Buying a new machine, a van or more expensive software is a decision worth tens of thousands of euros — and a gut feeling that it will pay off is not enough at that scale. Return on investment (ROI) is a simple way to estimate, before you buy, whether and when the money you put in will come back. It is not advanced mathematics: you compare the benefit of the investment with its cost, and include what is easily overlooked — depreciation, tax and the time value of money.
What is return on investment and why calculate it before buying?
Return on investment expresses how much extra a company earns because it put money into something — a machine that speeds up production, a vehicle that expands deliveries, or software that saves hours of admin. They share one feature: you pay today and the benefit arrives gradually, over months or years.
That is exactly why it pays to calculate in advance. The calculation need not be perfect — its purpose is not an exact figure to the euro, but a decision: yes or no, and roughly when. For Slovak companies, our overview of professional accounting in Slovakia puts these decisions in a wider context.
How to calculate the payback period?
The simplest indicator is the payback period — how long it takes for the investment to pay for itself from the money it brings in. The formula is straightforward: divide the purchase price by the annual net benefit (the saving or additional profit after tax).
Example: a machine costing 24,000 EUR saves 8,000 EUR a year in costs. The payback period is 24,000 divided by 8,000, that is 3 years. If the machine lasts eight years, the remaining five years already work for the company. The payback period is clear and quick, but it has a weakness — it ignores what happens after it ends, and the fact that a euro today is worth more than a euro in three years.
What does ROI tell you and how to use it?
ROI (return on investment) expresses the benefit as a percentage of the amount invested. You calculate it as the net benefit over the whole period divided by the purchase price, multiplied by a hundred. If a machine costing 24,000 EUR delivers a net benefit of 40,000 EUR over eight years, the ROI is roughly 167 % over the period, or about 21 % a year.
ROI is useful for comparing different investments — whether to buy machine A or machine B, or whether to put the money elsewhere. It is important to calculate it from the net benefit — after operating costs and tax — not from the gross saving. Otherwise the numbers will promise more than the investment actually delivers.
Why include tax depreciation and the time value of money?
More expensive assets are not expensed at once — they are spread through depreciation over several years. In Slovakia, machinery is usually depreciated over six years, computers and most IT over four years, and a passenger car also over four years. Depreciation reduces the tax base gradually, so the tax saving from an investment does not arrive immediately but over the years — and that belongs in the calculation. Assets up to 1,700 EUR, or software up to 2,400 EUR, can be expensed directly, which speeds up the return.
The second factor is the time value of money: a thousand euros you receive in five years is worth less today than a thousand euros in hand. For longer investments, future benefits are therefore discounted to present value. You do not need a complex model; it is enough to know that the longer the payback, the more cautiously you should treat the numbers.
When is it better to buy, rent or finance with a loan?
Return affects not only whether to invest but how to pay for it. Buying from own funds is cheapest but ties up cash that is then missing for operations. A loan or lease frees up cash but adds interest — which must be counted as a cost in the return calculation.
A simple rule applies: if the investment yields a higher percentage than the loan interest, financing with borrowed money makes sense — the company earns more than it pays in interest. If the return is lower than the interest, borrowing makes the investment more expensive. Our note on Slovak tax advisory for companies covers how the tax side fits into these decisions.
What mistakes do companies make when evaluating investments?
The most common mistake is counting only the gross saving and forgetting the operating costs a new asset brings — service, energy, insurance, training. The second is ignoring tax and depreciation, so the investment looks better on paper than it really is. The third is overstating the benefit: an optimistic estimate of the saving often fails to materialise.
A sensible approach is to calculate cautiously — slightly underestimate the benefit and slightly overstate the costs. If the investment works out even under a conservative calculation, it is a safe decision. If it pays off only under the most optimistic scenario, it is wiser to wait or look for a cheaper alternative.
Considering a larger investment in a machine, vehicle or technology? We will calculate the return and the tax impact and advise whether to finance it from own funds or with a loan.
FAQ
How do I quickly calculate the payback period of an investment?
Divide the purchase price by the annual net benefit — the saving or additional after-tax profit the investment brings in a year. The result is the number of years in which the investment pays back. If a machine costing 24,000 EUR saves 8,000 EUR a year, the payback period is three years.
What is the difference between the payback period and ROI?
The payback period tells you how long it takes for the investment to pay for itself, expressed in years. ROI expresses the total benefit as a percentage of the amount invested and is better suited to comparing several investments. The first answers when, the second how much.
Do I need to include tax and depreciation in the return?
Yes. More expensive assets enter costs gradually through depreciation, so the tax saving does not arrive at once but over several years. If you ignore tax and depreciation, the calculation distorts the real return. Always calculate with the net benefit after tax, not the gross saving.