For businesses looking to justify a capital expenditure, there is but one way to calculate the cost benefit analysis, and that’s through an ROI (Return on Investment) calculation. The calculation itself isn’t at all difficult, but the analysis and information that goes into the calculation, requires much more work. However, when it comes to making sure that much needed purchase must work out, there is no better way than to perform a thorough ROI analysis. So, what’s included in this calculation, and what must businesses do to ensure, as much as possible, that the purchase will be a wise one?
ROI = (value from purchase –cost of purchase)/(cost of purchase)
Assess the Total Cost of Capital and Include Cost Reduction & Benefits
To simplify the approach, assume for a moment that a manufacturing company wants to purchase a new CNC machine because it will allow them to increase their production throughput by 20% daily. This 20% increase means an additional 5-10 units produced a day. Companies must not only know the total purchase price, but what that purchase will mean to the company in terms of cost reductions and benefits. In this case, the additional units produced could be seen as a reduction in production costs, or an increase in production throughput.
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