Industrial Robot: An International Journal

The economics of robots in industrial applications

M.Benedetti
Article information:
To cite this document:
M.Benedetti, (1977),"The economics of robots in industrial applications", Industrial Robot: An International Journal, Vol. 4 Iss
3 pp. 109 - 118
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http://dx.doi.org/10.1108/eb004480
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The economics of robots in industrial applications
M.Benedetti, Olivetti S.p.A., Italy.
1. INTRODUCTION
Modern accountancy offers top management ever more
sophisticated instruments, thus enabling it to base its decisions
not only on 'experience/intuition' but also on the rationali-
zation of data for solving investment problems.
Now, ignoring the simpler and rougher methods such as pay-
back period and return on investment ignore the cost of money,
the calculation of the present value and therefore, the timing
of the flows of income and expenditure relative to the invest-
ment are not considered. It seems that amongst the more
sophisticated methods there are two which are best suited to
the determination of the internal rate of return of robots.
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These methods, which are also universally valid for all profit-
ability analysis of industrial investments, are:
1. Present Value method (P.V.)
2. Discounted Cash-Flow Rate of Return method (DCFRR)
Before passing on to a brief exposition of the theoretical basis
and the illustration of some practical applications, we will an-
alyse the main parameters which characterize the use of robots.
In this analysis we will examine the field of application of
robots without any theoretical or conceptual limitations.
We must point out that the purpose of this article is not to
present specific tables or formulae for immediate application
to practical problems; this would be extremely difficult due
to the scarcity of operational data on such a new argument
and to the vastness of the field of application. The main
purpose is rather to trace the main lines and the underlying
assumptions which condition the use of such instruments.
2. CONSIDERATIONS ON THE VARIABLES WHICH IN-
FLUENCE PROFITABILITY ANALYSIS FOR ROBOTS
The main variables which, from a profitability point of view,
characterize the use of robots capable of substituting for
human operators, are as follows:-
N = total number of workpieces to be produced
Tc = human production time (seconds) for one workpiece
Cs = cost of one second of operator time
Tr = work-cycle time (seconds) for the robot to produce
one workpiece
Ta = operator intervention time (seconds) for each work-
piece produced by the robot
lr = cost of robot
la = cost of dedicated fixtures
Kr = fraction of the cost Ir of the basic machine absorbed
by each second of robot working time.
The Industrial Robot
109
In practice we have:
where N r is the total
number of hours
worked by the mach-
ine in its life
The fundamental profitability condition is expressed by:
(1) N.TC.CS  N.K r .T r + N.Cs.Ta + l a
in which the equality, which expresses the boundaries of
profitability, may be represented in general terms by the
equation
K = ax + by + cz
This equation enables us to use the cartesian rappresentation
of space based on three orthogonal axes, x y z, for our analysis
and considerations.
In our equation, the following may be considered external
variables:
Kr = hourly cost of the basic machine
N = total number of workpieces to be produced
Tc = operator work content in seconds
Cs = cost of one second of operator time
The following terms may be considered independent variables:
Tr = practical time for the robot in seconds = y
Ta = operator time in seconds for parts feeding and other
operations for each robot cycle = x
Ia = cost of dedicated fixtures = z
Obviously, no two other independent equations expressed
in general terms exist that relate the three variables involved,
therefore the profitability problem does not lend itself to an
algorithmic solution in general terms. However, equation (1)
enables us to make some useful considerations of a qualitative
nature and to throw some interesting light on the interdepend-
ence between the variables under consideration.
It is immediately evident that when two of the variables
assume given values, the limiting value of profitability for the
third variable is uniquely determined.
Let us therefore make some considerations on each of the
three variables in turn, expressing it as a function of the
other two variables.
September 1977
 110
Robot Cycle Time
(2)
If we assume that no dedicated fixtures are required then l a = 0
and equation (2) becomes:
(3)
If we make the further assumption (at present unrealistic)
that the robot completely substitutes the human operator
and therefore works without assistance, then T a = 0 and
equation (3) becomes:
(4)
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Equation (4) expresses the fact that the ratio between the time
taken by the robot and the time taken by the human operator
must as a maximum stay within the ratio of their respective
costs.
If we assume that this ratio be:
i.e. the cycle time of the robot is not allowed to exceed twice
the operator cycle time and that if T r = Tc (that is, the robot
and operator times are equal) then we must not spend more
than ½NTCCS for the fixtures and the operator intervention
time.
Operator Intervention Time per Cycle
(5)
If, in equation (5) we assume that T r = 0, that is, that the
robot is not used, then the equation becomes:
(6) which becomes l a NC s (T c -T a )
This expresses the general limiting condition for profitability
which is valid for all specific machines and all dedicated fix-
tures which are limited to the execution of a certain operation;
this condition simply states that the cost of the fixture must
be entirely recuperated during the execution of that operation.
If, in equation (5) we also assume that l a = 0 then we have
T a  T c which states the obvious fact that T3 must at the
most be equal or less than T c .
The Industrial Robot
Cost of Specific Fixtures
(7) la  N [ C s ( T c - T a ) - K r . T r ]
If in equation (7) we consider T r = 0 we arrive again at
equation (6):
l a  N.C S (T C -T a )
which expresses the limiting condition for profitability of
dedicated fixtures or machines
Obviously, with this assumption maximum profitability will
be obtained when
l a + N.Cs.Ta = minimum
If the cost of l a were fixed, then it is even more obvious
that maximum profitability would be obtained for the mini-
mum value of T a .
If, in equation (7) we also set T r = 0 we have:
(8) l a  N.CS.TC
which expresses the maximum value of l a .
We may now recapitulate the above considerations with the
following concluding remarks:
- the three variables considered may each vary within the
following limits:
Obviously, maximum rate of return would be obtained where
the convenience function
F (T r , T a , l a )
reached a minimum; this point may not be determined
analytically since the above function may not be expressed
by means of an algorithm.
However, we may conclude that, if the external variables are
defined and the real limits of variation of the variables are
known, maximum rate of return will be obtained when the
sum of the values induced by each variable is at a minimum.
In our analysis we introduced an assumption which was in
contrast with the methods initially proposed which were
based on cash-flow and on the calculation of the present
value, in fact we spread over the working life the cost of the
robot, l r . This is an investment and generally consists of a
one-off expenditure while we have considered it a continuous
cost K r comparable to the operator cost Cs.
September 1977

