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Ten financial justifications for new equipment

Financial justifications for new equipment come in two varieties: hard and soft.

Focus on the hard justifications, which will require you to provide data to demonstrate a return on investment. Then back it up with additional soft justifications for which you don’t have data but which support clear benefits. For example, you may be able to provide three hard justifications that will generate more than $590,000 in savings over a three-year period. Then you may be able to pick out seven other soft justifications for which you can’t produce data.

You should never try to justify a project solely on soft justifications—at most companies, there are too many accountants who will require hard justifications. Be sure to include cost avoidance, not just cost savings, in your justifications.

1. Reduction/elimination of excessive maintenance costs. Even if you track the cost of breakdowns, repairs, and maintenance to keep an older machine going, the math sometimes doesn’t justify a replacement machine. The key in looking at maintenance costs is to take a take holistic view of costs over the life cycle of a given machine. And maintenance costs, including costs of spares, vary widely in given applications and given environments.

2. More sales due to more uptime. You can only realistically use this justification if you’re selling 100% of what you make, you’re maxed out in shifts, and if it’s indisputable that any marginal additional amount you can produce also will be sold.

3. Reduced work periods, shifts, and overtime. This is tricky due to the nuances in separating fixed costs that you incur anyway (overhead, lighting, rent, etc.) from variable costs (hourly workers staffing the line). Also, by eliminating downtime you may not actually reap as much savings as you thought because you aren’t necessarily going to send people home and save that money.

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