Reviewed November 2026. Formulas are shown above the guide. Report an error or request a calculator.
Three ways to judge an investment
Simple payback answers how long until the savings have repaid the purchase price. It is easy to explain and favoured by plant managers, but it ignores what happens after the payback date.
ROI over the useful life compares total net savings with the investment. It shows whether the machine earns its cost several times over or only just covers it.
IRR is the discount rate at which NPV is exactly zero. Finance teams like it because it can be compared directly with the company's hurdle rate.
NPV discounts each year's saving back to today at your cost of capital. A positive NPV means the machine earns more than the money would earn elsewhere at that rate. It is the strictest of the three.
Worked example
The defaults describe an automation cell costing $185,000 installed, saving $52,000 of labor and $14,000 of scrap a year, and adding $9,500 of power and maintenance, over a 7-year life at an 8% discount rate.
| Item | Value |
|---|---|
| Net saving per year | $56,500 |
| Simple payback | 3.3 years |
| Lifetime net saving | $395,500 |
| ROI over 7 years | 114% |
| NPV at 8% | about $109,000 |
| IRR | 23.6% |
An IRR of 23.6% means the machine returns the same as an investment earning 23.6% a year, well above an 8% cost of capital.
What to include
- Investment: purchase price, freight, installation, utilities hook-up, guarding, tooling, programming and training.
- Savings: labor hours actually removed (not just freed up), scrap and rework avoided, energy saved, and subcontracting brought in-house.
- Added costs: power, consumables, maintenance contracts, spare parts and software licences.
Labor savings are only real if the hours are removed or redeployed to work that earns money. If the operator stays and simply watches the machine, the saving is zero.
Typical approval thresholds
Many manufacturers approve projects that pay back in two to three years, and automation projects are often held to the same bar. Strategic investments, such as capacity for a new customer, may be approved on a longer payback if the NPV is positive. Use the discount rate your finance team uses for capital requests, often between 8% and 12%.
Frequently asked questions
What is a good payback period for a machine?
Under 2–3 years is the usual target for cost-saving equipment. Longer paybacks need a strong NPV or a strategic reason.
What discount rate should I use?
Your company's weighted cost of capital or the hurdle rate finance sets for projects, typically 8–12%.
Why can payback be good but NPV negative?
If the useful life is short, the machine may repay its cost but earn too little afterwards to beat the discount rate.
Does this include tax and depreciation?
No. It is a pre-tax cash view, which is the usual first screen. Ask finance for the after-tax version before approval.