Int. J.

Production Economics 66 (2000) 45}52

Justi"cation of manufacturing technologies using fuzzy

bene"t/cost ratio analysis
Cengiz Kahraman *, Ethem Tolga
, Ziya Ulukan

Department of Industrial Engineering, Istanbul Technical University 80680 Mac7 ka-Istanbul, Turkey

Faculty of Engineering and Technology, Galatasaray University, 80840 Ortakoy-Istanbul, Turkey
Received 23 June 1998; accepted 15 July 1999

Abstract
The application of discounted cash #ow techniques for justifying manufacturing technologies is studied in many
papers. State-price net present value and stochastic net present value are two examples of these applications. These
applications are based on the data under certainty or risk. When we have vague data such as interest rate and cash #ow to
apply discounted cash #ow techniques, the fuzzy set theory can be used to handle this vagueness. The fuzzy set theory has
the capability of representing vague data and allows mathematical operators and programming to apply to the fuzzy
domain. The theory is primarily concerned with quantifying the vagueness in human thoughts and perceptions. In this
paper, assuming that we have vague data, the fuzzy bene"t}cost (B/C) ratio method is used to justify manufacturing
technologies. After calculating the B/C ratio based on fuzzy equivalent uniform annual value, we compare two assembly
manufacturing systems having di!erent life cycles.  2000 Elsevier Science B.V. All rights reserved.
Keywords: Economic justi"cation; Fuzzy set theory; B/C ratio

1. Introduction
Many authors give the economic justi"cation
approaches of manufacturing systems: Meredith
and Suresh [1], Lavelle and Liggett [2], Soni et al.
[3], Kolli et al. [4], Boaden and Dale [5], Khouja
and O!odile [6], Proctor and Canada [7], etc.
Kolli et al. [4] classify the approaches into two
main groups: single criterion and multi-criteria
approaches. These two main groups are then
divided into two subgroups: deterministic and nondeterministic approaches. Simple criterion and
* Corresponding author.
E-mail addresses: cengiz2@ayasofya.isl.itu.edu.tr (C. Kahraman), tolga@gsunv.gsu.edu.tr (E. Tolga)

deterministic approaches contain discounted cash

#ow techniques (NPV, JRR, PP, etc.). Single criterion and nondeterministic approaches contain
sensitivity analysis, decision tree, Monte Carlo
simulation, etc. Multi-criteria deterministic approaches contain scoring, AHP, goal programming, DSS, dynamic programming, and ranking
methods (ELECTRE, PROMETHEE, 2). Multicriteria nondeterministic approaches contain fuzzy
linguistics, expert system, utility models, and game
theoretic models. Wilhelm and Parsaei [8] use
a fuzzy linguistic approach to justify a computerintegrated manufacturing system. Kahraman
et al. [9] use a fuzzy approach based on the
fuzzy present value analysis for the manufacturing
#exibility.

0925-5273/00/$ - see front matter  2000 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 5 - 5 2 7 3 ( 9 9 ) 0 0 1 0 3 - 6

46

C. Kahraman et al. / Int. J. Production Economics 66 (2000) 45}52

To deal with vagueness of human thought,

Zadeh [10], "rst introduced the fuzzy set theory,
which was oriented to the rationality of uncertainty
due to imprecision or vagueness. A major contribution of fuzzy set theory is its capability of representing vague data. The theory also allows
mathematical operators and programming to apply to the fuzzy domain. A fuzzy set is a class of
objects with a continuum of grades of membership.
Such a set is characterized by a membership (characteristic) function, which assigns to each object
a grade of membership ranging between zero and
one.
Quite often in "nance future cash amounts and
interest rates are estimated. One usually employs
educated guesses, based on expected values or
other statistical techniques, to obtain future cash
#ows and interest rates. A statement like `approximately between 10% and 15%a must be translated
into an exact amount such as `12.5%a. Appropriate fuzzy numbers can be used to capture the
vagueness of `approximately between 10% and
15%a [11].
A tilde &&' will be placed above a symbol if the
symbol represents a fuzzy set. Therefore, PI , r , n are
all fuzzy sets. The membership functions for these
fuzzy sets will be denoted by k(x"PI ), k(x"r ), and
k(x"n ) respectively. A triangular fuzzy number
(TFN), M
I is shown in Fig. 1. A TFN is denoted
simply as (m /m , m /m ) or (m , m , m ). The
   



parameters m , m and m respectively denote the
 

smallest possible value, the most promising value,
and the largest possible value that describe a fuzzy
event.

