Investing in high technology projects

Many companies have found it hard to justify high technology investments. A US auto manufacturer, for example, found it difficult to justify investing in a new computer-based flexible manufacturing system because its cost savings occurred so far in the future. When discounted, the present value of these savings did not justify the initial outlay. The president of the company was convinced, however, that the new system had benefits not quantified in the cash flow estimates, so he approved the investment even though it had a negative net present value.

Companies have difficulty in justifying an investment in high technology projects for several reasons. First, often several years pass before companies see the cash inflows from the investment. Even if the cash inflows are high, their net present value is low if they come several years in the future.

Second, management has difficulty identifying and measuring all of the benefits of new technology. When personal computers replaced typewriters, for example, people learned many new ways of creating and storing documents by using the computer. These benefits occurred because people used computers and experimented with them. These benefits would have been difficult to predict, much less measure, back when companies were trying to justify investment in personal computers. Managers believe that sometimes they just have to have faith that the investment is a good one, even though they cannot justify it on quantifiable economic grounds.