Does the 4.2-Month Payback Count the Operating Cost?

Ada re-derives this chapter’s own numbers step by step, at full precision

ADA · CALCULATION AUDIT

Does the 4.2-Month Payback Count the Operating Cost?

The chapter’s ROI table shows a 4.2-month payback: 8 failures a year at $75,000 each is $600,000, and preventing 85% saves $510,000 against a $180,000 investment. But that divides by the gross savings and never subtracts the $36,000/year operating cost. This audit rebuilds the cash flow to ask: does the 4.2-month payback count the operating cost?

Companion to the chapter Predictive Maintenance — every number here comes from that chapter.

Ada: A payback figure is only as honest as the cash flow underneath it, so let me rebuild the Sample ROI table’s 4.2 months from its own inputs and check exactly what that number includes.

First, what does one failure actually cost? The $600,000 annual figure hides a two-part cost per failure — lost production plus a replaced motor:

• Cost per failure: 12 hours x $5,000 + $15,000 = 60,000 + 15,000 = $75,000
• Annual failure cost: 8 x 75,000 = $600,000, matching the table

Now the savings and payback:

• Prevented failures: 8 x 0.85 = 6.8 per year
• Gross annual savings: 6.8 x 75,000 = $510,000
• Payback as printed: 180,000 / 510,000 = 0.3529 years = 4.2 months

That reproduces the table exactly — but notice it divides the investment by the gross $510,000 and never subtracts the $36,000/year operating cost the table lists just above it. Net that cost out, the way the chapter’s own chemical-plant example does, and the figure moves:

• Net annual savings: 510,000 - 36,000 = $474,000
• Net payback: 180,000 / 474,000 = 0.3797 years = 4.6 months

The two numbers — 4.2 months gross, 4.6 months net of operating cost — bracket the truth, about ten days apart, and the headline conclusion (payback in under half a year) holds either way. The design lesson is small but load-bearing: a payback figure should always say whether it is gross or net of running costs, because the same investment reads faster or slower depending on that one unstated choice, and the number the operating budget actually feels is the net 4.6 months.

Every number above is taken from the chapter’s own material and re-derived step by step.