This apparent incongruity was introduced intentionally to
underline the fact that the robot is a multi-purpose machine
and normally does not serve a single operation of dimension N,
but rather ' i ' operations of dimensions N i .
By assuming that the cost of the machine l r is spread over
its working life, we are able to assign to each operation of
dimension Ni its proper cost.
These considerations permit us to draw an interesting conclu-
sion of a qualitative nature; if N is very large, a dedicated
machine or fixture would be more convenient since its design
and construction costs (which would be always smaller than
N.CS (T c - T a )) could be conveniently absorbed by the opera-
tion.
For lower values of N, the use of the robot would be more
convenient since, by the addition of specific fixtures, it may
be used for several operations.
For even lower values of N, the manual solutions would be-
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come more convenient. It will thus be possible to determine
the three ranges of convenience as a function of the N to be
produced: the lower range for manual operations, the middle
range for robot operations and the upper range for operations
using dedicated fixtures or special single-purpose machines.
The above considerations are illustrated in Fig.1 by means of
a cartesian representation along the three axes x, y, z.
The points A B and C on the axes correspond to the maxi-
mum permissible values given by the fundamental profitability
condition (1).
If we join these points by means of straight lines, we obtain
a pyramid having its vertex at B which encloses the profit-
able space given by condition (1).
The equations of the straight lines which limit the upper
range of each plane are respectively:
- in the x-y plane Cs.x + K r .y = Cs.Tc
- in the x-z plane N.Cs.x + z = N.CSTC
- in the y-z plane N.Kr.y + z = N.CS.TC
The Industrial Robot
111
The purpose of the above considerations is to analyse the
qualitative aspects and possible inter-dependences of the
variables which characterize the use of robots, so as to enable
us to indicate lines along which it will be possible, on the
basis of practical data relative to specific fields of applications,
to prepare tables or formulae which will permit us to choose
instantly the most convenient solution.
We are of the opinion however, that, once this preliminary
choice is made, a more accurate determination of the rate
of return or a successive refinement of the choice are to be
based on cash-flow and present value methods.
In fact, many authors who have dealt with profitability
analysis basing themselves mainly on the concept expressed
by equation (1), have presented formulae, often very complex,
which include variables connected with general expenses,
capital charges, depreciation etc. The method which we
propose, based on the concept of cash-flow and the present
value of values effectively involved, cannot take these external
variables into consideration.
In our method, the determination of the profitability of an
investment may always be reduced to the study of only two
variables: on the other hand the sum of the expenses con-
nected with the project and on the other the sum of the ex-
pected savings.
We may conclude by stating that all the parameters and vari-
ables taken into consideration must be transferred to costs
of the project and to expected savings and these costs and
savings must be correctly positioned on a time axis.
The above simplification of the data will enable us to express
the investment operation in the following way:
(9)
where Fk = Dk - lk
=
Dk Rk - Ck (savings - costs)
financial resources available in
year k
lk = Outlay or investment in year k
3. PRESENT VALUE METHOD (P.V.)
If we apply the present value formulae to the succession of
cash flows relative to an investment, the relative formula
becomes:
and the value V 0 is defined as the present value.
September 1977
 112
Fquation (1 ) permits us to represent the investment on the
basis of the cash flows connected with it in such a way as to
take into account the period in which the flows effectively
occurred.
where:
1.870 = No of working hours per year
5 = hourly labour costs in U c

