Int J Adv Manuf Technol (2002) 19:151–156  2002 Springer-Verlag London Limited Justification of Advanced Manufacturing Technologies (AMT) P. Aravindan 1 and M. Punniyamoorthy 2 1 Bharathidasan Institute of Engineering and Technology, Bharathidasan University, Trichy, India; and 2 Management Studies, Regional Engineering College, Trichy, India Increasingly, discounted cash flow (DCF) techniques have been questioned when used for evaluating technology intensive long- term investment proposals. This is mainly because DCF tech- niques ignore the intangible benefits accruing from these sys- tems. This paper attempts to justify an investment in a new technique – the advanced manufacturing technology (AMT) using the extended Brown–Gibson model. It can be seen that investment in AMT is attractive if we consider the benefits accruing from the subjective factors. This is an attempt to help practising managers to convince their top management of the investment worthiness of AMT. Keywords: AMT; Flexibility; Intangible benefits 1. Introduction The development of science and technology has led to many new concepts and products, which are replacing the old ones. Similarly, in the field of financial management, many new concepts have emerged relating to revenues and costs. While evaluating capital intensive technological projects, such as flex- ible manufacturing systems (FMSs), conventional financial management techniques such as capital budgeting undervalue the strategic benefits arising from advanced manufacturing technology (AMT). Flexibility, improvement in productivity and quality, faster response to market shifts, shorter throughput and lead time and savings in inventory and labour costs, etc. enable customer demands to be met in a shorter time [1–6] The objective of this paper is to develop a new model, which justifies the investment in AMT. Changing customer preferences and tastes oblige the manu- facturer to change his products frequently. Increased consumer awareness has led to the manufacture of high-quality goods. The manufacturing process has to be faster to meet market demands at the appropriate time and to overcome competition. All these factors have led to changes in manufacturing pro- Correspondence and offprint requests to: Mr M. Punniyamoorthy, Department of Management Studies, Regional Engineering College, Trichy-15, India. E-mail: puniyarect.ernet.in cesses, which have prompted many manufacturers to adopt computer-integrated manufacturing, namely AMT. AMT has operational, technical superiority and other intangible benefits, compared to traditional systems. 2. Problems in Using Conventional Techniques The logic behind the use of the discounted cash flow (DCF) technique is that the value of the money received in future is less compared to the value of money today. DCF does not recommend any specific time period as a reference point for evaluating the investment proposal. However, it is a common practice in industry to expect the investment in AMT to pay back in a relatively short period of 4–5 years [4]. The purpose of investing in AMT is for long-term benefits, and evaluating the proposal for a short time horizon is certainly wrong. The decision to fix a time period of 4–5 years arbitrarily is taken by management and is not a prerequisite for using the DCF technique. The second error occurs in the use of very high discount rates, which adversely affect the cash flow 5 or more years in the future. Opportunity cost of the capital is a better estimator than the highest prevailing market rate, which gives a distorted figure [4,7]. The assumption of steady cash flow in the future using traditional technologies will not be of much advantage if a competitor acquires a competitive advantage by using advanced technology such as an FMS, and thereby attains a higher market share. In such an event, the company cash flow is bound to deteriorate along with its market share in advanced manufacturing technology products, in the light of declining cash flows from the conventional system. In other words the assumption of the status quo in terms of market share and margins using traditional systems is erroneous. In addition, conventional accounting techniques do not take account of the intangible benefits accruing from AMT during project evaluation.