Economic Analysis

Introduction

A robot project must make sense in terms of money, and not only in terms of technology. Management usually decides to install a robot based on the economic analysis. The cost of the automation must be justified by future savings and revenue.

flowchart LR
    D["Basic data<br/>costs, revenue, cycle time"] --> M["Method of analysis"]
    M --> P["Payback"]
    M --> E["EUAC"]
    M --> R["ROI"]
    P --> J["Decision<br/>install or not"]
    E --> J
    R --> J

How it works

1. Collect the Basic Data Required for the project
2. Use one or more of the three methods to test the project
3. Adjust the result for special cases, such as reuse of the robot or a faster production rate
4. Consider the factors that you cannot put a number on

The three methods

• Payback Method finds how many years it takes to get the investment back
• Equivalent Uniform Annual Cost Method changes all cash flows into one yearly value at the company's MARR
• Return on Investment Method finds the actual rate of return and compares it with the MARR

Key equations

Let $IC$ be the investment cost, $R$ the annual revenue, $C$ the annual cost and $SV$ the salvage value.

$$n=\frac{IC}{R-C}$$ $$EUAC=-IC\left(\frac{A}{P},i,n\right)+R-C+SV\left(\frac{A}{F},i,n\right)$$

Decision rules:

• Payback: a shorter $n$ is better, and most companies want $n$ of 2 to 3 years or less
• EUAC: set $i=MARR$, then $EUAC>0$ is good and $EUAC<0$ is not good
• ROI: set $EUAC=0$ and solve for $i$, then $i>MARR$ is good and $i<MARR$ is not good

Special cases

• Subsequent Use of the Robot
• Differences in Production Rates
• Existing Projects
• Robot Economic Analysis
• Factors that are Difficult to Quantify

Important

Costs are negative values. Revenues, savings and salvage values are positive values.