This method of representing the problem offers the following b) Robot assembly
advantages:
- investments - basic machine 40 KU C
1) it frees profitability analysis, which is an economic fact, -fixtures 10 KU C
from the general accountancy conventions - theoretical machine time per workpiece 110 secs.
2) in calculating cash flows it does not take into account - practical machine time per workpiece 110/0,80 = 138 secs.
depreciation which is merely an accountancy notion - hourly production rate 3.600/138 = 26
3) it intrinsically takes into account possible interest - the machine will therefore work on
charges brought into play by Ik, R k , Ck so that it avoids the two shifts to satisfy the desired
necessity of taking them into account in successive calcula- production rate of 32 workpieces
tions per hour
4) it is based on the notion that profitability is governed - operator intervention time (practical)
by future expenses and incomes, ignoring past accounting per workpiece 30 secs.
events. - yearly direct labour charges

To apply the P.V. method it is necessary to determine the

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following data:
- maintenance costs
period of utilization = 120 (hours) x 9.000 (hourly cost) = 1.08 KUc
net cash flows for each year
discount rate; normally one chooses the rate correspond-
ing to the average cost of money, for example 12% Table 1

We therefore use formula (10):

76 77 78 79 80 81

a) manual assembly
labour cost — 26,99 30,22 33,84 37,90 42,44

b) robot assembly
If, when we substitute the real data in the above formula, we maintenance cost 1,18 1,29 1,41 1,55 1,70
electric power cost 0,16 0,18 0,21 0,24 0,28
find Vo > 0, then it means that the progressive incomes 2,78 3,48
labour cost 3,11 3,89 4,35
Rk will enable the capital and interests to be recuperated in capital investment 50,00
n years leaving a positive balance of V o .
Fk( a - b) —50,00 22,87 25,64 28,74 32,22 36,11

Example

We wish to determine the convenience of buying a robot

compared with the present situation which consists of manual We assume that the machine is used for 5 years on two shifts
assembly of mechanical components. at a constant production rate.

Because of the exemplificative and didactical objective of this It is assumed that the residual value of the machine and fix-
paper and for the sake of clarity all the monetary data, as tures at the end of the 5 years is zero. Also the value of the
costs and prices, are expressed in a completely arbitrary unit work stations and fixtures freed at the beginning of the
called U c that is not corresponding to any real currency. project is zero.

The example too does not apply to any existing robot appli-
cation.
a) Manual assembly
- number of workpieces to be produced
duration of the production
- practical cycle time per workpiece
hourly production rate
- yearly direct labour charges
To simplify the calculations, we also assumed that the utili-
zation of the robot began at the beginning of the year follow-
ing its purchase.
We further assumed a yearly increase in labour costs of 12%
299.200 and an increase in maintenance costs of 10% per year.
5 years
290 secs. If we assume that interest on capital is 12% and introduce
32 the above data, equation (10) becomes:

