Buying a Packaging Equipment? Here's How to Calculate ROI First

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.

Understanding the Significance of Machine ROI

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:

1. The annual cost of your current packaging process.
2. The estimated yearly net benefit or loss resulting from the new machine.

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. 

Step 1: Calculate the Total Cost of New Packaging Tool

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:

• Annual maintenance and spare parts outlays
• Commissioning and installation costs
• Equipment purchase price
• Freight expenses
• Training expenditures

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.

Step 2: Calculate the Net Benefit/Loss of Investing in New Equipment

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:

Annual Labor Costs

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.

Annual Gross Profit

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 hourly production rate and hours of operation to get the estimated yearly production number. Using your profit per package, you can determine the gross profit before and after automation to determine the estimated gain/loss in gross profit.

Annual Waste Reduction

Consider these factors to estimate yearly savings from reduced waste: current waste rate, type and cost of the product, and amount of waste generated. Automation typically reduces product waste, resulting in cost savings.

These annual labor, gross profit, and waste reduction figures combine to calculate your net benefit/loss. Let's move on to the last step.

Step 3: Calculate ROI

Now that you have the total cost of new equipment (A) and the net benefit/loss (B), you can calculate ROI. The packaging machine ROI formula is: ROI = [(B - A) / A] x 100.

This formula gives you a percentage representing the return on your investment. A positive percentage means you're making money from the investment, while a negative percentage suggests the investment is losing money.

There you have it—a 3-step formula for calculating the ROI of your packaging machine investment, helping you make smart business decisions.

Let Plan IT Packaging Guide Your Investment

We're here to guide you through the decision-making process and help you select the packaging machine that maximizes your ROI. With decades of experience in the packaging industry, our team of packaging specialists understands the unique challenges and opportunities that each business faces. 

Our team can provide a comprehensive analysis of your packaging needs, helping you identify the most cost-effective and efficient packaging solutions. We assist in evaluating and comparing different packaging machine options, considering factors such as speed, output volume, footprint, energy consumption, and maintenance requirements, to help you make an informed choice.

Ready to maximize your packaging machine ROI? Contact our team today for a free consultation.