Foster Engineering Ltd is considering introducing a flexible manufacturing system (FMS) to modernise production in a department currently using conventional metal-working machinery. The declining market and the awareness that its main competitors have recently introduced new technology have made the need to modernise plant facilities an urgent priority. An AMT proposal has been put forward, offering an FMS capable of producing the present output. It involves two machining centres with CNC lathes, a conveyor system for transferring components and a computer for scheduling, tooling and overall control. The total investment would cost 2.4 million, half being incurred at the start and the other half after one year, at which point the existing machinery could be sold for 50,000. Any benefit would arise from Year 2 onwards for five years. The two quantified benefits are as follows: 1 A reduction in the number of skilled workers from 50 to 15 . The annual cost of a skilled worker is 20,000 (savings of 3520,000=700,000 p.a.). 2 Savings in scrap and re-work of 50,000 p.a. The company requires all projects to offer a positive net present value discounted at 15 per cent. The accountant produces the following evaluation showing that the FMS proposal has a negative NPV of 159,000 and fails to meet corporate investment criteria: An incensed production engineer in Foster Engineering, on hearing that the proposal is unacceptable, points to the 'intangible' benefits that the FMS will offer: Improved quality leading to a significant, but unknown, reduction in sales returns through faulty workmanship. - Reduced stock and work-in-progress, enabling improved shopfloor layout, greater space and a lower working capital requirement. - Lower total manufacturing time, enabling the company to respond more quickly to customer orders and to reduce work-in-progress further. - Significantly improved machine utilisation rates, although the actual degree of improvement is difficult to quantify. - Increased capacity with the option to operate unmanned night working. - Greater flexibility, enabling shorter production runs and faster re-tooling and re-scheduling. CIM involves the computerisation of functions and their integration into a system that regulates the manufacturing process. It brings together the individual manufacturing techniques referred to earlier under unified computer control. Many of these benefits could be quantified, at least in part (e.g. the savings in working capital), although the degree of confidence in the underlying assumptions may not be high. But even so, there will still be a large intangible element that cannot be quantified. This has led to the charge that conventional methods of investment appraisal are biased against AMT investments. Kaplan (1986) raises the question of whether AMT projects must be 'justified by faith alone'. Should managers in Foster Engineering replace the DCF approach with a belief that AMT is the key to the future and that strategic positioning must override economic analysis? The answer is not to dismiss DCF analysis, but to see it within a wider strategic context. We advocate a three-stage approach to analysing AMT capital projects: 1 Does the project fit well within the company's overall corporate strategy? 2 Does the DCF analysis, based on the quantifiable elements of the decision, justify the investment outlay? 3 Where the net present value calculated in stage 2 is negative, examine the shortfall. Does management believe that the 'value' of the intangible benefits exceeds the shortfall? This last stage is essentially a subjective process whereby managers consider the strategic and operational benefits. No one can put an accurate value on flexibility, for example, but it would be wrong to exclude such a major benefit from consideration in the decision process. Foster Engineering Ltd is considering introducing a flexible manufacturing system (FMS) to modernise production in a department currently using conventional metal-working machinery. The declining market and the awareness that its main competitors have recently introduced new technology have made the need to modernise plant facilities an urgent priority. An AMT proposal has been put forward, offering an FMS capable of producing the present output. It involves two machining centres with CNC lathes, a conveyor system for transferring components and a computer for scheduling, tooling and overall control. The total investment would cost 2.4 million, half being incurred at the start and the other half after one year, at which point the existing machinery could be sold for 50,000. Any benefit would arise from Year 2 onwards for five years. The two quantified benefits are as follows: 1 A reduction in the number of skilled workers from 50 to 15 . The annual cost of a skilled worker is 20,000 (savings of 3520,000=700,000 p.a.). 2 Savings in scrap and re-work of 50,000 p.a. The company requires all projects to offer a positive net present value discounted at 15 per cent. The accountant produces the following evaluation showing that the FMS proposal has a negative NPV of 159,000 and fails to meet corporate investment criteria: An incensed production engineer in Foster Engineering, on hearing that the proposal is unacceptable, points to the 'intangible' benefits that the FMS will offer: Improved quality leading to a significant, but unknown, reduction in sales returns through faulty workmanship. - Reduced stock and work-in-progress, enabling improved shopfloor layout, greater space and a lower working capital requirement. - Lower total manufacturing time, enabling the company to respond more quickly to customer orders and to reduce work-in-progress further. - Significantly improved machine utilisation rates, although the actual degree of improvement is difficult to quantify. - Increased capacity with the option to operate unmanned night working. - Greater flexibility, enabling shorter production runs and faster re-tooling and re-scheduling. CIM involves the computerisation of functions and their integration into a system that regulates the manufacturing process. It brings together the individual manufacturing techniques referred to earlier under unified computer control. Many of these benefits could be quantified, at least in part (e.g. the savings in working capital), although the degree of confidence in the underlying assumptions may not be high. But even so, there will still be a large intangible element that cannot be quantified. This has led to the charge that conventional methods of investment appraisal are biased against AMT investments. Kaplan (1986) raises the question of whether AMT projects must be 'justified by faith alone'. Should managers in Foster Engineering replace the DCF approach with a belief that AMT is the key to the future and that strategic positioning must override economic analysis? The answer is not to dismiss DCF analysis, but to see it within a wider strategic context. We advocate a three-stage approach to analysing AMT capital projects: 1 Does the project fit well within the company's overall corporate strategy? 2 Does the DCF analysis, based on the quantifiable elements of the decision, justify the investment outlay? 3 Where the net present value calculated in stage 2 is negative, examine the shortfall. Does management believe that the 'value' of the intangible benefits exceeds the shortfall? This last stage is essentially a subjective process whereby managers consider the strategic and operational benefits. No one can put an accurate value on flexibility, for example, but it would be wrong to exclude such a major benefit from consideration in the decision process