Financial, economic and strategic issues concerning the decision to invest in advanced automation

SUMMARY

The major contribution of this paper is to provide a synthesis of the capital budgeting problems when dealing with advanced automation projects. First, we identify and form expectations of the future cash flows while paying particular attention to the indirect, non-pecuniary effects. Second we use tools from modern finance-theory, such as the Capital Asset Pricing Model, to evaluate the riskiness of the component cash flows and arrive at a set of appropriate discount-rates. This prescription is intended to reduce managerial subjectivity in the decision to invest in such projects.

Finally we use an empirical simulation to illustrate the suggested analysis. These results are used to highlight the sensitivity of the decision vis-à-vis the various subjective inputs to the decision process.