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

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.

CAP Answer

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).

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.

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