The Industrial Robot September 1977


The present value of the operation is 52 KU C which means
that after reimbursing the capital and interest charges (at 12%)
we are left, at the end of the operation with a profit of 52 KUc
the investment is therefore to be considered favourable.
Fig.2 represents the variation of the P.V. over the years for
different values of the rate ' i ' .
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In relation to what was stated in paragraph 2 above, if we
assume that the robot be used for other operations (since the
machine is not fully saturated for the whole of the twoshifts)
we may divide the cost of the robot in proportion to the
hours of utilization.
In our case therefore, bearing in mind that the number of
hours of effective utilization are = 11.508 while
The Industrial Robot
113
the total number of hours available are 18.700, we may reduce
our value of investment from
In this case, the investment to be considered in the formula
should be 25 KU C for the basic machine + 10 MIL for the
fixtures = 35 KU C
Since the savings will be unchanged, the rate of return will
rise to i = 69%.
4. DISCOUNTED CASH-FLOW RATE OF RETURN OR
DCFRR METHOD
Part 1 of the appendix traces the theoretical basis for this
method. The result of the application of this method for the
determination of profitability can be found from the solu-
tion of the following equation:
where V is the unknown variable.
Let us now apply this method to the case previously resolved
with the P.V. method.
By setting 1+i = X in equation (11) we have:
Assuming as a first approximate value of Xo that given the
ROI method
and solving by means of the Newton—Fourier method, we
obtain the value of X1 closest to the real value of X which
satisfies the equation:
and therefore
i = X1 - 1 = 0,46 = 46% = internal rate of return DCFRR
The variations due to successive approximations may be con-
sidered negligible.
The determination of profitability by the DCFRR method
offers certain advantages which may be summarized as follows:
- it has a rigorous theoretical basis
it evaluates the appropriate remuneration of the resources
and represents both the cost and the advantages expected in
ratio to the resources employed and the risks undertaken
September 1977
 114
it enables one to obtain, for each alternative, its rate of
return and to measure it by comparison to a reference solu-
tion; this enables one to classify the various alternative;
according to their rate of return
by relating the investment to an ideal cash flow, it take:
into consideration only those essential variables effectively
involved in the investment.

The method also presents the following disadvantages:

it presupposes that the cash made available be reinvested

at the same rate of return as that yielded by the method
- for cases in which there is an inversion of sign of the cash
flow subsequent to the original one - due for example to
further future investments which annul the profits accrued
to that moment - equation (11) presents more than one real
solution. Therefore it may not be used to determine the rate
of return; in such a case it becomes necessary to apply the
P.V. method as may be seen in the example illustrated in
table 2
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Table 2

year Cash flow = -50.00 + 22.87 + 25.64 + 28.74 + 32.33 + 36.11

item 0 I II III IV V VI in MIL

DCFRR i = 46% calculated by means of an algorithm

investments 250 - - 200 _ - -

savings - 85 95 100 150 200 230

cash-flow -250 +85 +95 -100 +150 +200 +230 Starting from a point corresponding to 1.7 on the abscissa,
we draw a line which intersects curve n=5 corresponding
P.V. (i =12%) = -250 +75.9 + 75.7-71.2 + 95.3 to 5 years of utilization of the machine; on the abscissa we
+ 113.5+116.5 = 155.7 find the value of 'i' which is 47-48%.

example B
5. SIMPLE METHOD FOR FINDING THE DCFRR
Cash flow: -90 +15.99 +16.61 +17.32 +18.02 +18.72 +19.41
A further defect of the DCFRR method is the complexity +20.30 +21.06 +21.94 +22.81
of the calculations involved which requires a mathematical rate V calculated by means of the algorithm
background which not everybody may have. V = 16.5%

To overcome this difficulty, and to enable one to find instant-
ly the internal rate of return, we have prepared the diagrams
of Fig.4 which, with sufficient accurary give the internal rate
of return as a function of the ratio where C = investment
and F m = yearly average of the savings obtained.
The mathematical assumptions on which these diagrams are
based are devloped in Part II of the appendix.
The less the variation between the yearly savings the more
accurate are the diagrams proposed; in practice, this is general-
ly the case.
Let us examine two examples:
example A described previously
= 4.7 on the table yields V = 17%
The diagrams lose significance for high rates of return, not so
much due to a faulty representation, as to the effective math-
ematical ratios between the parameters involved; in fact, for
higher rates of return, the effect of the calculation of the
present value becomes less and less significant, and thus not
discriminating, the data relative to future years.
In our opinion this defect is negligible since;
- from an application point of view, and if inflation is not too
high, very high rates of return are difficult to reach and invest-
ments which fall in such ranges are certainly convenient
- from a theoretical point of view, it should be noted that
even small errors in the estimates of the variables involved (e.g.
cycle times, production volumes, labour costs, cost increase
trends, investment costs, etc.) will result, in the high rate of
return ranges, in large variations in the rate itself.

