How to Calculate RoI on your CNC
Calculating the cost of your CNC
Various methods of Calculating the Return on Investment
There are many ways to look at working out the Payback Period, or Return on Investment of your machine. This article has been a "how to" for a long time in the thought department and with more clients often asking how to factor the price of the machine into their cost strategies, we thought it was time to put some of this down on paper for all to benefit from.
This does not constitute legal or financial advice and you must seek your own advice before making decisions, however this is part of the contractor process for how we work out our finances.
Let’s start the process by looking at the Return on Investment Calculation in its simplest form, purchase price divided by the lifespan of the asset.
RoI = purchase $ / lifetime
Going one step further we can look at factoring in a resale value we will get when the machinery reaches the end of its useful commercial lifespan.
RoI = (Purchase-Sale) / Lifetime
The inland revenue department gives us their figures for expected lifetime of equipment, given in the IR265 which stipulates 15.5 years as the expected lifetime of the CNC machine (Page15, Engineering, milling Numerical Control). We will use this figure for now, however we will optimise this figure some more further on in the article.
RoI(per annum) = (Purchase-sale) / 15.5
The most common way to work out billables and costs is on an hourly basis. This means we need to work out how many hours we can reasonably expect to be using this machine per year. Statistics New Zealand defines a full time employee as working 30 hours or more per week, with an average of 250 working days per year. Extrapolating this, we get 6 hours per day or 1500 hours per year.
RoI(per hour) = (Purchase - Sale) / (1500 x 15.5)
Or
RoI(per hour) = (purchase - sale) / ( (6 x 250) x 15.5 )
Let’s insert same numbers here for the purchase price of the machine, and the estimated resale value;
RoI(per hour) = ($35,000 - $20,000) / ( 1500 x 15.5 )
= $15,000 / 23,250
= $00.645 per hour, to pay for the machine.
Example 1: Mass Parts Production, working out costs
Using a Zealandia Systems Proteus CNC should provide a minimum of 8 years reasonable commercial life before you would want to upgrade. Allowing for some errors and other unplanned life events, we want to have a RoI of 4 years of the machine.
In this example, we will use a Proteus P3 with an Automatic tool changer and some extra bells and whistles, bringing the purchase price to $28,000+GST NZD.
We expect in four years, the machine will be worth $18,000+GST NZD.
Next we must think and estimate a reasonable amount of hours of machine use per day. Discussions with clients typically end up looking like:
“By the time I finish setting up the machine, tooling and probing work coordinates I reckon I can get 6 hours per day of machining, 4 days per week, making 200 days per year.” ~MM
We must calculate the total hours the machine will run during the RoI period:
6h x 200 days x 4 years = 3,200 hours RoI.
Moving this number into our hourly rate RoI:
RoI = (28,000 - 18,000) / 3,200
31c per hour
$0.31+GST per hour must be included in your Cost of Goods Sold (CoGS) to cover off on the cost of replacing the machine after four years.
Example 2: Hourly RoI payback period
Certainly the most popular method of calculating your payback period is to budget a fixed cost per hour into your pricing structure.
Let’s use the same machine as before, a P3 with an Automatic Tool Changer and some accessories bringing the package purchase price to $28,000+GST NZD. Four years the estimated resale value will be $18,000+GST NZD. Giving us a depreciative cost of $10,000NZD.
By including $5 per hour in your hourly costs, for the sole purpose of machinery replacement you can amass quite a bit of savings very rapidly.
6h x 200 days = 1,200 billable hours per year
Flipping this on it’s head,
$10,000 / $5 = 2,000 hours,
or 1.6 years until the machine is paid for and can be upgraded
We are all running businesses and trying to manage costs. Before buying any piece of equipment it is good to think about the long term value, versus the initial dollar cost. By doing some calculations on the ROI it will give a much truer indication of the value (or not) to your business.
Please get in touch with any questions or to discuss how a CNC machine from Zealandia Systems can add to your business.