Business · Worked example
When does a $12,000 equipment investment pay back?
A $10,000 machine with $2,000 of setup costs requires $12,000 of initial cash. If it saves $500 per month but adds $100 per month of running costs, the net cash benefit is $400. With constant benefits, no discounting and no resale proceeds, it reaches simple payback at the end of month 30. A one-year evaluation would correctly show no payback within that horizon.
Buy an outcome, not an advertised productivity percentage
The $12,000 initial investment includes delivery, setup and training in this example. The monthly model subtracts running and maintenance costs from cash savings and any additional contribution. Here, additional contribution is zero and the $500 savings are assumed to be real spending reductions.
Time saved is not automatically cash saved. If the same payroll remains and no additional work is sold, putting all saved hours into the cash-savings box would overstate the benefit. Additional sales should enter only as cash contribution after their variable costs, not as gross revenue.
Reconcile the recovery month
After 12 months, $4,800 has been recovered and the cumulative position is negative $7,200. After 24 months it is negative $2,400. The next six $400 benefits close that gap, bringing cumulative cash to zero after month 30.
Over the five-year horizon, $24,000 in operating cash benefits less the initial $12,000 leaves $12,000 net cash. That is a modeled result, not a forecast or an annual rate of return. The same purchase can have a reasonable payback and still compare poorly with another use of the money.
Test useful life and the value of waiting for cash
Set the horizon to one year to see the explicit no-recovery result. Reduce the monthly savings, add running costs or model a declining annual net benefit. The annual-change input changes net operating cash flow at each year boundary; it does not independently forecast every cost.
A positive discount rate makes later cash worth less today, so discounted payback can be later than simple payback or absent. Resale proceeds count only at the end of the selected horizon and must be entered net of disposal costs. Do not move a speculative resale value into an earlier year to manufacture recovery.
Five years, $400 monthly net benefit
Hypothetical inputs: Equipment purchase price: 10000; Delivery, setup and training: 2000; Monthly cash savings: 500; Additional monthly contribution after variable costs: 0; Monthly running and maintenance costs: 100; Evaluation years: 5; Annual change in net operating cash flow (%): 0; Annual discount rate (%): 0; Net resale proceeds at end of evaluation: 0.
- Initial cash investment: $12,000.00
- Initial monthly net cash benefit: $400.00
- Simple payback: 30 months
- Net cash after investment: $12,000.00
- Net present value: $12,000.00
The same equipment evaluated after one year
Hypothetical inputs: Equipment purchase price: 10000; Delivery, setup and training: 2000; Monthly cash savings: 500; Additional monthly contribution after variable costs: 0; Monthly running and maintenance costs: 100; Evaluation years: 1; Annual change in net operating cash flow (%): 0; Annual discount rate (%): 0; Net resale proceeds at end of evaluation: 0.
- Simple payback: Not recovered within the selected horizon
- Discounted payback: Not recovered within the selected horizon
- Net cash after investment: $-7,200.00
Limitations and what to check
Hypothetical cash flows without debt financing, depreciation or other tax effects, uncertain downtime, opportunity constraints or a guaranteed resale value. Simple payback is only one metric and ignores benefits after recovery. This is not accounting, tax or investment advice.
Sources
- SBA: Manage your business finances and assets — Provides cost-benefit and cash-flow planning context, distinguishing recurring and nonrecurring costs. The $12,000 equipment scenario and discounted calculations are Fair Calcs' own hypothetical model.