A standard definition of ROI is the ratio of a benefit or loss made in a fiscal year expressed in terms of an investment and shown as a percentage. In packaging equipment terms, the ROI formula is as follows:
(Net benefit or loss generated by new equipment / Total new equipment cost) x 100
As an example, if you are considering purchasing a packaging system for $200,000 and predict a net annual benefit of $150,000 (via labor savings and profit from increased throughput), your return on investment will be:
($150,000 / $200,000) x 100 = 75%
Payback period (PBP) formula
The payback period calculates how much time it will take to recoup the initial investment. In packaging equipment terms, the payback period formula is as follows:
Total new equipment cost / Total periodic benefit realized from new equipment
Using the same example above of $200,000 equipment cost and $150,000 net annual benefit, the payback period will be:
$200,000 / $150,000 = 1.3 years