October 24, 2023
Whether you're a newbie to packaging automation or a seasoned pro in equipment acquisition, calculating the return on investment (ROI) is pivotal in your decision-making process. You'll want to determine how quickly you can recover your initial investment and compare the ROI of different packaging equipment options.
So, how do you go about crunching these critical numbers? Our experts simplify the process for you below.
Before delving into the intricacies of calculating the ROI for a potential packaging machine acquisition, it's crucial to grasp why this process holds immense importance.
Simply put, it all boils down to one fundamental aspect—ensuring that any investment in capital equipment proves profitable for your company. This decision carries significant weight and consequences.
While this may seem common sense, it's surprising how many companies skip the vital step of crunching the numbers before acquiring food packaging equipment. Although it requires time and effort, the results derived from ROI calculations can be invaluable for informed decision-making.
But here's the kicker—ROI considerations aren't a one-time affair. Throughout the entire lifespan of the packing machine, you must remain vigilant to avoid mistakes that could eat into your profits and efficiency gains.
When determining the ROI for the shiny new packaging device you've been eyeing, you'll need two crucial figures:
ROI formulas provide a structured approach to comparing these two numbers, shedding light on the financial feasibility of investing in your desired automated packaging equipment.
So, without further ado, let's dive into a step-by-step guide on calculating the return on investment for your upcoming equipment purchase.
When you're in the process of acquiring an automated packaging machine, it's essential to consider more than just the machine's price tag. For precise ROI calculations, your equipment cost should encompass the total cost of ownership, which includes factors such as:
These expenses can vary significantly and may be challenging to estimate accurately. We recommend contacting packaging equipment manufacturers to obtain precise cost information tailored to your application and business requirements.
Now that you have determined the total cost of ownership for the new equipment you are contemplating, it's time to proceed to the next step.
A significant aspect of ROI calculations is the total monetary gain or loss expected upon purchasing new equipment. When making these assessments, consider three main categories:
Begin by determining your packaging staff's current fully loaded hourly wage, factoring in pay rates and benefits such as insurance, paid time off, and other perks. Before getting the return on invested capital, calculate the total annual labor cost, encompassing all employees in your packaging line.
Next, compute the exact figure, but this time, account for how labor costs would change by implementing a new automated packaging system. Although the hourly wages may remain the same, the number of employees needed may significantly decrease.
Often, this means a substantial reduction in the required workforce, sometimes by half or more. Subtract B from A to calculate your estimated labor gain/loss.
Start by calculating the number of packages produced annually and the return on investment profit per package in monetary terms. Multiply these figures to determine your annual gross profit from packaging activities.
Then, calculate the same metric, considering how gross profit would change with packaging automation. Use specifications provided by manufacturers, such as cycles per minute or bags per minute, to estimate the number of packages you could produce after automation.
Multiply this by the hours spent packaging daily, days per week, and operational weeks annually to arrive at an annual estimate. Multiply your estimated packages produced with the new equipment by the return on investment per package.
Subtract the figure in A from figure B to identify your estimated gross profit loss or gain.
Current packaging-related expenses may encompass items like scrap and rework costs and the value of plant space currently occupied by your packaging line.
Potential costs with a new packaging system could involve engineering or R&D expenses for a custom packaging system or commissions payable to third-party integrators. Subtract B from A to calculate your net gain/loss. Now that you've figured out these critical numbers, you can proceed with your ROI assessment.
Now, let's simplify the process further. Add up the net gain/loss from all three categories in step 2 to determine your total net gain/loss from the new equipment.
Use the following straightforward formulas to calculate your ROI:
ROI, often expressed in percentage, represents the ratio of the benefit or loss made in a fiscal year relative to the investment. The formula for equipment purchases is:
ROI = (Net benefit or loss from new equipment / Total new machine cost) x 100
For instance, if you plan to purchase custom packaging equipment for $400,000 and anticipate a net annual benefit of $250,000 (which includes labor savings and increased throughput profit), your ROI will be:
ROI = ($250,000 / $400,000) x 100 = 62.5%
The payback period calculates the time required to recoup the initial investment. In packaging device terms, the formula is:
PBP = Total new machine cost / Overall periodic benefits from new machine
Using the same example of $400,000 equipment cost and $250,000 net annual benefit:
PBP = $400,000 / $250,000 = 1.6 years
These formulas provide a clear picture of the financial viability and time frame for recovering your investment in new food packaging equipment.
ROI helps answer critical questions like the following:
A positive ROI signifies a favorable outcome, making it a good choice when comparing equipment options. A negative ROI suggests a net loss during that period, urging caution or reconsideration. Remember that some investments show a loss in the first year but improve over time.
Remember that ROI calculations are just part of the picture. They provide a starting point. A positive ROI leads to a more in-depth evaluation to determine if your automated packaging equipment is the right choice now.
Accurate data is vital for precise ROI calculations. Fuzzy numbers yield uncertain results. Also, consider that ROI doesn't address a capital equipment investment's inherent risk or uncertainty. ROI offers valuable insights, but it's just one factor in your decision-making process.
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