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True payback calculation isn't simple

The editors at Packaging World got a little lesson in computing machinery investment payback, thanks to Liz Hobbs, a reader and project engineer at Chattem Consumer Products, Chattanooga, TN.
We thought we'd pass it along to you. In a recent e-mail communication Hobbs took PW to task for projecting machinery payback based on simple savings. In a story about Biocraft Laboratories (see PW January '96 p. 34) it was reported that an investment of $900 would be recouped in one year based on savings of $800 in labor and $100 in materials. "The payback will actually be longer than one year" wrote Hobbs. "The $900 annual savings is considered income and will therefore be taxed. If you use an eight-percent discount rate for the cash flow a 38-percent tax rate and a ten-year straight-line depreciation for the equipment the payback will be 1.6 years." Like many readers Hobbs recognizes many factors determine the effects of packaging investments and few companies would share the formula. So we'll probably have to continue reporting "simple" payback. PMMI SEEKS
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