Determining the best automation solution today requires senior level engineers to be able to understand financial modeling to ensure positive outcomes early in their review process. Assessing the NPV, IRR, ROI, and breakeven are critical to know if the solution is worth the expense. Universal provides the tools necessary for quick assessment of these metrics. Here is what each of them mean.
NPV: The Net Present Value is the difference between the initial investment and the discounted value of cash flows (cost savings in this case) over the life of the project. The value of the cash flows should be higher that the initial invested capital, and if it is not there needs to be other reasons to support the argument of why to proceed with the project.
IRR: The Internal Rate of Return estimates the profitability of the investment over a period of time by percentage. With Universal’s Neocortex, our IRR is typically higher than normal, exceeding companies required rate of return (the hurdle rate), which for most organizations is ~30%.
ROI: Return on Investment is a ratio expressing the benefit of the savings divided by the cost of the investment. This percentage should exceed other alternatives for investing capital. The higher the better.
Breakeven: For most retailers, the breakeven point should be under three years, and for manufacturing, under five years. The less time the better.
Our financial modeling tool runs these metrics in tandem. We load the cost of the current manual operation, the cost of the automated solution, then use the savings delta between these two total costs to evaluate the financial benefits over the life of the automation.
In considering the value of the transaction, there are many variables that must be considered to capture the total cost and benefit. Those include fully burdened salaries, training and turnover, injuries, down time, equipment use, wear and tear, floor space allocation, power consumption, throughput efficiencies, inflation, quality, security, continuous improvement, and data analytics.
This modeling gives engineers insight into how the finance departments will review and analyze the opportunity and allows engineers, when faced with competing opportunities to determine the best use of financial resources.