2. Perform a Cost Benefit Analysis
A cost benefit analysis is used to substantiate how investment in the new equipment will result in an overall cost savings. For instance, if old equipment rakes up too much maintenance costs, compare the cost of the new equipment to the monthly maintenance cost of the old equipment, to demonstrate the cost savings.
Business owners and managers consider the hurdle rate, or the minimum acceptable rate of return that the equipment would generate, in return for the risks and opportunity cost of the money invested. The hurdle rate depends on the source of the money. If the money comes from a bank loan, the hurdle rate factors in the rate of interest. If the money comes from internal accruals, the hurdle rate factors in the rate of return of an alternative investment. If the money comes from investors or stakeholders, the hurdle rate factors in a rate of return higher than what another project may offer.
When determining the cost benefit analysis factors, do so for both direct and indirect costs. For instance, when replacing equipment, consider direct costs such as cost of parts, labor, power, fuel, and maintenance time, vis-à-vis the same factors related to new equipment plus costs and interest rate for the investment made. Also, consider indirect costs such as the lost opportunity for more profits when the production halts as the old equipment is in maintenance.
When purchasing new equipment, consider the profits resultant from enhanced production or productivity per day or month with the new equipment against the purchase price and interest rate of the investment for the new equipment. Substantiate all cost analysis with evidence such as actual bills or invoices, estimates from suppliers or contractors, historical cost and time data, and more.