Reliability: How much is it worth? Beyond its estimation or prediction, the (net) present value of reliability

J.H. Saleh and K. Marais

Reliability Engineering and System Safety, 2006, vol. 91, issue 6, 665-673

Abstract: In this article, we link an engineering concept, reliability, to a financial and managerial concept, net present value, by exploring the impact of a system's reliability on its revenue generation capability. The framework here developed for non-repairable systems quantitatively captures the value of reliability from a financial standpoint. We show that traditional present value calculations of engineering systems do not account for system reliability, thus over-estimate a system's worth and can therefore lead to flawed investment decisions. It is therefore important to involve reliability engineers upfront before investment decisions are made in technical systems. In addition, the analyses here developed help designers identify the optimal level of reliability that maximizes a system's net present value—the financial value reliability provides to the system minus the cost to achieve this level of reliability. Although we recognize that there are numerous considerations driving the specification of an engineering system's reliability, we contend that the financial analysis of reliability here developed should be made available to decision-makers to support in part, or at least be factored into, the system reliability specification.

Keywords: Optimal reliability; Net present value (NPV); Revenue generation; Value of reliability (search for similar items in EconPapers)
Date: 2006
References: View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reensy:v:91:y:2006:i:6:p:665-673

DOI: 10.1016/j.ress.2005.05.007

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