Will this machine pay for itself? A simple payback method for MSMEs

Machine suppliers like to print a payback period in the quotation. "Pays for itself in 18 months" looks very good on paper.

That figure is usually worked out for an ideal factory. The machine runs every shift, saves every rupee promised and never waits for a spare part.

Your factory is not that factory.

This guide gives you a simple way to do the sum yourself, with your own numbers. You need a calculator and two weeks of honest records from your own floor. Do it before you sign the purchase order, not after.

A small disclosure first. At Jagannath Polymers we sell some packaging machines ourselves, and we run our own production lines in Jaipur. So I have seen this sum from both sides of the table.

The payback sum in one line

Simple payback answers one question: how many months of savings will it take to get back the money you spent?

Payback (months) = total investment ÷ net saving per month

India's Bureau of Energy Efficiency uses the same sum (investment × 12 ÷ yearly saving) in its manual on energy conservation for the Alwar oil mill cluster, based on energy audits done in 2010 under its SME programme. I like it for one reason. Anyone in the factory, from the accountant to the shift supervisor, can check it on a calculator.

It is the same sum a farmer does before buying a tractor instead of hiring one. How many hours of hire will he stop paying for? And what will the diesel, the repairs and the EMI cost him? Your two hard parts are the same as his: the honest total cost, and the honest monthly saving.

Step 1: Count everything you spend to get the machine running

The quotation is only the first line. Add up all of these:

1. The machine price, as written on the final purchase order.
2. GST, but only if you cannot claim it back as input tax credit (see the FAQ below).
3. Freight, insurance and unloading. For an imported machine, add customs duty and clearing charges.
4. Civil work, such as a foundation, a floor repair or a shed extension.
5. Electrical work, such as new cable, a starter or panel, and a higher sanctioned load if your connection needs it.
6. Installation and commissioning, including the engineer's travel and stay if the supplier charges for them.
7. The first set of spare parts you buy with the machine.
8. Trial material. In the first days, every machine makes some waste while the settings are found.
9. Training time. Your operators produce less while they learn.

People forget items 8 and 9, because no invoice ever arrives for them.

They are still real money.

Step 2: Count only the savings that reach your bank

A saving is money that stops going out of the factory, or extra sales that come in. Anything else is a hope.

1. Labour is usually the biggest saving and the shakiest one. Count the hours saved per month × the full cost of one hour. The full cost means wages plus the employer's statutory contributions, bonus and leave. This saving is real only if a person moves to other useful work, or a vacancy you would have filled stays empty.
2. Material saving means less consumable used per unit, or a cheaper material. Measure today's use per 100 units before the machine arrives, so you have a figure to compare against later.
3. For scrap and rework, count today's rejects for two weeks. Then you will know what you are actually saving.
4. Count extra output only if orders are already waiting. Extra capacity with no orders behind it is just idle steel.
5. Count fewer complaints and returns only if you have a record of what they cost you today.

I would not accept a labour saving in any payback sheet until someone writes down which job that person will move to, and from which date.

Step 3: Take away what the machine costs to run

1. Power is kW × hours per day × working days × your rate per unit. Take the rate from your own electricity bill, including fixed charges and duty. Ask the supplier for the actual running load, because a machine often draws less than the total of its motor ratings.
2. Consumables are whatever the machine uses, such as tape, film, paper, glue, oil or filters.
3. Wear parts are belts, blades, heaters, bearings and sensors. Ask the supplier for a list with the expected life of each part. Then ask an existing user what they really spend.
4. Maintenance time means daily checks, monthly servicing and any annual maintenance contract. Our starter plan for preventive maintenance shows what this involves.
5. Interest counts too. If you borrow for the machine, the monthly interest is a running cost.
6. Add a new operator's cost if the machine needs a more skilled person than you have.

For machines that run on a consumable, this step decides almost everything. In the air cushion business, I tell buyers that the film price matters more than the machine price. You buy the machine once. You buy the film every month for as long as the machine runs.

A worked example (assumed figures)

Every figure below is made up to show the method. None of them is the price or output of a real machine. Replace each one with your own.

The situation: a factory wants a semi-automatic machine for its packing line. With it, two packers can do the work that three do today. The third packer will move to a vacant post in dispatch, so nobody new is hired there.

Payback = ₹5,75,000 ÷ ₹22,000 = 26.1 months. That is a little over two years.

Now look at the brochure version of the same sum. It takes the machine price only and the gross saving only: ₹5,00,000 ÷ ₹28,000 = 17.9 months. The same machine looks 8 months better, just by leaving things out.

Step 4: Test the assumptions you are least sure of

One payback figure is not an answer. Change each doubtful assumption, one at a time, and watch what moves.

Look at the last row.

Power, spares and volume move the answer by a month or two. The labour assumption decides whether the machine pays back at all.

So spend your checking time where the answer moves the most. In this example, that is labour first and volume second. Run the same test on your own figures, because your weak spot may be somewhere else.

What simple payback does not tell you

The method has two blind spots, and you should know them.

1. It ignores everything after the payback date. Two machines can both pay back in two years. If one lasts ten years and the other is worn out in three, simple payback still rates them the same.
2. It ignores the time value of money. A rupee saved in year three is worth less than a rupee today, especially when you are paying interest on a loan.

For a small machine, simple payback is a good first filter. For a large purchase, ask your CA for the net present value as well.

Also hold the payback figure against three dates. When will the machine be worn out? When does your loan end? How long will the demand last? A 26-month payback on a machine bought for one customer, whose contract runs for 12 months, is a bet on that one customer.

When a machine is not the answer yet

Sometimes the sum says "not yet". That is a good result, because the money stays in the bank for something that does pay back.

1. The volume is low or seasonal, so the machine would stand idle for most of the month.
2. The process is not stable yet. A machine only runs a bad process faster.
3. Nobody on the shift will look after it. A machine without daily care loses its saving in breakdowns.
4. Spares and service are far away. If one failed part stops the machine for three weeks, the saving for those weeks is gone, and the people you moved have to come back.
5. Your product or pack size changes often, and every change means a long changeover.

Before you buy a second machine, find out how much of the first one you are really using. Our guide to OEE for small factories shows how to find the hidden hours. Sometimes the cheapest extra capacity is in a machine you already own.

Checks you can do this week

1. Time the current job with a stopwatch. Do 50 units, at three different times of the day.
2. Count rejects and the material used per 100 units for two weeks.
3. Ask the supplier for the running load in kW, the wear-parts list, and two existing users you can call.
4. Call those users. Ask what broke in the first year and how long the spare part took to arrive.
5. Put your own numbers into the two tables above and run the five "what changes" lines.

If you are weighing a packing machine, the same method works for a carton sealing machine or any other upgrade on the line.

Which saving in your current payback sheet are you least sure about? Start your testing there.