No matter what the business investment decision, whether you are purchasing a press, expanding your facility, or buying supplies, if the final result doesn't somehow lead to profit improvement, then the exercise is futile. More importantly, in a capital-intensive industry like printing, investment mistakes often lead to grave consequences. There are some basic financial metrics that can be used to help evaluate and compare capital investment choices. Before discussing these measures, their underlying components must be addressed. In general, three pieces of information form the foundation for analyzing investments.
Many printers fall short in assessing all of the costs associated with a given capital decision.
There are some key cost considerations to think about. The sum of additional net earnings generated from the investment and any tax benefits from asset depreciation must be determined from the potential investment. This is the required rate of return for a given investment, often referred to as the hurdle rate in capital budgeting. This criterion is popular because of its simplicity, but its main disadvantage is that it ignores the value of money over time. To compensate for that shortcoming, future cash flows can be discounted, meaning that the present value of the future cash flows must be determined by applying the appropriate discount rate or hurdle rate that reflects the risk of a project.