Each TFN has linear representations on its left

and right side such that its membership function
can be de"ned as

x(m ,

(x!m )/(m !m ), m )x)m ,




 (1)
k(x"M
I )"
(m !x)/(m !m ), m )x)m ,





0,
x'm .

A fuzzy number can always be given by its corresponding left and right representation of each
degree of membership:
0,

M
I "(MW, MW)
"(m #(m !m )y, m #(m !m )y)






y3[0, 1],

(2)

where l(y) and r(y) denotes the left side representation and the right side representation of a fuzzy
number, respectively. Zimmermann [12] gives the
algebraic operations with triangular fuzzy numbers. Many ranking methods for fuzzy numbers
have been developed in the literature. They do not
necessarily give the same rank. Two ranking
methods are given in the appendix.
Buckley [11], Ward [13], Chiu and Park [14],
Wang and Liang [15], Kahraman and Tolga [16]
are among the authors who deal with the fuzzy
present worth analysis, the fuzzy bene"t/cost ratio
analysis, the fuzzy future value analysis, the fuzzy
payback period analysis, and the fuzzy capitalized
value analysis.

2. Fuzzy bene5t/cost ratio analysis

The bene"t}cost ratio can be de"ned as the ratio
of the equivalent value of bene"ts to the equivalent
value of costs. The equivalent values can be present
values, annual values, or future values. The bene"t}cost ratio (BCR) is formulated as
BCR"B/C,

Fig. 1. A triangular fuzzy number, M

I .

(3)

where B represents the equivalent value of the bene"ts associated with the project and C represents
the project's net cost [17]. A B/C ratio greater than
or equal to 1.0 indicates that the project evaluated
is economically advantageous.

C. Kahraman et al. / Int. J. Production Economics 66 (2000) 45}52

In B/C analyses, costs are not preceded by

a minus sign. The objective to be maximized behind
the B/C ratio is to select the alternative with the
largest net present value or with the largest net
equivalent uniform annual value, because B/C ratios are obtained from the equations necessary to
conduct an analysis on the incremental bene"ts and
costs. Suppose that there are two mutually exclusive alternatives. In this case, for the incremental
BCR analysis ignoring disbene"ts the following
ratios must be used:
*B
*PVB
U "
U
*C
*PVC
U
U

(4)

or
*B
*EUAB
U "
U ,
*C
*EUAC
U
U

(5)

where *B
is the incremental bene"t of AlternaU
tive 2 relative to Alternative 1, *C
is the inU
cremental cost of Alternative 2 relative to
Alternative 1, *PVB
is the incremental present
U
value of bene"ts of Alternative 2 relative to Alternative 1, *PVC is the incremental present value
U
of costs of Alternative 2 relative to Alternative1,
*EUAB
is the incremental equivalent uniform
U
annual bene"ts of Alternative 2 relative to Alternative 1 and *EUAC is the incremental equivalent
U
uniform annual costs of Alternative 2 relative to
Alternative 2.
Thus, the concept of B/C ratio includes the advantages of both NPV and NEUAV analyses.
Because it does not require to use a common multiple of the alternative lives (then B/C ratio based
on equivalent uniform annual cash #ow is used)
and it is a more understandable technique
relative to rate of return analysis for many
"nancial managers, B/C analysis can be
preferred to the other techniques such as present
value analysis, future value analysis, rate of return
analysis.
In the case of fuzziness, the steps of the fuzzy B/C
analysis are given in the following:
Step 1: Calculate the overall fuzzy measure of
bene"t-to-cost ratio and eliminate the alternatives

47

that have
BI /CI "

L BW(1#rW)\R L BW(1#rJW)\R
R R
, R R
O1 ,
L CW(1#rW)\R L CW(1#rW)\R
R R
R R
(6)

where r is the fuzzy interest rate and r(y) and l(y) are
the right and left side representations of the fuzzy
interest rates and 1 is (1, 1, 1), and n is the crisp life
cycle.
Step 2: Assign the alternative that has the lowest
initial investment cost as the defender and the nextlowest acceptable alternative as the challenger.
Step 3: Determine the incremental bene"ts and
the incremental costs between the challenger and
the defender.
Step 4: Calculate the *BI /*CI ratio, assuming
that the largest possible value for the cash in year
t of the alternative with the lowest initial investment cost is less than the least possible value for the
cash in year t of the alternative with the next-lowest
initial investment cost.
The fuzzy incremental BCR is

