To determine whether or not to invest in a new piece of equipment, begin by considering the following questions – and do the research to answer them honestly and thoroughly.
- How often will you use it?
- How many man-hours will it save?
- What does it cost to operate and maintain? Will maintenance require extended down time?
- How durable is it, and what are the projected annual repair costs (during and after the warranty period)?
- How long will it take to learn to operate?
- Does the distributor provide free training? If not, what will that cost?
- What comes with the equipment? (To assess its purchase price accurately, you need to know whether the deal includes everything needed to use it, or whether other equipment, such as accessories, must be bought.)
- What else would you need to use the equipment? Would you need different power or water service?
- What are your payment options? How you pay for it could affect the overall price.
- What are the shipping and setup costs?
Determining ROI for an Equipment Investment
Once you’ve gotten a full picture and reviewed the costs for the new equipment, it’s time to calculate whether the return on investment (ROI) will be high enough to justify the purchase. A basic formula is Savings / Investment Costs = ROI. You add together whatever savings you expect in a given time period from the investment and divide it by the cost of the investment.
For example, John Brown Jewelry Inc., a five-person workshop, decides it’s time to join the laser age. It spends $25,000 for the laser welder, another $1,000 for worker training, and another $2,000 on miscellaneous costs. Total cost: $28,000.
John Brown Jewelry then estimates the following savings:
Because it will use the laser welder extensively on repairs and fabrications, the employee time required to do the jobs will fall by 30 percent. Two employees work full time on repairs and one focuses on fabrication, each earning $14 an hour. To arrive at the “fully loaded” value of their compensation, which accounts for benefits and other costs, we multiply the wages by 1.5. Over the course of a year (with allowances for sick time, vacations, and other down time), these three employees are paid $122,220 ($14 x 3 employees x 40 hours/week x 48.5 weeks worked/year x 1.5 [percentage to account for benefits and other costs]).
By investing in the laser welder, you cut down on the time required to perform tasks by 30 percent, which saves you $36,666 ($122,220 x 0.3) a year.
You could use that savings to reduce staffing levels while maintaining current output; the laser would then be paid for in less than a year. You could also maintain your current staff and increase the number of repaired or fabricated pieces you do to gain market share—in which case, rather than dividing the laser investment costs into the savings, you would divide it by the amount of additional profit your increased productivity enables.
When applying this formula to your own business, it’s important to make sure you’re looking at the true cost of the equipment, which includes not just the initial investment but also training, installation, maintenance, operational expenses, and the cost of any consumables. Once you’ve done your homework and have an accurate sense of what investing in a piece of equipment will cost you, you’ll know whether or not you’re in the position to take the leap.