How to Calculate Equipment ROI Before You Buy
Buying equipment isn't just about the purchase price. Learn how to estimate the revenue, savings and operating costs so your next machine supports business growth rather than draining cash flow.
The cheapest machine isn't necessarily the best investment. A more capable piece of equipment may cost more initially but generate significantly greater value through additional revenue, faster job completion and reduced reliance on contractors.
Before buying an excavator, forklift, tractor, workshop machine or other commercial asset, it helps to calculate the likely return on investment. This gives you a clearer picture of whether the equipment can justify its cost.
Look Beyond the Purchase Price
A useful equipment assessment should consider revenue generated, labour saved, jobs completed faster, work brought in-house, operating expenses, finance repayments and the expected working life of the machine.
What Does Equipment ROI Mean?
Return on investment, commonly called ROI, compares the financial benefit produced by an asset with the amount invested in purchasing it.
In practical terms, equipment ROI helps answer a simple business question:
The value may come from direct revenue, but that isn't the only benefit. Equipment can also improve profitability by reducing wages, contractor expenses, equipment hire, delays and lost productivity.
A Simple Equipment ROI Formula
For example, if equipment costs $100,000 and creates an estimated annual net benefit of $40,000, the estimated annual ROI would be 40%.
ROI Is an Estimate
No calculator can guarantee future revenue or profitability. Use realistic figures, allow for unexpected expenses and consider testing several scenarios before committing to a purchase.
Five Questions to Ask Before Buying Equipment
Consider additional jobs, greater production capacity and new services your business could offer.
Equipment may automate manual work or allow the same team to complete more work.
Time saved can create capacity for additional billable work.
Owning equipment may reduce contractor, hire and transport expenses.
Dependable equipment can reduce delays, downtime and cancelled work.
The equipment needs to be used regularly enough to justify ownership.
Step 1 — Estimate Additional Revenue
Start by identifying the work you could complete because the equipment is available. This may include jobs currently being turned away, additional projects, increased production or new services.
Example: Purchasing a Mini Excavator
A landscaping contractor currently hires a mini excavator several times each month. Owning one would allow the business to accept more excavation work and avoid waiting for hire equipment to become available.
| Revenue Assumption | Estimated Amount |
|---|---|
| Additional jobs per month | 3 |
| Average additional revenue per job | $3,500 |
| Additional monthly revenue | $10,500 |
| Estimated additional annual revenue | $126,000 |
Be conservative. Base the calculation on work you reasonably expect to secure rather than the maximum number of jobs the equipment could theoretically complete.
Step 2 — Calculate Time and Cost Savings
Some equipment creates value by reducing the time needed to complete existing work. A job that previously took eight hours may take five hours with the right machine.
Those three saved hours could allow your team to complete another job, reduce overtime or improve delivery times.
Common Equipment Savings
Weekly or monthly hire charges may be replaced by ownership costs.
Work previously outsourced may be completed by your own team.
Automation and greater efficiency may reduce time spent per job.
Equipment availability can reduce waiting time and interrupted schedules.
Step 3 — Estimate the True Operating Costs
Additional revenue tells only half the story. You also need to estimate what the equipment will cost to operate and maintain.
- Fuel, electricity or charging
- Servicing and preventative maintenance
- Repairs and replacement parts
- Tyres, tracks and wear items
- Comprehensive insurance
- Registration and licensing
- Transportation between sites
- Storage and security
- Operator wages and training
- Finance repayments
Allow for Downtime
Equipment doesn't need to be broken to cost your business money. Servicing, parts delays and operator availability can all affect utilisation. Building a downtime allowance into your estimate produces a more realistic result.
Equipment ROI Calculator
Enter your estimated purchase costs, revenue and expenses to calculate the potential annual benefit and approximate payback period.
Your Estimated Results
This calculator provides a general estimate only and does not account for taxation, depreciation, asset resale value, interest allocation or every operating expense. Finance repayments include principal and should not be treated entirely as an economic cost when completing a detailed accounting assessment. Seek professional financial and taxation advice for your circumstances.
