BIZOMAT MAKEOS · Money
Equipment Investment Appraisal (NPV, IRR, Payback, B/C, EUAC)
Does buying this machine pay for itself: what are its net present value, rate of return, payback, benefit–cost ratio and equivalent annual cost?
Appraisal of an equipment purchase with uniform yearly savings and running cost: net present value of the cash flows and salvage at your interest rate, internal rate of return by search (as the IRR tool), simple and discounted payback, the benefit–cost ratio (as the benefit–cost ratio tool), and the equivalent uniform annual cost of owning and running the machine using the capital recovery factor (as the interest factors tool).
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How this tool works
Inputs, units and where to find them
| Input | Unit | Typical source |
|---|---|---|
| Purchase and installation cost | $ | Total first cost including installation and commissioning. |
| Savings or extra income per year | $/yr | Yearly savings or added income the machine brings. |
| Running cost per year | $/yr | Yearly running cost (maintenance, power, consumables) of the machine. |
| Salvage value at the end | $ | Resale or scrap value at the end of the life. |
| Life | years | Years the machine is expected to serve. |
| Interest (hurdle) rate | % | Interest rate or minimum acceptable rate of return. |
| Longest payback accepted | years | Longest simple payback your business accepts. |
What each input means
Open an input to see what it is, its units, the worked example and the common mistakes, with a small diagram.
What this means: Purchase and installation cost
- What it is
- The first cost of the machine: purchase price plus delivery, installation and commissioning, paid at the start.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0.000001 or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $100000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher first cost lowers NPV and lengthens payback.
- Get it right
- Use the full installed cost from quotations, not just the equipment price.
What this means: Savings or extra income per year
- What it is
- The yearly cash benefit the machine brings, as cost savings or added income, before its own running costs.
- Units and format
- Enter a number in $/yr: money per yr. The form accepts $0/yr or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $30000/yr as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Higher savings raise NPV, IRR and the benefit–cost ratio and shorten payback.
- Get it right
- Count only savings that become real cash or capacity you will use.
What this means: Running cost per year
- What it is
- The yearly cost of running the machine: maintenance, power, consumables and any extra operator cost.
- Units and format
- Enter a number in $/yr: money per yr. The form accepts $0/yr or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $5000/yr as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- It is subtracted from the savings each year, so a higher figure lowers every result.
What this means: Salvage value at the end
- What it is
- What the machine will be worth at the end of its life as resale or scrap value, counted as cash received in the last year.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $10000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
What this means: Life
- What it is
- The number of years the machine is expected to serve; savings and running costs are counted for each of these years.
- Units and format
- Enter a number in years: years. The form accepts 1 years to 50 years. Use a whole number. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 6 years as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Get it right
- Use the economic life you can rely on, not the longest the machine might physically last.
What this means: Interest (hurdle) rate
- What it is
- The interest rate or minimum acceptable rate of return used to discount future cash flows, normally set by your finance team.
- Units and format
- Enter a number in %: percent: the number is read as a percentage, so type 8 for 8 %. The form accepts 0% to 50%. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 8% as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher rate lowers NPV and the benefit–cost ratio.
- Get it right
- Type the percentage itself, not a fraction.
What this means: Longest payback accepted
- What it is
- The longest simple payback period your business accepts for this kind of investment.
- Units and format
- Enter a number in years: years. The form accepts 0.5 years to 50 years. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 5 years as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
Method and formulas
- Net yearly flow A = savings − running cost; NPV = −P + A (P/A, i, n) + salvage (P/F, i, n).
- IRR: the rate that makes NPV zero, found by bisection (as the IRR tool).
- Simple payback = P ÷ A; discounted payback = first year the discounted cumulative flow turns positive.
- B/C = PV of savings ÷ (P + PV of running cost − PV of salvage) (as the benefit–cost ratio tool); EUAC = (P − salvage)(A/P, i, n) + salvage i + running cost.
- Example: NPV 21,874 at 8%, IRR 14.619%, payback 4 years, B/C 1.1873.
Limitations
- Before tax and inflation; tax depreciation and price changes alter the result.
- Uniform yearly flows; uneven flows need the IRR tool directly.
- Example values are illustrations. Replace them with values for your actual task.
