Using a Cost Benefit Analysis For Capital Expenditures.

February 19, 2020 • By

Companies know that to increase market share, customer service, reduce costs, and gain a competitive advantage, they must expand at some point, which is often associated with high capital expenditure. What is capital expenditurecapital expenditure is used for improvement and expansion. In most companies, allocations are made for capital expenditures. Although this can often be nervous, using a cost-benefit analysis approach can make this purchasing decision a lot easier. So, what is the process by which a company can systematically reduce the likelihood of a mistake and make sure that the purchase decision is correct?

Evaluate product life cycle and market trends

  1. Evaluate product life cycle and market trends

For any decision necessary to move forward, a thorough analysis of the product’s life cycle in the market and where the market is heading is essential. This includes a detailed analysis of product and market trends, the purpose of which is to determine the future demand for the product after 1, 5 or even ten years in the market. Is the product in the initial stages of implementation, in the growth phase, in the mature phase, or in the recession phase? Each of these steps means a different approach.

  1. Estimate the reputation of machinery or equipment

No business ever plans to buy something to do so later. However, even in situations where the company has completed its homework, there is still a chance of error. The company can do everything right in this case, and still face a situation where the market is changing, and it must sell its equipment. If this equipment has poor resale value or a poor reputation, the ability to sell this equipment in an emergency will be extremely difficult.

  1. Determine the cost of ownership

Regardless of what is purchased or how well the equipment is advertised, there is always a cost of ownership and maintenance. The company also pays for training employees to use it.

  1. Determine the time for payment and set the purchase price

In this case, the company knows that the machines will increase productivity by 30%. This increase in production should be turned into a value that the company can use to measure its benefits. What does a 30% increase in production capacity mean for a company? How many extra units will be made per day, and what is the current gross profit per unit? Based on this value, the company can determine the daily, weekly, monthly, quarterly, and annual additional gross profit received as a result of increased productivity.

Although each of these four steps summarizes the approach that needs to be taken, each of them requires a much more in-depth and more intensive analysis. The purpose of this is to eliminate, as far as possible, the possibility of failure. This is not a simple solution, but if you spend time carefully analyzing each of these aspects, this solution will become much more comfortable.