Posted on February 25, 2022 @ 04:53:00 PM by Paul Meagher
In this blog I want to discuss the concept of a "Payback Period" and how it can be used to analyze an investment decision.
I will use a recent investment I made to illustrate the application of the payback period concept.
Early this week I purchased a used Portable Toilet of the type that you use at outdoor events or for construction crews. It was pretty near brand new and I paid $1000 for it.
We held a couple of multiday weekend events last year at our farm that required renting portable toilets. The cost to rent each toilet was $100 ($25 transport, $75 rental). We will be hosting more events on the farm this year. In a non-pandemic year where there are more events happening, and there is significant inflation in the economy, the portable toilet rental company may need to charge more than $100 per unit for the weekend this year which I consider to be a pretty good deal. By having at least one portable toilet that we own and don't have to rent, a conservative estimate might be that we save at least $200 in fees for renting toilets each year in which case the investment will have a payback period of 5 years or less.
The payback period could be faster if we managed the portable toilet unit on site by transferring waste to a larger storage tank and only bringing in a vacumn truck to empty that larger storage tank. Sounds gross but I spent some of my youth shovelling cow manure into a wheel barrow so I am not easily grossed out by the thought of human manure handling.
Purchasing the portable toilet also gives us the ability to offer washroom facilities at the barn without having to make a larger investment into septic system upgrades right now. We can also be flexible in where we setup the portable toilet.
We have our first wedding event planned for the barn this year. We will likely rent the portable toilet out for wedding events which would speed up the payback period and start generating profit once the payback period is reached.
The payback period concept is a useful concept that can be used to think about investments involving buying certain goods that might assist your business. The payback period for an investment can change under different scenarios for how the purchased asset might be managed. Generally there are several different factors that people take into account when making an equipment purchasing decision and if the decision seems like a good one from several different aspects then it might be a good purchase to make.