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Measuring the Return on Investment for Equipment
The average level of capital equipment spending for all shops (as
a percentage of sales for 2005) was 8.1 percent. Top shops spent
10.5 percent while the other shops spent 7.3 percent. Almost half
of all shops said they anticipated an increase in capital equipment
spending for 2006 versus 2005. 61.7 percent of the top shops
anticipated increasing capital spending compared to only 46.1
percent of the other shops.
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Investment Cost
Owning equipment costs money, one part of ownership costs is
Investment costs which include the following:
The interest on the money invested.
Taxes of all types which are assessed against the equipment.
Insurance.
Storage.
1. Interest
Many owners charge interest as part of hourly owning and
operating costs, others consider it as general overhead in their
overall operation. When charged to specific machines, interest
is usually based on the owners average annual investment in
the unit.
Interest is considered to be the cost of using capital. The
interest on capital used to purchase a machine must be
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considered, whether the machine is purchased outright or
financed.
If the machine will be used for N years (where N is the number
of years of use), calculate the average annual investment
during the use period and apply the interest rate and expected
annual usage:
Interest on borrowed money, 12%
INSURANCE
N = No. Years
(p(N+1)+S(N-1) ) Insurance % Rate
_____________________________
___________2_N______________
Hours/Year
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Property tax
N = No. Years
(p(N+1)+S(N-1) ) Tax Rate %
___________________________
___________2_N_____________
Hours/Year
The rates for these costs vary among different owners, with
location and whether or not the equipment is actually used.
The average annual cost of interest (I), is based on the average
value of the equipment ( P ) during its useful life, which can be
calculated based on straight-line depreciation as follows:
P N 1 S N 1
P
2N
Where:
P Total initial cost
P Average value
N Life in years
S Salvage value
If there was no salvage value, then the following Eq.
P N 1
P
2N
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References
1.
http://www.investopedia.com/terms/n/netinvestment.asp
(2015/3/21):
2. http://americanmachinist.com/machining-
cutting/measuring- new-equipment-return-investment-roil
(2015/3/21) :
3.
http://www.forconstructionpros.com/press_release/11274685/201
4-economic-outlook-construction-equipment-investment-expected-
to-decline
(2015/3/21) :
4.
http://www.fminet.com/investment-banking/ib-
industries/construction-capital-equipment.html
(2015/3/21):