Why a machine with a 3.2-year payback period costs €434,375 in year one

The quotation is on the table. A new five-axis machining centre with robot loading, €480,000 excluding VAT. The saving has been worked out: one operator fewer on the night shift and less scrap, together €150,000 per year. The payback period is 3.2 years. For a machine that lasts ten years that is an easy decision, and the owner-director signs.

Six months later the bank calls. The overdraft facility is at its limit and the second-quarter VAT has not yet come back. The new machine has only been running at full speed since last week. The calculation was right. What was missing from the calculation was the question of how much money the company had to be able to spare in the first year, and where it would come from.

The payback period measures the return on the investment: how long the saving takes to recover the purchase price. The liquidity you need along the way is measured with a different number, the lowest cash balance in the first year, and that number is not on the quotation. We earn money from conversations about exactly that cash flow, so read the conclusions below with that in mind.

Why small companies decide on payback period, and what is then missing

Graham and Harvey (2001), peer reviewed, surveyed 392 CFOs and found that large companies mainly use present value methods, while small companies relatively often use payback period as a criterion. Twenty years later Graham (2022), peer reviewed, repeated that study and described decision rules that are conservative and persistent, with internal forecasts that the CFOs themselves consider reliable only two years ahead. A payback period of 3.2 years therefore reaches further than the horizon over which the same CFOs trust their own figures.

At manufacturing companies with revenue between €4 and €15 million, we see that the payback period is usually the only calculation made for an investment. There is a good reason for that. The calculation takes one minute and everyone at the table understands it. It also forces an honest estimate of the saving. Two things are missing from it: the timing of the money within the first year, and everything that still has to be paid after the purchase price before the saving begins.

The worked example: from 3.2 to 3.9 years

In this worked example a metalworking company orders a €480,000 machine excluding VAT on 5 January. The supplier asks for a 30 percent deposit with the order and the rest on delivery. The lead time is twelve weeks, the machine is installed at the end of March and handed over at the beginning of April. The saving is €150,000 per year, €12,500 per month, as soon as the machine runs at full capacity.

What actually goes out of the door in the first year:

The purchase price was €480,000. Spending is €525,000, because the machine only makes money once it is in place, connected and commissioned, and the people can work with it. The saving in the first year is €90,625 instead of 150,000, because the machine yields nothing up to and including April (ordered in January, handed over at the beginning of April) and then needs two months to get up to speed.

The annual total of €434,375 is not even the lowest point. At the end of April, when the balance has been paid and the saving has yet to begin, the counter stands at €525,000. Then there is the VAT: 21 percent on €480,000 is €100,800, of which €30,240 is paid in January and €70,560 in April. A quarterly filer only gets that money back in the return after the end of the quarter. In April €625,800 is therefore temporarily outstanding. That money comes back, in May and in August, but the overdraft facility has to carry it in the meantime.

The same calculation over five years:

Cash is back at zero after 3.9 years, counted from the order. The payback period on the quotation said 3.2 years. With the additional costs included, but without the start-up months, it comes to 3.5 years (525,000 divided by 150,000). About half of the difference between 3.2 and 3.9 is therefore costs that are not on the quotation, and the other half is the months in which the machine is there but not yet yielding anything.

Why the profit and loss account does not show the cash dip

The accountant books the machine plus the foundation and connection, together €502,000, as capital expenditure (capex) on the balance sheet and depreciates it. The Belastingdienst (Dutch Tax Administration), a government source, allows at most 20 percent of the acquisition cost per year for tax purposes, so at least five years. In this example we use those five years and no residual value: €100,400 depreciation per year, nine months in the first year, so €75,300.

The result in year one: €90,625 saving, minus €75,300 depreciation, minus €8,000 training, minus €15,000 lost contribution. That is minus €7,675. From year two it is plus €49,600 per year (150,000 minus 100,400). So for the first year the profit and loss account shows a loss of €7,675, while the bank account is €434,375 lower. If you try to read the investment from the monthly figures, you will not see it there. We describe the same blind spot in the article on cash flow as a brake on growth.

From year two, corporate income tax (vennootschapsbelasting) is due on that €49,600 of extra profit, 19 percent in the first bracket, €9,424 per year; that amount falls in the assessment after the end of the year and therefore belongs in the cash planning for year three. The investment allowance does not help here: the kleinschaligheidsinvesteringsaftrek 2026 (small-scale investment allowance) tapers to zero above an investment amount of €398,236, and at €502,000 this machine is above it. If the machine is on the Energy List (Energielijst), an energie-investeringsaftrek (Energy Investment Allowance, EIA) of 40 percent applies in 2026, to be notified in advance to RVO, and the Belastingplan 2027 (2027 Tax Plan) proposes an increase to 45 percent from 2027, a bill that still has to pass both chambers of parliament. That trade-off is covered in the article on the EIA and postponing an energy investment.

Why the changeover costs money, and how much

The two months of start-up and the three weeks of lower output in the example are assumptions. Their direction has been researched. Terwiesch and Bohn (2001), peer reviewed, describe the period between handover of a new production process and full utilisation as ramp-up: the process is still poorly understood, which gives low yields and low production rates, and learning through deliberate experiments costs capacity in the short term. Haller and others (2025), peer reviewed and open access, conclude in a literature review that ramp-ups are often poorly executed and miss their targets, and that managers in that phase make decisions without sufficient data.