Example Equipment ROI Calculation
Consider a business purchasing machinery with a total installed cost of $110,000. The equipment is expected to generate additional revenue and reduce external hire costs.
| Annual Calculation | Estimated Amount |
|---|---|
| Additional revenue | $126,000 |
| Hire and contractor savings | $24,000 |
| Operating and maintenance costs | −$42,000 |
| Estimated annual benefit | $108,000 |
Using the simplified formula, the estimated annual ROI would be approximately 98%. The purchase could therefore recover its initial cost in just over one year if the assumptions are achieved.
In reality, the business should also consider taxation, depreciation, interest, resale value, unexpected repairs and fluctuations in demand.
When Buying Equipment May Not Make Sense
Owning equipment isn't automatically better than hiring. Hiring can provide greater flexibility when demand is uncertain or the machine will only be used occasionally.
Hiring May Be More Practical When:
- The equipment is needed for one project
- Demand is seasonal or unpredictable
- The machine would sit unused for long periods
- Specialist equipment changes between jobs
- Maintenance capability is limited
- The business is testing a new service
Don't Buy Equipment Just to Own It
A machine that spends most of its life parked may tie up capital without creating meaningful value. Utilisation is one of the most important factors in any equipment ROI calculation.
Signs It Could Be Time to Buy
- You regularly hire the same equipment
- You are turning profitable work away
- Hire equipment is frequently unavailable
- Your team loses time waiting for machinery
- Contractor costs continue to increase
- You have reliable ongoing demand
- The equipment would create a new income stream
- Your current equipment causes excessive downtime
When several of these conditions apply, comparing the cost of ownership against your current hire or outsourcing expenses can reveal whether purchasing is the stronger long-term option.
How Equipment Finance Affects Cash Flow
Financing equipment can help a business preserve cash while putting the asset to work immediately. The aim is generally for the value generated by the equipment to comfortably exceed its operating costs and scheduled repayments.
For example, equipment that creates an estimated $9,000 in monthly cash contribution after operating costs may comfortably support a $2,500 monthly repayment. Equipment producing only $2,800 before repayments would leave far less room for unexpected costs or slower trading periods.
Stress-Test the Purchase
Recalculate the numbers using lower revenue and higher operating costs. A worthwhile purchase should ideally remain manageable even if actual performance is weaker than your original forecast.
Different lenders have different policies regarding equipment age, business history, documentation and loan structure. Comparing options can help identify a solution that suits the asset and the business purchasing it.
Frequently Asked Questions
How do you calculate equipment ROI?
Estimate the equipment's annual financial benefit, subtract annual operating costs and divide the resulting net benefit by the total equipment investment. Multiply the result by 100 to produce an estimated percentage.
What is a good ROI for business equipment?
There is no single percentage suitable for every business. The required return depends on the equipment's risk, expected working life, utilisation, alternative investment opportunities and the business's financial position.
Should I include finance repayments in the calculation?
Repayments should be considered when assessing cash flow. However, a repayment commonly includes both principal and interest, so it should not necessarily be treated entirely as an operating expense in a detailed accounting ROI calculation.
Should I buy or hire equipment?
Buying may suit equipment that will be used regularly over an extended period. Hiring can be more practical for one-off work, uncertain demand or highly specialised machines that would otherwise remain unused.
Can used equipment provide a better ROI?
Potentially. Used equipment generally has a lower purchase price, which may improve the return on investment. However, maintenance history, condition, remaining service life and potential repair costs should be assessed carefully.
Can a new business obtain equipment finance?
Some lenders consider eligible newer businesses depending on industry experience, asset type, business circumstances and the overall strength of the application.
Is Low Doc equipment finance available?
Low Doc equipment finance may be available to eligible self-employed applicants through participating lenders, subject to their individual lending requirements.
Ready to Invest in Your Next Piece of Equipment?
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