The Industrial Robot September 1977

 115

6. G R A P H I C A L D E T E R M I N A T I O N OF T H E RANGE IN
WHICH I T IS C O N V E N I E N T TO SUBSTITUTE
M A N U A L WORK WITH A ROBOT

If we determine a certain cost for the robot and relative fix-

tures, and we fix a minimum internal rate of return below
which we judge the investment not convenient, we may pre-
pare triangular diagrams on a logarithmic scale which instantly
define the ranges of convenience of times and volumes.

If, for example, we decide that an assembly robot costs 4 0 K U C

and the relative fixtures cost 10 M I L and we assume a utili-
zation period of 5 years, w i t h a m i n i m u m internal rate of
return of 30%, and consider as variables the yearly production
rate and the cycle time in seconds, equation (11) becomes:

(12) 50.000.000 =
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where V = yearly production volume

Tc = manual unit cycle time in seconds
Ta = u n i t operator intervention time on the robot
in seconds.

In brackets we have the hourly labour costs adjusted for a

yearly 12% increase.

If we set T c - T a = T r = time saved, and we call K 5 the value

of the expression in the brackets, which varies w i t h the num-
ber of years of utilization, then equation (12) becomes:

The diagram of Fig.5 on a logarithmic scale, was obtained
from the expression.
In the diagram, the straight line CD cleanly separates the
range o f convenience of the robot f r o m that of manual op-
erations.
Recalling what was stated in the introductory paragraph, it
should be possible t o draw a line which limits the range of
convenience of robots f o r very high production volumes;
this line should mark the boundary beyond which it becomes
convenient t o use special purpose machines, which are ob-
viously convenient for very high volumes.

The diagram was obtained ignoring the costs o f maintenance
and electricity since, at a first approximaton, these were con-
sidered negligible. Should one wish t o take these factors
into account one would obtain the dotted line slightly trans-
lated upwards.
This line is indicated in Fig.5, out of scale, since we do not
possess practical data t o permit us t o position it correctly.
7. D E T E R M I N I N G T H E M A X I M U M ADMISSIBLE
I N V E S T M E N T PER U N I T OPERATOR R E D U C T I O N

The diagram of Fig.5 was compiled for a five year utilization Having fixed a m i n i m u m internal rate of return, say 30%,
period but, as shown in Fig.6, one can draw straight lines equation (11) may be used t o determine the maximum admis-
corresponding t o different numbers of years. sible investment per u n i t operator reduction.

Figures 5 and 6 show the t w o examples previously illustrated Let us assume:

and Fig.5 illustrates example A w h i c h , having an internal rate - hourly operator cost 5 Uc
of return greater than 30%, falls in the range of convenience - No. of effective working hours per year 1.650
of the r o b o t ; Fig.6 illustrates example B which obviously - average yearly increase in labour cost 12%
falls in the range of convenience of manual operation.

September 1977
The Industrial Robot
 116
Since Fo is the unknown variable and all other terms are
known, equation (11) becomes, for n = 7:

From the above equation it follows that the maximum admis-

sible investments, in relation to the number of years of utiliza-
tion, are:

for 3 years maximum investment 18.5 KU C

" 4 " '' ''
23.1 "
'' ''
" 5 " 27.0 "
'' ''
" 6 " 30.3 "
'' ''
" 7 " 33.3 "
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8. DETERMINATION OF INVESTMENTS AVAILABLE

FOR ROBOTS AS A FUNCTION OF OPERATOR
REDUCTION

If we consider labour costs to be unaffected by inflation and

therefore constant in time, equation (11) enables us to draw
an interesting diagram of practical use which indicates instant-
ly the maximum capital investment at a given internal rate
of return, which will result in a certain operator reduction on
APPENDIX
the basis of a real solution.
Part 1

In fact, assuming that labour costs are constant and that the Basic assumptions for the calculation of the discounted
solution adopted be fixed (constant reduction of operators), cash-flow rate of return or DCFRR
equation (11) becomes:

Let us re-examine equation (10)

(16)

where F c = constant = saving due to operator reduction. For
a given value of V and a given number of years the term
becomes a constant and therefore the value of
(10)
If, having determined the utilization period and the cash flows,
we set Vo = 0, the equation becomes a function of the un-
known variable V.

