Page 44 - An Introduction To Predictive Maintenance

34 An Introduction to Predictive Maintenance

because of inflation. It also assumes a uniform stream of payback, and it ignores any
returns after the two years. Why two years instead of any other number? There may
be no good reason except “The controller says so.” It should also be noted that if
simple payback is negative, then you probably do not want to make the investment.

Percent Rate of Return (PRR)
Percent rate of return is a close relation of payback that is the reciprocal of the payback
period. In our case above:

25
$,000
= . 05 50% rate of return
=
$0,000
5
This is often called the naive rate of return because, like payback, it ignores the cost
of money over time, compounding effect, and logic for setting a finite time period for
payback.

Return on Investment (ROI)
Return on investment is a step better because it considers depreciation and salvage
expenses and all benefit periods. If we acquire a test instrument for $80,000 that we
project to have a five-year life, at which time it will be worth $5,000, then the cost
calculation, excluding depreciation, is:

( $0 000 - $50 000)
8
,
,
= $15 000 per year
,
5 years
If we can benefit a total of $135,000 over that same five years, then the average incre-
ment is:
6
$0,000
75
1
1
$3 ,000 - $ ,000 = = $ 2,000 per year
5
5 years
The average annual ROI is:
75
$,000
=
= . 55 55%
$3 ,000
5
1
Ask your accounting firm how they handle depreciation because that expense can
make a major difference in the calculation.
Internal Rate of Return (IRR)
Internal rate of return is more accurate than the preceding methods because it includes
all periods of the subject life, considers the costs of money, and accounts for differ-