How to Calculate the ROI on a Potential Packaging Machine Investment

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Packaging Machine Investment

July 18, 2022

Automated packaging machine purchasers often inquire how long it will take to recoup their investment.

Understanding your ROI is a key component of your choice.  It allows you to compare the machines under consideration and make an informed decision.

This blog post will outline a few key elements to consider when calculating the ROI for an automated packaging machine.

We’ll also touch on a few other factors that can impact your decision, such as flexibility and sustainability.

What is Your Payback Period?

The payback period is the amount of time it will take to recover the cost of your investment.

For example, if you purchase a $40,000 packaging machine and it will save you $25,000 per year in labor costs, your payback period would be four years.

($40,000/$25,000 = 1.6 years)

To calculate your payback period, you’ll need to know the cost of the machine and the estimated savings in both time and money that the machine will provide.

Many packaging machine manufacturers will provide you with an estimate of the savings their machines will offer. If they don’t, be sure to ask. You can also use our packaging labor savings calculator to get an idea of the potential savings.

What is Your Internal Rate of Return?

Rate of Return

Your internal rate of return (IRR) is the percentage of return you can expect to earn on your investment.

To calculate your IRR, you’ll need to know the cost of the machine, the estimated savings in both time and money that the machine will provide, and the estimated lifespan of the machine.

The following formula can be used to calculate your IRR:

IRR = (Savings – Cost of Machine) / Cost of Machine x 100

For example, if you purchase a $40,000 packaging machine that will save you $25,000 per year in labor costs and has an estimated lifespan of 10 years, your IRR would be 15%.

Determine the overall price of the new packing equipment

You should not simply look at the machine’s pricing when making an investment in automated packing equipment.

Your ROI estimates will be more accurate if the whole cost of ownership of your equipment is taken into account, such as:

  • Transportation and installation fees
  • Training
  • Finance charges
  • Annual maintenance and parts expenditures

We suggest seeking information regarding machine prices particular to your application and company demands since they vary greatly and are difficult to predict.

Consider these other important factors:

Flexibility

When your business inevitably changes, will the machine be able to accommodate those changes?

For example, you may start out packaging small items but eventually, want to package larger items. Can the machine be easily modified to do so? If not, you may have to purchase a new machine down the road, which will impact your ROI.

It’s important to consider both current and future needs when making your decision.

Sustainability

Sustainability

Is the machine environmentally friendly? How much energy will it use? These are important factors to consider, especially if you’re looking to reduce your carbon footprint.

Packaging machines that use sustainable materials and have a small environmental impact can help you achieve your sustainability goals.

Additionally, some sustainable packaging machines may qualify for government incentives or tax breaks. Be sure to check with your accountant to see if this is the case.

Calculate labor costs with and without packing

To begin, calculate the current fully loaded salary that each member of your packing team earns per hour. This encompasses not just the rate of compensation but also the cost of benefits such as insurance, paid time off, and any other employee incentives that may be offered.

Next, calculate how the introduction of packing automation might affect the cost of your workforce.

It is possible that your fully loaded pay per hour will remain the same following the implementation of automation, but the number of personnel that will be needed will shift.

In many cases, this will result in a reduction in the number of workers needed to operate a packing line, perhaps by as much as fifty percent.  

This will have a profound impact on the cost of your labor, and subsequently, your ROI.

Calculate productivity variables with and without packaging automation

The first step in calculating packaging efficiency is determining how many packages are presently manufactured each year and how much money you make off of each box in dollars (or your local currency).

After that, you may determine how many packages you might anticipate making after introducing automation by utilizing the specs that are offered by manufacturers of packing equipment (you can either check out their website or give them a call).

Specifications of throughput are often expressed in terms of bpm (bags per minute) or CPM (cartons per minute) (cycles per minute).

A yearly estimate may be calculated by taking this amount and multiplying it by the number of hours spent packaging each day, the number of days in a week, and the number of operating weeks in a year.

