Return On Investment of New Manufacturing Equipment

Purchasing new manufacturing equipment can be a huge capital expense and a tough decision, but there are ways to plan and ensure it’s a good financial decision.  If it is a worthwhile purchase, it will have a high Return on Investment (ROI) rate. ROI is a useful performance metric for evaluating overall savings or revenue increases due to a specific piece of equipment after all other costs have been accounted for.

Calculating ROI for Manufacturing Equipment: Boosting Efficiency and Profits

So, how do you figure out the Return on Investment for an equipment purchase?

Before determining the ROI of manufacturing equipment, you must calculate the Total Cost of Ownership (TCO).  These costs come with operating and maintaining equipment and should be done with both the old and potential new equipment.  Factors to consider include maintenance and downtime, replacement parts, and how many employees are needed to operate the equipment.

Now that you have this number of the TCO, what can you save, and what will increased production do to revenue? You can calculate the ROI of the manufacturing equipment.  

Equipment ROI Calculator

The ROI formula is  Net Profit / Total Investment * 100 = ROI.  

Example:

• Net profit of $50,000 and spend $200,000 on new equipment
• The ROI is 50,000 / 200,000 * 100 = 25% ROI.  

Once you have this figured out, you can determine the ideal payback period, which helps determine what is affordable.  This is just the cost of the purchased equipment divided by the profit it creates.

In the example above, this would be 200,000 / 50,000 = 4 years before the equipment has paid for itself and the company breaks even on the investment. All the years after that, the company would profit from the equipment purchase.  

Factors Beyond Cost in Purchasing Decisions

Of course, there are factors other than just pure financial costs and calculations that go into a purchasing decision.  

• Is the old equipment not safe anymore and needs to be replaced no matter what?
• Has your manufacturing process changed, and the old equipment doesn’t operate as you need it?  
• Is it undersized for your increased production needs?
• Is the technology it uses so outdated that it’s causing issues?

If you’re interested in new manufacturing equipment, contact a Carrier Vibrating Equipment representative and we can help you figure out the ROI and costs of replacing your equipment.