Equipment Cost Analysis







Equipment Cost Analysis Gear
	Capital expenses for Facility equipment should be evaluated on standard financial models to provide sound decision making. These models vary depending on the company. The typical models include Net Present Vaue (NPV), Average Payback (in years) and Rate Of Return (ROR). This financial tool walks you through the steps necessary to determine if an investment to repair or upgrade existing equipment is a sound business decision.
		© LeeKing Inc., 2017 - 2021



Annualized Financial Analysis: Repair OR Replace?

	Financial Variables
	Company's Cost of capital:
	Company's Tax rate:
	Useful life for comparison:	years

	Cost of Capital: Your interest rate on cash.
	Tax rate: Your company's tax rate.
	Useful life: The time the equipment is expected to last based on one of several factors: Manufacturer's estimate, Actuarial tables or commercial lease terms.

	© LeeKing Inc., 2017 - 2021


Investment Characteristics	Old Equipment	New Equipment

Original Investment life (years)			Investment life (years)
Current age of investment	0	0	Current age of investment
Initial depreciable investment cost			New depreciable investment cost
Future salvage value			Future salvage value
Current salvage value		$0.00	Current salvage value
Depreciation (straight line)			Depreciation (straight line)



Background When buying equipment a company will determine if the cost is a "capital" purchase. There are cost thresholds where purchases like FF&E (Furniture, Fixtures and Equipment) will be capitalized. Capital expenditures are depreciated on the company books and affect the company year-end tax report. Often times the depreciation on capital expenses tie to the the first term of the lease (for leased properties) or to the depreciation tables that are used for "Useful Life" determination. Check with your Finance department for you company guidelines.
© LeeKing Inc., 2017 - 2021


		Old Equipment		New Equipment
	Initial (Costs) or Benefits
	Cost avoidance		1
	Other initial benefits (E.g. Salvage Value of old equipment.)				2
	Total Initial Benefits
	Initial investment cost
	Other required new investment		3
	Total Initial Costs



Inputs
1	Downtime associated with equipment change-over.
2	Only after deciding to install the new equipment, can the old equipment's salvage value be recouped
3	Cost to return to operation (Assumes currently non-operational)
© LeeKing Inc., 2017 - 2021


	PV Future (Costs) or Benefits
		Old Equipment	New Equipment
		Old Equipment	New Equipment
	Future salvage value
	Other future benefits
	Total Future Benefits
	PV Future Benefits
	(Resale costs)			4
	Other future costs
	Total Future Costs
	PV (Present Value) Future (Costs)
	Future PV Subtotals

	Inputs
4	Advertising, etc.


	© LeeKing Inc., 2017 - 2021


PV Annual (Costs) or Benefits
	Old Equipment	New Equipment

Revenues (sales, etc)
Other annual benefits
Total Annual Benefits
PV Annual Benefits
Operating costs
Maintenance/repair costs
Other annual costs
Depreciation tax shield
Taxable income
Taxes
Total Annual Costs
PV Annual (Costs)
Total Annual (Costs) or Benefits

Annual PV Subtotals

© LeeKing Inc., 2017 -2021


Present Value Analysis
		Old Equipment	New Equipment
	Initial (Costs)/Benefits
	Future (Costs)/Benefits
	Annual (Costs)/Benefits
	Net Present Value (NPV)

	NPV (alternative vs status quo)


	AVERAGE PAYBACK (years)

	© LeeKing Inc., 2017 - 2021