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222 CHAPTER 6 • PRoCEss TECHnology sTRATEgy
include more than the immediate and obvious costs involved in a decision, and a life
cycle approach proves a useful reminder of this.

The time value of money: net present value (NPV)
One of the most important questions to be answered in establishing the ‘real’ value of
either costs or benefits is determining when they are incurred or realised. This dynamic
is important, because money in your hand today is worth more to you than the same
money would be worth in a year’s time. Conversely, paying out a sum in one year’s time
is preferable to paying it out now. The reason for this has to do with the opportunity
cost of money. If we receive money now and invest it (in a bank account or in another
project giving a positive return), then in one year’s time we will have our original invest-
ment plus whatever interest has been paid for the year. Thus, to compare the alternative
merits of receiving €100 now and receiving €100 in one year’s time, we should compare
€100 with €100 plus one year’s interest. Alternatively, we can reverse the process and
ask ourselves how much would have to be invested now, in order for that investment to
pay €100 in one year’s time. This amount (lower than €100) is called the present value
of receiving €100 in one year’s time.
For example, suppose current interest rates are 10 per cent per annum. The amount
we would have to invest to receive €100 in one years’ time is as follows:
1
:100 * = :90.91
1.10
1 1 1
:100 * = :100 * = :82.65
(1.10) (1.10) (1.10) 2
The rate of interest assumed (10 per cent in our case) is known as the discount rate.
More generally, the present value of €x in n years’ time, at a discount rate of r per cent is

x
(1 + r/100) n

Limitations of conventional financial evaluation
Conventional financial evaluation has come under criticism for its inability to include
enough relevant factors to give a true picture of complex investments. Nowhere is
this more evident than in the case of justifying investment in process technologies
comprising a significant IT element. Here costs and benefits are uncertain, intangi-
ble and often dispersed throughout an organisation. Indeed, with all the talk about
there being a ‘new economy’, the myriad discussions about computers removing cost
(labour) from operational processes, or the impact of the creation of knowledge and
information-based markets, you could be forgiven for thinking that the computer age
was an unambiguously positive thing for business. Until recently, however, there has
been little actual evidence that, for all the IT investment that firms have made, there
has been any real impact upon overall productivity.
Acceptability in terms of impact on market requirements
Extending the idea of considering all competitive benefits from an investment, we
have argued elsewhere in this chapter that process technology can impact all of the
generic operational performance objectives: quality, speed, dependability, flexibility

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