Introduction

The amount spent by a company or an economy on capital assets,

or gross investment, less depreciation. Net investment helps give
a sense of how much money a company is spending on capital
items (such as property, plants and equipment), which are used
for operations. Subtracting depreciation from this amount, or
capital expenditure (since capital assets lose value over their life
because of wear and tear, obsolescence, etc.), provides a more
accurate picture of the investment's actual value. Capital assets
include property, plants, technology, equipment and any other
assets that can improve the productive capacity of an enterprise.

If gross investment is consistently higher than depreciation, net

investment will be positive, indicating that productive capacity is
increasing. Conversely, if gross investment is consistently lower
than depreciation, net investment will be negative, indicating that
productive capacity is decreasing, which can be a potential
problem down the road. This is true for all entities, from the
smallest companies to the largest economies.

Net investment is therefore a better indicator than gross

investment of how much an enterprise is investing in its business,
since it takes depreciation into account. Investing an amount
equal to the total depreciation in a year is the minimum required
to keep the asset base from shrinking. While this may not be a
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problem for a year or two, net investment that is negative for a
prolonged time period will render the enterprise uncompetitive
at some point.

A simple example will show how net investment is calculated.

Suppose a company spends $1 million on a new machine that has
an expected life of 30 years and has a residual value of $100,000.
Based on the straight-line method of depreciation, annual
depreciation would be $30,000 (i.e. {$1,000,000 - $100,000} / 30).
Therefore, the amount of net investment at the end of the first
year would be $970,000.

Continued investment in capital assets is critical to an enterprise's

ongoing success. The net investment amount required for a
company depends on the sector it operates in, since all sectors
are not equally capital intensive. Sectors such as industrial
products, goods producers, utilities and telecommunications are
more capital-intensive than sectors such as technology and
consumer products. Therefore, comparing net investment for
different companies is most relevant when they are in the same
sector.

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Measuring the Return on Investment for Equipment

Traditional methods of measuring the return on investment for a

new piece of equipment are being replaced. Rather than
measuring returns solely on capacity and cost effectiveness,
factors such as competitiveness also are being used to determine
the overall returns that a new piece of equipment provides.

When the financial department looks at the cost justification for a

new piece of equipment it usually wants to see a return of at
least 15 percent the typical cost of capital plus burden rate
over a given payback period. A normal payback period used to be
five years, but today's increased competition for capital is forcing
expected payback periods to be as short as two years. While
there are several cost justification methods, including the internal
rate of return, the accounting rate of return, the net present
value and other types of discounted cash flow analyses, all of
them focus on reduced labor, inventory or operating costs. But
how do you justify buying a machine that does not lower costs,
yet is critical to a company's survival?

What we are seeing more frequently are customers using a

capabilities-based return on investment calculation, rather than
the more traditional capacity-oriented justification. They're
looking at utilizing better technologies, improved methods,
systems and automation to create not only cost savings but also
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shorter process times, greater flexibility and elimination of work
in process.

We can provide customers with standard cost analysis on our

machines that they can plug into whatever ROI calculations they
do. Frequently a customer will be looking at a machine to use for
a specific contract, but we also have customers who are looking
at how upgrading their equipment will increase their margin,
their capacity or their competitiveness.

The 2006 American Machinist Benchmarking Survey asked

companies to describe their return on invested capital (net
operating profit after taxes/capital invested). The average ROI for
all shops in 2006 was 26.6 percent, up from 18.1 percent in 2003.
The top shops (those who perform in the top 20 percent)
reported an ROI of 34.6 percent, up from 21.4 percent in 2003,
while the other shops reported an average of only 19 percent, up
from 14.8 percent in 2003.

The average level of capital equipment spending for all shops (as
a percentage of sales for 2005) was 8.1 percent. Top shops spent
10.5 percent while the other shops spent 7.3 percent. Almost half
of all shops said they anticipated an increase in capital equipment
spending for 2006 versus 2005. 61.7 percent of the top shops
anticipated increasing capital spending compared to only 46.1
percent of the other shops.
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 Investment Cost
Owning equipment costs money, one part of ownership costs is
Investment costs which include the following:
The interest on the money invested.
Taxes of all types which are assessed against the equipment.
Insurance.
Storage.

To protect their equipment investment and be able to replace

it, the machine owner must recover over the ownership period
an amount equal to the loss in resale value plus the other costs
of owning the equipment including interest, insurance and
taxes.

1. Interest
Many owners charge interest as part of hourly owning and
operating costs, others consider it as general overhead in their
overall operation. When charged to specific machines, interest
is usually based on the owners average annual investment in
the unit.
Interest is considered to be the cost of using capital. The
interest on capital used to purchase a machine must be

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considered, whether the machine is purchased outright or
financed.
If the machine will be used for N years (where N is the number
of years of use), calculate the average annual investment
during the use period and apply the interest rate and expected
annual usage:
Interest on borrowed money, 12%

2. Insurance and Taxes

Insurance cost and property taxes can be calculated in one of
two ways. If the specific annual cost is known, this figure should
be divided by the estimated usage (hours/years) and used.
However, when
the specific interest and tax costs for each machine
are not known, the following formulas can be applied:

INSURANCE
N = No. Years
(p(N+1)+S(N-1) ) Insurance % Rate
_____________________________
___________2_N______________
Hours/Year

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Property tax
N = No. Years
(p(N+1)+S(N-1) ) Tax Rate %
___________________________
___________2_N_____________
Hours/Year

Taxes, insurance and storage, 8%

The rates for these costs vary among different owners, with
location and whether or not the equipment is actually used.
The average annual cost of interest (I), is based on the average
value of the equipment ( P ) during its useful life, which can be
calculated based on straight-line depreciation as follows:
P N 1 S N 1
P
2N

Where:
P Total initial cost
P Average value
N Life in years
S Salvage value
If there was no salvage value, then the following Eq.
P N 1
P
2N

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 References
1.
http://www.investopedia.com/terms/n/netinvestment.asp

(2015/3/21):

2. http://americanmachinist.com/machining-
cutting/measuring- new-equipment-return-investment-roil

(2015/3/21) :

3.
http://www.forconstructionpros.com/press_release/11274685/201
4-economic-outlook-construction-equipment-investment-expected-
to-decline

(2015/3/21) :

4.

http://www.fminet.com/investment-banking/ib-

industries/construction-capital-equipment.html

(2015/3/21):