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

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  • Saleh, J.H.
  • Marais, K.

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.

Suggested Citation

  • Saleh, J.H. & Marais, K., 2006. "Reliability: How much is it worth? Beyond its estimation or prediction, the (net) present value of reliability," Reliability Engineering and System Safety, Elsevier, vol. 91(6), pages 665-673.
    • Handle: RePEc:eee:reensy:v:91:y:2006:i:6:p:665-673
    DOI: 10.1016/j.ress.2005.05.007
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    Citations

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    Cited by:

    1. Marais, Karen B. & Saleh, Joseph H., 2009. "Beyond its cost, the value of maintenance: An analytical framework for capturing its net present value," Reliability Engineering and System Safety, Elsevier, vol. 94(2), pages 644-657.
    2. Jeanne Demgne & Sophie Mercier & William Lair & Jérôme Lonchampt, 2017. "Modelling and numerical assessment of a maintenance strategy with stock through piecewise deterministic Markov processes and quasi Monte Carlo methods," Journal of Risk and Reliability, , vol. 231(4), pages 429-445, August.
    3. Saleh, J.H. & Marais, K.B. & Bakolas, E. & Cowlagi, R.V., 2010. "Highlights from the literature on accident causation and system safety: Review of major ideas, recent contributions, and challenges," Reliability Engineering and System Safety, Elsevier, vol. 95(11), pages 1105-1116.
    4. Gómez Fernández, Juan F. & Márquez, Adolfo Crespo & López-Campos, Mónica A., 2016. "Customer-oriented risk assessment in network utilities," Reliability Engineering and System Safety, Elsevier, vol. 147(C), pages 72-83.
    5. Marais, Karen B., 2013. "Value maximizing maintenance policies under general repair," Reliability Engineering and System Safety, Elsevier, vol. 119(C), pages 76-87.
    6. Hoepfer, V.M. & Saleh, J.H. & Marais, K.B., 2009. "On the value of redundancy subject to common-cause failures: Toward the resolution of an on-going debate," Reliability Engineering and System Safety, Elsevier, vol. 94(12), pages 1904-1916.
    7. Berle, Øyvind & Asbjørnslett, Bjørn Egil & Rice, James B., 2011. "Formal Vulnerability Assessment of a maritime transportation system," Reliability Engineering and System Safety, Elsevier, vol. 96(6), pages 696-705.

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