L (BW!BW) (1#rW)\R
*BI
R
" R R
,
L (CW!CW) (1#rW)\R
*CI
R R
R
L (BW!BW) (1#rW)\R
R
.
(7)
# R R
L (CW!CW) (1#rPW)\R
R R
R
If *BI /*CI is equal or greater than (1, 1, 1), Alternative 2 is preferred.
In the case of a regular annuity, the fuzzy BI /CI
ratio of a single investment alternative is

BI /CI "

AWc(n, rW) AWc(n, rW)

,
,
CW
CW

(8)

where CI is the "rst cost and AI is the net annual

bene"t, and c(n, r)"((1#r)L!1)/(1#r)Lr).
The *BI /*CI ratio in the case of a regular annuity
is

*BI /*CI "

(AW!AW)c(n, rW) (AW!AW)c(n, rW)




, 
.
CW!CW
CW!CW




(9)

48

C. Kahraman et al. / Int. J. Production Economics 66 (2000) 45}52

Step 5: Repeat steps 3 and 4 until only one

alternative is left, thus the optimal alternative is
obtained.
The cash-#ow set +A "A: t"1, 2,2, n,, conR
sisting of n cash #ows, each of the same amount A,
at times 1, 2,2, n, with no cash #ow at time zero, is
called the equal-payment series. An older name for it
is the uniform series, and it has been called an
annuity, since one of the meanings of `annuitya is
a set of "xed payments for a speci"ed number of
years. To "nd the fuzzy present value of a regular
annuity +AI "AI : t"n,, we will use Eq. (10). The
R
membership function k(x"PI ) for PI is determined by
L
L
f (y"PI )"f (y"AI ) c (n, f (y"r ))
(10)
LG
L
G
\G
for i"1, 2 and c(n, r)"(1!(1#r)\L)/r. Both
AI and r are positive fuzzy numbers. f (.) and f (.)


shows the left and right representations of the fuzzy
numbers, respectively.
In the case of a regular annuity, the fuzzy BI /CI
ratio may be calculated as in the following:
The fuzzy BI /CI ratio of a single investment alternative is

BI /CI "

AWc(n, rW) AWc(n, rW)

,
,
FCW
FCW

(11)

where FC is the "rst cost and AI is the net annual

bene"t.
The *BI /*CI ratio in the case of a regular annuity is
*BI /*CI "

(AW!AW) c (n, rW) (AW!AW) c (n, rW)




, 
.
FCW!FCW
FCW!FCW




(12)

Up to this point, we assumed that the alternatives had equal lives. When the alternatives have
life cycles di!erent from the analysis period, a common multiple of the alternative lives (CMALs) is
calculated for the analysis period. Many times,
a CMALs for the analysis period hardly seems
realistic (CMALs (7, 13)"91 years). Instead of an
analysis based on present value method, it is appropriate to compare the annual cash #ows computed
for alternatives based on their own service lives. In
the case of unequal lives, the following fuzzy BI /CI
and *BI /*CI ratios will be used:

BI /CI "

PVBWb(n, rW) PVBWb(n, rW)

,
,
PVCWb(n, rW) PVCWb(n, rW)

*BI /*CI "

(13)




PVBWb(n, rW)!PVBWb(n, rW)



,
PVCWb(n, rW)!PVCWb(n, rW)


PVBWb(n, rW)!PVBWb(n, rJW)


,
PVCWb(n, rW)!PVCWb(n, rW)


(14)

where PVB is the present value of bene"ts, PVC the

present value of costs and
b(n, r)"((1#n)Li/((1#r)L!1)).

3. Application
In this hypothetical application, two assembly
manufacturing systems will be considered, namely
a transfer machine with robot workhead (RW) and
a robot assembly cell (RAC). Figs. 2 and 3 show
these two manufacturing systems.

Fig. 2. RW * transfer machine with robot workhead.

C. Kahraman et al. / Int. J. Production Economics 66 (2000) 45}52

49

time for the robot to assemble a part, the part

quality, the average downtime at a station due to
a defective part, the number of production hours
per shift, the plant e$ciency, the cost of a robot, the
cost of a part feeder, the cost of a robot gripper, the
annual cost of a supervisor have been accepted as
triangular fuzzy numbers. For example, the average
time of the RAC to complete an assembly i, is used
while calculating the number of shifts and the annual labour cost. It is formulated by
AT "NP  [AP  PQ  AD ],
G
G
Fig. 3. RAC * robot assembly cell.

