Business leaders in manufacturing, construction, maintenance and other heavy industries often face a dilemma when taking on new equipment. Determining the ROI for buying vs. renting requires insights into your company's cash flow and its intentions for the machinery.
Here's how to look at this issue from multiple angles so you can make the best decision.
ROI of renting industrial equipment
Renting equipment is logical in many cases. With technology moving as fast as it is, renting is a great way to secure immediate access to new features without buying a machine that may be outdated in a few years. Therefore, equipment with a relatively short lifetime is probably a good fit for renting over purchasing.
For a detailed breakdown, you must know the average costs to buy and rent standard equipment. You can then calculate how long you could rent the machine before purchasing becomes the more cost-effective option.
Here are some common examples throughout multiple industries:
- Excavators: Excavators in the 15-to-20-ton range cost up to $200,000 brand-new. Renting runs $571 per day or $3,433 every four weeks.
- Forklifts: A 6,000-pound model costs around $13,000 new but rents for $1,640 every four weeks.
- Scissor lifts: Scissor lifts run about $22,000 brand-new. Renting the same model costs around $399 every four weeks.
Finding your machinery ROI means knowing the cost to rent the machine in your region and how long you'll need the equipment.
ROI of buying industrial equipment
What if you want to buy equipment?
To get a rough idea of your machinery ROI, take the net profit you expect it to earn and divide it by the equipment's total cost.
If, after maintenance and ownership costs, a $100,000 piece of equipment brings $25,000 in revenue in the first year, its ROI is 25%. That means it will take four years to pay for itself. This duration is the payback period (PBP), after which the machine delivers pure profit.
You can take a few other steps if you want a fuller picture of the ROI for buying manufacturing equipment:
- Determine the depreciation cycle: Start with the number of useful years remaining. A boom lift purchased in 2017 will probably reach this point after 12 years. To determine the cost of the depreciation cycle, divide the equipment's purchase price by the number of months remaining in its lifetime.
- Find the machine's profitability: Estimate how much the machine earns you per month and subtract the monthly depreciation value you found in step one. This calculation tells you how much profit you can expect when you purchase the equipment outright.
- Know the resale value: Take the original purchase price and multiply it by 99% for every month you'll own your equipment, up to the end of the depreciation cycle.
Knowing your purchase's resale value determines whether depreciation is worth the convenience of having in-house machines.
ROI of outsourcing industrial equipment services
This last point concerns the cost of outsourcing industrial-equipment services, such as manufacturing and machining jobs, rather than renting or purchasing the equipment to do it in-house.
Maintenance should always influence your decision to buy vs. rent. When you rent or lease equipment, you're not responsible for maintenance costs and you don't shoulder the cost of depreciation. Outsourcing industrial equipment services or processes bypasses both expenses.
Several examples exist throughout the industrial world—including buying time on injection-molding machines or outsourcing a portion of a large construction project to another company.
In many applications, the cost of outsourcing is much more manageable than purchasing or renting industrial equipment. You can calculate to compare your options:
- Total outsourcing cost: Rate to outsource (per year, month or day) x length of term (years, months or days) = total cost to outsource the process
- Outsourcing cost per year/month/day: Total cost to outsource the process / outsourcing period (years, months or days) = outsourcing cost per year, month or day
- Total cost of ownership: Purchase price + ownership expenses (labor, maintenance, depreciation) – resale value = total cost to buy
- Cost of ownership per year, month or day: Total cost to buy / period of ownership = cost to own per year, month or day
These calculations will provide you with values you can compare to the cost-per-week of renting industrial equipment as well as the expense and depreciation versus potential revenue if you buy instead.
Many smaller businesses will outsource machining jobs and similar processes now that manufacturing-as-a-service has become an industry. Bearing the cost of buying and maintaining a $1,000,000 CNC setup could be unreasonable for many, compared with the straightforward expense of outsourcing CNC processes by the week or month.
Make the right choice for your business
In any event, you should feel better prepared to look at the bigger picture when deciding between buying, renting and outsourcing. Make the right choice that saves you the most money.
Kayla Matthews is a freelance technology journalist. Read more from her at ProductivityBytes.com