ISA, 2006.