The robot assembly cell uses one robot. This

sophisticated robot has six degrees of freedom.
Tables 1 and 2 give the data for RAC and RW,
respectively. The tax rate (TR) is 40% and is not
fuzzy. The crisp life cycles are 7 years for RAC and
5 years for RW. The fuzzy discount rate is (15%,
20%, 25%) per year.
To fuzzify the data for RAC and RW, it is assumed that the model parameters are triangular
fuzzy numbers. The parameters like the average

(15)

where NP is the fuzzy number of parts in each

G
assembly i, AP the fuzzy average time (in seconds)
for the robot to assemble one part, PQ the fuzzy
part quality (the fraction of defective parts to good
parts), and AD the fuzzy average downtime at a
station due to a defective part.
The other details are not given in the paper but
the calculated results are.
In year 6, a new robot assembly cell is required.
So, ATCF (0. While calculating after-tax cash

#ow, the following formula has been used:
ATCF "(REV !LAB )(1!TR)
R
R
R
 DEP ;TR!II .
R
R

(16)

Table 1
The fuzzy data for RAC
Year, t

Revenue ($)
REV (;10)
R

Labour cost ($)

LAB (;10)
R

Investment ($)
II (;10)
R

Depreciation ($)
DEP (;10)
R

After-tax cash #ow ($)

ATCF (;10)
R

1
2
3
4
5
6
7

(180,
(200,
(220,
(320,
(350,
(390,
(425,

(60, 70, 80)

(65, 75, 85)
(70, 80, 90)
(105, 115, 125)
(115, 120, 125)
(130, 135, 140)
(140, 150, 160)

(270, 280, 290)

(7, 8, 9)
(7, 8, 9)
(25, 30, 40)
(10, 15, 20)
(300, 310, 320)
(20, 25, 30)

(50,
(45,
(35,
(35,
(30,
(80,
(70,

(!210, !178, !146)

(78, 93, 108)
(83, 98, 113)
(91, 115, 134)
(127, 143, 161)
(!138, !117, !96)
(157, 173, 189)

200,
210,
230,
330,
360,
400,
430,

220)
220)
240)
340)
370)
410)
435)

60,
50,
40,
40,
35,
85,
75,

70)
55)
45)
45)
40)
90)
80)

Table 2
The calculated ACFI for RW
R
Year, t

ATCF (;10 $)
R

(!190, !128,!94)

(109, 130, 151)

(116, 137, 158)

(127, 161, 187)

(178, 200, 225)

50

C. Kahraman et al. / Int. J. Production Economics 66 (2000) 45}52

Now, using Eq. (13), we will calculate BI /CI ratios

for each alternative. First, let us calculate PVB
,
0!
PVB
, PVC
, and PVC
.
05
0!
05
15y#83
15y#78
#
PVB
"
0!
(1.25!0.05y) (1.25!0.05y)

24y#91
16y#127
#
#
(1.25!0.05y) (1.25!0.05y)



16y#157
108!15y
#
,
(1.25!0.05y)
(1.15#0.05y)
113!15y
134!19y
#
#
(1.15#0.05y) (1.15#0.05y)
161!18y
189!16y
#
#
(1.15#0.05y) (1.15#0.05y)






32y!210
!21y!117
#
,
1.15#0.05y (1.15#0.05y)

PVC
"
0!

!21y!96
!32y!146
#
1.25!0.05y)
1.25!0.05y

34y#127
22y#178
#
#
(1.25!0.05y) (1.25!0.05y)






"

(1.15#0.05y)(0.15#0.05y)
,
(1.15#0.05y)!1

Z"

(1.25!0.05y)(0.25!0.05y)
,
(1.25!0.05y)!1

S"

(1.25!0.05y)(0.25!0.05y)
,
(1.25!0.05y)!1

(204.230#78.275y)
BI /CI
"
,
0!
(233.191!38.642y)S

(239.498#88.08y)<
BI /CI
"
,
05
(165.217!58.55y)Z

(468.848!109.27y)Z
,
(81.739#24.928y)<

PVBJW !PVBPW Z
0!
05
,
"PVCPW " S!"PVCJW " <
0!
05
PVBPW S!PVBJW <
0!
05
,
"PVCJW " !"PVCPW " Z
0!
05
"(0.665, 1.452, 3.283),

*BI /*CI "

151!21y
158!21y
#
(1.15#0.05y) (1.15#0.05y)

187!26y
225!25y
#
#
(1.15#0.05y) 1.15#0.05y)






(383.675!101.17y)S
,
(153.817#40.732y)

