The difficulty in deciding whether to purchase a new machine for a given task is universal. For instance, I am asked at least once a week by all kinds of shop owners whether to buy an edgebander. This is a sizable investment, but it may represent a good one if the right one is bought for the right applications and the right size of business.

Look at the alternatives to having the machine in-house before coming to any conclusion. From a practical point of view, an edgebander certainly will do a better and faster job than banding by hand. It may increase the opportunity to do more work than without it, in particular work that you have shied away from because of the volume of banding entailed. It may also increase your professionalism as a company. How then can you justify such a tool?

Do the math

As all smart business decisions must be, it is a question of the numbers. So let us look at an example. Say a shop with \$1 million in annual sales generates these sales with four people working on the shop floor. This means one worker will produce \$250,000 per annum. A 40-hour week at 50 weeks is 2,000 hours per annum, so by division each worker generates revenues of \$125 per hour. This is the opportunity cost of one man-hour, for this particular example.

Let us further say that a total time of 30 hours per month is spent on edgebanding by hand by one worker or another. This means that the edgebanding must generate \$125 per hour, resulting in a total opportunity cost of \$3,750 per month. Now, let us look at the alternative.

Considering options

An edgebander for the size of business we chose to look at can cost from \$10,000 to \$30,000, so let's take a mean of \$20,000. Such a machine, amortized over five years, will cost \$4,000 per year or \$334 per month, without considering any other costs like interest on money or installation, etc. For simplicity we simply write off this tool and assume it has no value after the five-year period.

This cost could be erroneously expressed as \$2 per hour (\$4,000/2,000 hours), which is a total illusion because it would work far fewer hours than that. The cost can, however, be expressed in the saving of time and thus increase the opportunity of the workman to do other work, which is certainly more valuable than edgebanding by hand.

Typically we would reduce the time from the stated 30 hours per month to 2 hours with the use of the machine. This saves us 28 hours a month which equates to in increase in opportunity cost of 28 x \$125 = \$3,500, representing added revenue created by the shop.

That means that the investment for the edgebander on a monthly basis represents 10 percent (\$334/\$3,500) of the gain, which is less than virtually all costs, thus making it a good investment. Under consideration of 40 percent material costs, this investment represents a return on investment of less than a year which makes it a great one.

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