How can you estimate the payback period of your automation and robotics projects?

1 What is payback period?

Payback period is a simple and intuitive way to measure the profitability of a project. It is the number of years or months it takes for the net cash flows from the project to equal the initial investment. For example, if you spend $100,000 on a robot that generates $20,000 of net cash flow per year, the payback period is five years. The shorter the payback period, the faster you can recover your investment and start making profits.

2 How to calculate payback period?

To calculate the payback period, you need to estimate the initial investment and the net cash flows of the project. The initial investment includes the purchase price, installation costs, training costs, and any other upfront expenses related to the automation and robotics solution. The net cash flows are the difference between the revenues and the expenses generated by the project, such as increased productivity, reduced labor costs, lower maintenance costs, and higher quality. You can use a spreadsheet or a calculator to divide the initial investment by the annual net cash flow to get the payback period in years. Alternatively, you can use the formula:

Payback period = Initial investment / Net cash flow per period

3 What are the advantages and disadvantages of payback period?

Payback period has some advantages and disadvantages as a tool for evaluating automation and robotics projects. It is easy to understand and communicate, and it helps to identify projects that have a quick return on investment, as well as reducing the risk of uncertainty and changes in the market. On the other hand, it ignores the time value of money, cash flows after the payback period, and opportunity cost. That is to say, it does not account for the interest rate or inflation, reflect the total profitability or life cycle of the project, or compare the project with other alternatives or the minimum required rate of return.

4 How to improve the accuracy of payback period?

Payback period can provide a useful indication of the financial viability of automation and robotics projects, but it should not be the sole criterion for decision making. To ensure accuracy and reliability, you should use realistic and conservative estimates of the initial investment and net cash flows, adjust the net cash flows to account for inflation and taxes, and use a discounted payback period to reflect the time value of money. Additionally, you should compare the payback period with other metrics, such as net present value, internal rate of return, or return on investment.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?