The ROI (Return on Investment) calculator is a new tool added to Setpoint System’s web site. This tool allows you to measure the viability of a potential automation project that Setpoint Systems could provide. The tool requires the following information.
First, you need to provide and estimate of the total cost of the automation project. This cost is more than just the cost of the equipment. It should include items like installation and support.
Second, the ROI tool requires your best estimate of the annual savings the automation will provide. These savings could include added profit from increased volumes, labor cost savings, lower scrap rates, floor space savings, and higher consistency in the output.
Third, you will provide the number of years the annual savings will be realized.
Fourth, you will provide the minimum annual interest rate return required for the automation equipment. This rate is often provided by your finance organization. It is a measure of the return that the money invested in your business should get. Some call this the hurdle rate or the cost of invested capital in your business if you want to use finance jargon.
Once you have entered these inputs into the ROI Tool, you will get an output report. This report will provide three ROI metrics that your finance guru will love. They are NPV (Net Present Value), Payback, and IRR (Internal Rate of Return).
NPV measures the amount of money the project returns in today’s dollars when compared to the initial investment. A NPV below 0 means you are better off rejecting the investment because the benefits of the automation in today’s dollars do not cover the initial costs. On the other hand, a positive NPV tells you that this investment beats your initial required rate of return in using current dollars.
Payback simply tells you how long it will take to get your initial investment back – clearly the shorter the payback the better. Payback is a simple tool that is used for a reality check. Since it does not consider the investment to the return in current dollars, it is considered inferior to NPV and IRR.
IRR measures the rate of return that the project pays out based on the initial investment and the return information. If the IRR is higher than the minimum annual interest rate, then you are getting a better return than the minimum. IRR method is a terrific way to present a project to management. If your IRR is 25% on a project and your minimum required rate is 12%, you can say that this investment beats your required rate by 13%. You would be crazy not to proceed with this project.
So have fun with this exciting tool. I know a lot of you working on automation are technical. I hope that you realize that this tool can be as exciting as running calculations on your old HP 11C calculator. It can also help your company make more money.