Recommendations for Justifying Capital Projects

As reported in the DeltaV News RSS feed recently, Automation World magazine‘s C. Kenna Amos wrote an article, Getting Projects Approved. I know from my days as a systems engineer, that financially justifying a capital project was not nearly as fun as executing the project. Most engineers enjoy the action of seeing their work come to life more than convincing others to approve the capital to get the project going. They also are not typically versed in the language of financial analysis.

The article captures the wisdom of Emerson’s Doug White, a vice president of advanced automation services. Doug and his team often assist process manufacturers in ways to help quantify return on investment for automation and advanced automation projects.

In the article, Doug notes:

The project has to be very attractive to be funded, because it will compete with others. The project has to show a clear and compelling return on investment.

Easy enough, but the trick is how to do this. Doug recommends that engineers work with the financial group to understand their selection criteria for capital projects. Basics for most projects include cash outflow analysis and when the return on investment begins. This is the basis for the payback calculations. Also, the capital proposal should include key non-quantifiable benefits often found in health, safety, and environmental (HSE) considerations.

The closer you can tie your proposal to key organizational initiatives, the more the proposal will be noticed more than others will. When it comes to presenting your proposal:

Begin by first defining the problem, then telling them why your project is important and giving reasons why it needs to be done, he emphasizes. Then–and only then–go into financials, beginning with the most likely scenario.

Doug has captured much of his experience in a whitepaper, Calculating ROI for Automation Projects. It comprehensively goes through the components of return on invested capital and how to calculate each component. Give this whitepaper a thorough review and you will be better prepared to have that conversation with the financial group.

For those of you going to the Emerson Exchange next week in Dallas, make sure to catch Doug’s short course, How To Find The Economics For Process Automation Investments that will be held Tuesday at 2:15pm and repeated Wednesday at 8am. Here’s the abstract for this presentation:

This session presents realistic approaches to automation project economic analysis and justification. The viewpoint is that of the business financial analyst. Specific areas where automation affects the business results are identified and quantified.

Posted Tuesday, September 4th, 2007 under Education, Emerson Exchange, Modernization.

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