This will give you a good idea of how productive your packing line might be after automation and what sort of an impact it would have on your business.

Estimate the value of your time

value of your time

Your time is valuable, and as the owner or operator of a business, there are only so many hours in the day that you can devote to running it.

Every minute that you spend on tasks that could be automated is a minute that you are not spending on other important tasks, such as developing new products, marketing your business, or growing your customer base.

In order to calculate the value of your time, first, estimate how much revenue your company generates each year.

Next, calculate how many hours you spend each week on tasks that could be automated, such as packing orders.

Once you have these numbers, you can estimate the value of your time by dividing your company’s annual revenue by the number of hours you spend on tasks that could be automated.

Factor in extra expenditures specific to your company

Be careful to include the expenses of scrap and rework, the engineering or research and development of a bespoke packaging system, as well as any commissions you may have to pay to third-party integrators, both before and after automating the process.

Your costs may also include the value of the plant square footage obtained by merging numerous manual packaging locations into the smaller footprint of a machine.

This would reduce the amount of space required for manual packaging.

The machine may also eliminate the requirement for ancillary storage and handling equipment, which would further reduce your operational footprint and associated costs.

Calculate the internal rate of return

Calculate the internal rate of return

The ratio of a gain or loss made during a financial year that is represented in terms of investment and displayed as a percentage is one meaning of the phrase return on investment (ROI). The formula for calculating return on investment in terms of packing equipment is as follows:

Multiplying the ratio of the net gain or loss created by new equipment to the total cost of new equipment by 100

If you anticipate a net yearly benefit of $150,000 (by labor savings and profit from improved throughput), for instance, and are thinking about acquiring a packaging system that costs $200,000, your return on investment will be as follows:

($150,000 / $200,000) × 100 = 75%

This indicates that for every dollar you spend on this new equipment, you will earn 75 cents back in return.

A company that is expecting a lower ROI might choose instead to invest that money in other areas of their business or wait until the technology improves or prices drop.

Apply the Payback period calculation formula (PBP)

The payback period is the amount of time that is estimated to pass until the original investment is fully recouped. The following is the formula for calculating the payback time in terms of packing equipment:

The whole cost of new equipment is divided by the total profit gained on a periodic basis from new equipment.

Using the same example from up above, in which the cost of the equipment was $200,000 and the yearly net benefit was $150,000, the payback time will be:

$200,000 / $150,000 = 1.3 year

Moreover,  this example also indicates that the company will start to earn a profit after 13 months.

Weigh the pros and cons of automating your packaging process

Weigh the pros and cons of automating your packaging process

Once you have calculated the ROI of a potential packaging machine, you need to weigh the pros and cons of automating your packing process.

Some of the advantages of automation include :

  1. Increased efficiency and throughput
  2. Reduced labor costs
  3. Increased consistency and accuracy
  4. Improved safety for employees
  5. Increased flexibility to accommodate changing product mix
  6. Reduced downtime for maintenance and repairs
  7. Smaller physical footprint
  8. Increased sustainability
  9. Enhanced packaging quality
  10. Increased customer satisfaction

Some of the disadvantages of automation include:

  1. High initial investment cost
  2. Requires a trained operator
  3. Downtime for cleaning and changeovers
  4. Vulnerable to power outages and other equipment failures
  5. Limited to repetitive tasks

In the end, the decision to automate your packaging process comes down to a cost-benefit analysis. Weigh the pros and cons of automation against the expected ROI to determine if it is the right move for your business.

Takeaways

When calculating the ROI of a potential packaging machine investment, be sure to consider the payback period, internal rate of return, and cost of ownership.

You should also factor in other important elements such as flexibility, sustainability, and company-specific expenditures.

If you are able to get an understanding of the possible return on your investment in packing equipment, you will gain confidence in your decision and the ability to plan the appropriate course of action for not just this purchase, but also for the next years as you strive to capitalize on your investment.

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