F 0 (investment) becomes a linear function of F c (number of Assuming a utilization period of 3 years, the explicit form of
operators reduced). the equation becomes:

The diagram shown in Fig.8 was obtained on the basis of these

considerations; it expresses the amount available for invest-
ment as a function of operator reduction (N) and the rate
of return desired.
Further, the following assumptions were made for the diagram
of Fig.8:
- investment utilization period = 5 years
- residual value of the machines and fixtures = 0
- two-shift utilization of the robot.
The value of V obtained is the 'Discounted Cash-flow Rate of
Return'. This represents the maximum rate of interest which
could be repayed if the investment were to be financed by
means of a loan.
Therefore, to determine the DCFRR it is necessary to resolve
the general equation:

(11)

The Industrial Robot September 1977

 117

The equation may be solved by successive iterations as shown

in Fig.2 which illustrates how to arrive, by trial and error, to
the determination of the curve which gives the P.V. = 0 for
V = 46%.

One may also compile tables which simplify the search for the
DCFRR.

We feel that at this point it may be interesting to illustrate an

algorithm which, though considerably complex, enables us to
solve the problem with sufficient accuracy and with math- The value X1 is closer to X than Xo and the process may
ematical rigour. be iterated.

This method was chosen as the basis for computer program In our case:
written for the P 101 Micro-computer. Since 1+i is always
different from zero, equation (11) may be written: f(X o ) = Fo X o n - F1 X o n - 1 - F 2 X o n - 2 --- -F n

f '(X) = n Fo X n - 1 - (n-1) F1 X n - 2 Fn-1

Replacing 1+i by X and reordering the terms, we have: f '(X o ) = n Fo X o n - 1 - (n-1) F1 X o n - 2 Fn-1

As a first approximation we can assume Xo equal to the ROI

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rate which is easily found:

This is an n-degree equation which in general may not be
solved for n > 4 and is very laborious for n=3 and n=4.
Since we are not interested in the exact value of X but it is
normally sufficient to obtain a value correct to the second
decimal place (since X-1+i this means having a correct integer
value for i%) we may use the Newton-Fourier method of
successive approximations. Part II

Basic assumptions for deriving the diagrams of Fig.4

Let us rewrite equation (11) in the form:

where C = capital invested

and F1 ÷ n = annual savings.

If we assume that all the F n be equal, that is,

F1 = F 2 = = Fn

then equation (11.1) becomes

With this method it is possible to obtain any degree of approx-
imation, though as pointed out above, this is not necessary in
our case.

If we set:
from which we derive:

the solution of the equation implies finding the value of X

for which the function cuts the abscissa, that is, for y=0.

Let us suppose that we know a value Xo of X which is In equation (11.3) the first term C/F is the pay-back period
close (it does not matter how close) to the value of X that (time taken to recuperate the capital invested) and the second
we are looking for. From Fig.7 we obtain the following term is the sum of the actualization coefficients.
relationships:

September 1977
The Industrial Robot
 118

In this case the ratio is a function of the rate V and vice Equation (11.3) then becomes:
versa; this function is represented in the diagrams of Fig.4

In practice the various F are not exactly equal but vary not
only due to variations in volume and operating conditions
but also as a result of the increase in labour costs.

We have however noted that, if in equation (11.3) we sub-

where average yearly savings.

stitute F with = the average yearly savings.

In practice, the value of V found is sufficiently accurate, The error in the value of V so found is obviously a function
as demonstrated by the practical examples illustrated. of the yearly differences, calculated at the present value with
respect to the average value F m .
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The Industrial Robot September 1977

 This article has been cited by:

1. Peter B Scott. 1984. Towards optimised robotic assembly. Omega 12:3, 283-290. [CrossRef]
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