Effect of the Learning Curve on the Capital Budgeting Process

Repetition of human activity tends to cause a certain amount of learning to occur. This learning curve (LC) effect has been widely discussed in the business literature and appears to be applicable in many diverse settings (for example, see Belkaoui (1983), Imhoff (1978), and Yelle (1979)). Many years ago companies in the aircraft industry discovered that certain repetitive processes could be described mathematically and that such models could be used to estimate the amount of time necessary to complete a task as it is repeated. It was determined that the more complex the activity, the greater the potential to achieve decreases in the time necessary to complete each succeeding unit of production.