Forty years ago, Sid Gilbreath, my favorite professor at Georgia Tech, drilled us on the time value of money in our course on Engineering Economy. As a result, I have always felt myself to be pretty proficient at calculating the return-on-investment (ROI) for materials handling projects. But, there are definitely some traps that I have fallen into myself. Some might even have a familiar ring to you, too.

Consider the simple cash flow diagram that shows negative and positive cash flows over the life of the project. This diagram starts with a capital investment in year "0", followed by an annual savings for 10 years. But, there are factors in "real" project life that alter the flow of cash in that diagram. And depending on exactly how those factors play out determines how close any project comes to its promises.

Start with engineering and progress payments. Only when we buy an off-the-shelf machine that we can plug in and turn on do we get instantaneous savings following the lump sum investment. For large systems, the costs for engineering, progress payments and installation are spread over 1 to 2 years, before we can even begin operation. Only then can we start to enjoy the savings.

Then there's the matter of unrealized savings. The system that we implement is designed to handle peak demands for some year in the future. Consequently, the actual annual savings will fluctuate with volume, usually beginning small in the first year, and then gradually rising as business grows. This should be reflected in the initial calculations, but will yield a much smaller ROI. If business changes such that the projected volume levels never materialize, that too, will reduce the actual ROI.

It's also important to factor in a delayed start-up. This is perhaps the most common, and most insidious, project event. The loss of expected savings in the first year, probably accompanied by additional costs for de-bugging and work-around operations, will drop the ROI below what would have been approved in the first place.

Another way to handicap a project's return is cost overruns. By the time we finally get things up and running, we may have spent more than the originally justified investment. Although a cost overrun certainly does affect the ROI, unless it is extreme, its impact is typically less painful than a delay.

Does all of this mean that we should shy away from capital projects? Not at all! If we don't invest in the future, it will surely be bleak. Instead, here are four important principles to observe when working through the financials of a project.

• If a project won't fly with a realistic budget, then don't start.
• Prepare for extra help and training at start-up to avoid costly delays.
• If the system is especially complex, consider implementing in phases to reduce the initial investment and to make start-up more manageable.
• Be a clock-watcher. Time is everything.