How to Calculate ROI on an Equipment Purchase — Part 2

aNewDomain.net — In part one of my Return on Investment story we dove into a number of calculations for before and during ownership of tech equipment. If you haven’t looked at that yet you can check it out here. You won’t get the whole picture without both parts of this document.

End of Life Cost

At some point, every piece of equipment will be retired. Whether you sell it off or pay for disposal, there is a cost associated with it. Knowing the future value of a piece of equipment can be difficult, but you can look to past history for guidance. If you plan to keep the equipment for five years, you can look at the current resale value or disposal costs of a similar five-year-old piece of equipment.

ROI Cost of OwnershipThis exercise does lead you into calculating additional ROI, but it is important to understand what it will cost to replace the equipment in the future. If you’re taking advantage of special pricing that may not be available in the future, this should be factored in. Consider the scenario of acquiring a niche product to take advantage of special pricing at the time of purchase. There’s usually a massive expense around purchase, training, support, and its integration. It makes business sense at the time. However this may return as an unpleasant cost-prohibitive surprise when upgrading or changing vendors in the future. Many organizations fall into this trap and find they can’t afford to upgrade a piece of aging equipment because they didn’t consider the future cost of replacement.

I’ve seen organizations go out of business for failing to recognize this.

Benefit Analysis

There is clearly a reason why you’re considering purchasing the new equipment, but what would the numbers look like if you didn’t purchase it? Consider your alternatives—the opportunity cost if you will—of your current situation. Play out the entire ROI of not replacing things, and then consider other scenarios. This is a financial decision, after all, so the numbers should support what you’re doing.

In many organizations, the decision to purchase a piece of equipment is to increase revenue. If that equipment is something that will make the sales team more efficient, for example, the purchase will add to the bottom line. Be critical of optimistic numbers. Equipment purchases rarely fuel the type of growth or efficiency the vendor promises. Seek out current owners of the equipment to gauge their experience.

Final Thoughts

You may not have to answer, or even be able to answer, the values at each step in the calculation. The key is to consider them and have discussions with those in the know. You may want to bring in an outside consultant—even if you have staff with relevant knowledge. Getting a perspective from outside your organization can save you a lot of headaches and cost. However you come to your numbers, though, make sure you get them—and then track the actual figures. Over time you’ll get better at making these ROI calculations and that will make your business more profitable.

Based in Vermont, Jeremy Lesniak is managing editor at aNewDomain.net and founder of Vermont Computing, Inc. and whistlekick.com Follow him @jlesniak or email him at jeremy@anewdomain.net

Jeremy Lesniak
Based in Vermont, Jeremy Lesniak is managing editor at aNewDomain.net and founder of Vermont Computing, Inc. and whistlekick.com. Email him [email protected]
Jeremy Lesniak
Jeremy Lesniak
Tags: Business,Technology