Typical uses
- Justify a new machine or automation project
- Compare a purchase against a hurdle rate
- Present a capital request with the usual measures
Who it is for
- Engineering managers
- Business owners
- Finance analysts
What you get
- Net present value and internal rate of return
- Simple and discounted payback
- Benefit–cost ratio and equivalent annual cost
Interpreting the result
- A positive NPV at the hurdle rate means the project earns more than the hurdle; payback alone ignores later years.
References
- Machinery’s Handbook, 29th edition (Industrial Press, 2012), printed pp. 139–146. Topic reference; no source tables or recommended settings are reproduced.
Learn the Concepts Behind This Tool
These BIZOMAT Library readings explain the method this tool uses, with worked examples.
Method explained here · BIZOMAT original book
Flame temperature and preheated air
What it covers: Adiabatic flame temperature and why excess air lowers it, dissociation, how preheating combustion air raises available heat, and whether a recuperator pays on a small batch furnace.
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Choosing a meter and the cost of error
In Flow Measurement by the Numbers
What it covers: A selection method across fluid, range, accuracy, pressure loss, installation and cost, sizing for the range, valuing a meter’s error, and appraising a meter that reveals compressed-air leaks.
Method explained here · Library collection
NPV, IRR and payback answer different questions: reading investment measures when they disagree
In Investment Appraisal and Business Cases
What it covers: One option has the higher return percentage and faster payback; another creates more value. How to read NPV, IRR and payback together, spot when IRR misleads and make the trade-off visible.
Method explained here · BIZOMAT original book
Assist gases: oxygen, nitrogen and air
In Laser Processing by the Numbers
What it covers: What oxygen, nitrogen and compressed air each do in a laser cut, the heat from burning iron, nozzle gas flow, and supplying nitrogen from cylinders, bulk liquid or a generator.
Method explained here · BIZOMAT original book
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Method explained here · BIZOMAT original book
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What it covers: Matching leak test methods to limits and line rates, cycle time against takt, helium use and cost, appraising a recovery system, and a gas budget that counted the part instead of its fill.
Method explained here · BIZOMAT original book
Self-consumption, tariffs and the business case
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What it covers: How to value a factory array's energy by self-consumption and export, build the business case with NPV, IRR and payback, test it at a P90 yield and a shorter stay, and plan the loan.
Method explained here · BIZOMAT original book
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In Stage Gates and Stopping Rules by the Numbers
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Method explained here · BIZOMAT original book
Fans, pumps and energy savings
In Variable-Speed Drives by the Numbers
What it covers: How the fan and affinity laws predict the power saved by slowing a fan or pump, why static head cuts the saving, how to measure the before and after, and how to appraise a drive as an investment.
Method explained here · BIZOMAT original book
Running a monitoring program
In Vibration Monitoring by the Numbers
What it covers: Choosing which machines to monitor and how, routes and intervals, people and qualifications, acting on findings, measuring the program's value, and appraising an online system for the chipper.
Learning pathway
Appraise an equipment investment
Learn what NPV, IRR and payback each answer, then appraise a purchase with your own figures.
1 Learn
Read NPV, IRR and payback answer different questions: reading investment measures when they disagree in Investment Appraisal and Business Cases.
One option has the higher return percentage and faster payback; another creates more value. How to read NPV, IRR and payback together, spot when IRR misleads and make the trade-off visible.
2 Apply
Open Equipment Investment Appraisal (NPV, IRR, Payback, B/C, EUAC) and enter your own figures.
Does buying this machine pay for itself: what are its net present value, rate of return, payback, benefit–cost ratio and equivalent annual cost?
3 Verify
Read the tool’s feasibility and verification checks under the result, and test your answer against its stated limitations:
- Before tax and inflation; tax depreciation and price changes alter the result.
- Uniform yearly flows; uneven flows need the IRR tool directly.
- Example values are illustrations. Replace them with values for your actual task.
4 Improve
Download the decision report or copy the link with your inputs to keep a record, then change one assumption at a time and compare.
Next reading: Sensitivity and scenario analysis: testing a business case before you trust it in Investment Appraisal and Business Cases.
BIZOMAT tools are screening and decision-support utilities. Verify important financial, engineering, safety, legal or operational decisions using appropriate professional standards and your organisation’s approved data.
Open the Equipment Investment Appraisal (NPV, IRR, Payback, B/C, EUAC) calculator