The Ultimate Guide to Equipment ROI Calculation

Closeup of a packaging machine filling an aluminum sachet

In fast-paced and competitive industries, businesses are always searching for ways to improve efficiency and reduce costs. One area that is closely examined is the return on investment (ROI) for equipment purchases. However, it’s important to note that equipment ROI calculation is more than just number crunching. It involves making well-informed decisions that can have a significant impact on a company’s financial success and overall operational efficiency.

How to Calculate Equipment ROI

When it comes to equipment ROI calculation, it’s important to consider both the costs and the financial benefits associated with it.

This is the formula to calculate ROI on equipment:

ROI = Net Profit from Equipment/Cost of Equipment x 100

Here’s a step-by-step guide that will walk you through the process:

Step 1: Determine the Total Cost of Equipment

When you purchase equipment, you pay more than what’s on the price tag. This includes the purchase price, installation or setup costs, and any other initial expenses required to make your equipment fully operational.

Step 2: Calculate Net Profit from Equipment

The next step is to calculate the net profit from equipment. You need to identify the revenue it generates. Next, deduct any the cost of equipment and any operating expenses associated with it. This can include maintenance costs, extra labor expenses, and utility bills.

The net profit can be determined using this formula:

  • Additional Revenue – Total Cost of Ownership

Step 3: Apply the ROI Formula

Now, you can actually use the formula for manufacturing ROI calculation. This is an example of how to do equipment ROI calculation:

Suppose you purchase a new machine for $50,000 and spend $5,000 on installation. This reduces labor costs and increases production efficiency, leading to an additional $20,000 in revenue annually, and it only costs $2,000 a year to maintain.

  • Net Profit from Equipment: $20,000 (revenue) – $2,000 (maintenance) = $18,000
  • Cost of Equipment: $50,000 (purchase) + $5,000 (installation) = $55,000
  • ROI: 18,00055,000×100=32.73%55,00018,000 ×100 = 32.73%

This means the equipment yields a 32.73% return on your investment.

Step 4: Record Data

Every successful business keeps track of these types of metrics because ROI might change over time. Operational costs and maintenance costs will fluctuate over the years, affecting your ROI. By recording your values, you can do an ROI analysis over the years to see how a purchase has impacted your business over time.

Factors to Consider for Equipment ROI Calculation

Equipment depreciation must be considered for equipment ROI calculation as it affects the value over time. Other non-financial benefits, such as brand reputation from better packaging and employee satisfaction from a reduced workload, may be challenging to quantify but are critical for sustained success. The timeframe for equipment ROI calculation should align with the expected lifespan of the equipment.

Find the Best Packaging Solution for Your Brand

T.H.E.M. is an industry leader for packaging solutions in North America. As a pioneer in introducing revolutionary Sanko technology, we have worked with countless brands to establish their own packaging solutions. Our years of expertise and experience allow us to help companies with best practices and optimized workflows to maximize their ROI.

Trust T.H.E.M. to handle your co-packing needs.