21y#109
21y#116
#
(1.25!0.05y) (1.25!0.05y)

PVC
"
05

PVB
"(88.08y#239.498, 436.848!109.27y),
05
"PVC
""(40.732y#153.817, 233.191!38.642y)
0!
"PVC
""(24.928y#81.739, 165.217!58.55y),
05
(1.15#0.05y)(0.15#0.05y)
<"
,
(1.15#0.05y)!1



62y!190 !34y!94
PVC
"
,
.
05
1.15#0.05y 1.15#0.05y
The approximate forms of PVB
, PVB
,
05
0!
PVC
, and PVC
are found as in the following,
05
0!
taking y"0, 1 and 0, respectively:
PVB
"$(204.230, 282.505, 383.675),
0!
PVB
"$(239.498, 327.578, 436.848),
05
"PVC
""$(153.817, 194.549, 233.191),
0!
"PVC
""$(81.739, 106.667, 165.217),
05
PVB
"(78.275y#204.230, 383.675!101.17y),
0!

BI /CI
0!
BI /CI
"(1.163, 3.071, 6.662),
05
*BI "(!113.352, !31.162, 49.926),
*CI "(!24.464, 18.305, 49.384),
*BI /*CI "(!2.295, !1.702, 2.041),
*BI /*CI "(a, b, c).

Kaufmann and Gupta's ranking method:

(a#2b#c)/4"!0.915,
1 "(1, 1, 1),
(a#2b#c)/4"1,

C. Kahraman et al. / Int. J. Production Economics 66 (2000) 45}52

*BI /*CI (1 , then the preferred alternative is RW.

Chiu and Park's weighting method (w"0.3):
((a#b#c)/3)#wb"!1.16,
1 "(1, 1, 1),
((a#b#c)/3)#wb"1.3,
*BI /*CI (1 , then the preferred alternative is RW.
4. Conclusions
This paper develops a fuzzy B/C ratio analysis to
justify a manufacturing technology. The analysis
presents an alternative to having to use exact
amounts for the parameters used in the justi"cation
process. Fuzzy B/C ratio analysis is equivalent to
fuzzy present value analysis. However, fuzzy B/C
ratio based on equivalent uniform annual bene"ts
and costs has the advantage of comparing alternatives having life cycles di!erent from the analysis
period, without calculating a common multiple of
the alternative lives. The details of fuzzy B/C ratio
are presented in this paper.
The developed fuzzy B/C ratio analysis only
takes into account of a quantitative criterion that is
the pro"tability, while justifying a manufacturing
technology. To justify a manufacturing technology,
generally, a number of quantitative and qualitative
criteria have to be considered. In this case, deterministic or nondeterministic multiple criteria
methods such as scoring or fuzzy linguistics should
be taken into account.

Appendix
There are a number of methods that are devised
to rank mutually exclusive projects such as Chang's
method [18], Jain's method [19], Dubois and
Prade's method [20], Yager's method [21], Baas
and Kwakernaak's method [22]. However, certain
shortcomings of some of the methods have been
reported in [23}25]. Because the ranking methods
might give di!erent ranking results, they must be
used together to obtain the true rank. Chiu and
Park [14] compare some ranking methods by using
a numerical example and determine which methods

51

give the same or very close results to one another.

In Chiu and Park's [14] paper, several dominance
methods are selected and discussed. Most methods
are tedious in graphic manipulation requiring complex mathematical calculation. Chiu and Park's
weighting method and Kaufmann and Gupta's
[26] three criteria method are the methods giving
the same rank for the considered alternatives and
these methods are easy to calculate and require no
graphical representation. Therefore, these two
methods will be explained in the following and will
be used in the application section.
Chiu and Park's [14] weighted method for
ranking TFNs with parameters (a, b, c) is formulated as
((a#b#c)/3)#wb,
where w is a value determined by the nature and the
magnitude of the most promising value.
Kaufmann and Gupta [26] suggest three criteria
for ranking TFNs with parameters (a, b, c). The
dominance sequence is determined according to
priority of:
1. comparing the ordinary number (a#2b#c)/4,
2. comparing the mode (the corresponding most
promising value), b, of each TFN,
3. comparing the range, c}a, of each TFN.
The preference of projects is determined by the
amount of their ordinary numbers. The project
with the larger ordinary number is preferred. If the
ordinary numbers are equal, the project with the
larger corresponding most promising value is preferred. If projects have the same ordinary number
and most promising value, the project with the
larger range is preferred.
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