Neither source gives a percentage for a machine in an SME workshop. What we see at clients: with a replacement machine with familiar operation, start-up is done in four to six weeks; with a new technology (from three to five axes, from manual to robot loading) it takes two to three months before the saving is fully visible, and in those months the old costs simply continue. If you do not count those months, the first quarterly report after handover shows a saving of €15,625 where the quotation promised €37,500.

Financing a machine with own funds, a bank loan, financial lease or operational lease

The machine can be paid from own funds, with a bank loan, with financial lease or with operational lease. In this worked example the bank finances 80 percent of the purchase price (€384,000) over five years on a straight-line basis, paid out on delivery in April with the first repayment in May, at 12-month Euribor plus 2 points. According to euribor-rates.eu, market data, 12-month Euribor stood at 3.379 percent on 25 September 2026, the highest level so far this year; we therefore use 5.4 percent. The financial lease covers 100 percent, in 60 instalments of €9,280 at 6.0 percent, because in our practice a lease is half a point to one and a half points above the bank loan. The operational lease in this example is a 60-month rental contract at €9,900 per month, with the leasing company remaining the owner and keeping the residual value. You pay the €45,000 of additional costs (foundation, transport, training and lost production) yourself in all four cases.

The row that matters is the top one. Own funds cost €434,375 in year one. The bank loan brings that back to €116,321, because the bank pays the balance and repayment only starts in May (€51,200 repayment and €14,746 interest in the first year). The financial lease drops to €37,895, the operational lease to €43,475. The price for that is in the third row, which also counts the instalments falling in the sixth calendar year, so that the full financing costs are visible: with own funds you keep €165,625, with the loan €111,193 (the difference is €54,432 of interest, calculated from April in year one up to and including April in year six), with the financial lease €88,825 and with the operational lease €51,625, and in that last case the machine is not yours after five years.

For the balance sheet and for tax, the distinction between financial lease and operational lease (operating lease) is sharp. The KVK (Chamber of Commerce), government-affiliated information, puts it like this: with financial lease you are the economic owner, put the purchase price on the balance sheet, depreciate and can use the investment allowance; with operational lease ownership stays with the leasing company, you do not depreciate, get no investment allowance and pay VAT per instalment instead of on delivery. Under Dutch accounting standards (RJ 292) the lessee recognises the costs of an operational lease in the income statement over the term and does not capitalise a right of use, as described by Crowe Peak (2023), an adviser's page. Under IFRS 16 that distinction would disappear, but a Dutch private limited company (bv) of this size usually reports under the RJ.

That leasing does more than spare cash is shown by Eisfeldt and Rampini (2009), peer reviewed: because a leasing company repossesses a leased machine more easily than a bank can enforce on a pledged machine, leasing has a higher debt capacity than a secured loan, and companies with tighter financing therefore lease a larger share of their capital goods. We see this at companies that are already at their limit with the bank: the leasing company says yes where the bank says no, and the lease instalment of €9,280 per month then comes on top of a limit that is already full.

What the bank looks at with a machine investment: solvency and DSCR

Take a company with a balance sheet total of €6 million and €2.1 million of equity, a solvency ratio of 35 percent. If it pays for the machine from own funds, nothing changes on the balance sheet about that 35 percent: money becomes machine. The bank loan puts €384,000 of debt on the balance sheet, and solvency drops to 32.9 percent. The financial lease puts €480,000 on it, and solvency drops to 32.4 percent. The operational lease leaves the balance sheet untouched, while you have to pay the same €9,900 per month. In credit terms for companies of this size we usually come across a solvency floor of 30 to 35 percent; this investment therefore puts the example company right on the edge in two of the four variants.

The second ratio is the DSCR, the debt service coverage ratio: operating cash flow divided by interest plus repayment in that year. On the investment itself it is 150,000 divided by 92,870 in year two (76,800 repayment plus 16,070 interest), which is 1.6. In year one the same ratio is much tighter: the extra operating cash flow is €90,625 saving minus €23,000 training and lost contribution, so €67,625, against €65,946 of repayment and interest (51,200 plus 14,746). That is 1.03. The bank, however, calculates it over the whole company, including all existing loans. We see 1.2 to 1.3 as the usual floor in covenants. A company with €210,000 of operating cash flow and €150,000 of interest and repayment is at 1.4. With the investment added it comes to 277,625 divided by 215,946 in year one, which is 1.29, and so drops below a threshold of 1.3. From year two it is 360,000 divided by 242,870, which is 1.48. That is the conversation the company from the opening ended up in. The investment was good; the covenants are tested on year one and the saving only counts in full from year two. How the bank looks at the rest of a project company's balance sheet is covered in the article on work in progress and the credit limit.

What is acceptable, and when you know it

The calculation above produces four numbers that you put side by side before signing. What we use as workable limits with clients:

The first test is the most important, and it is the one we see done least. We come across companies with an overdraft limit of €500,000 and average use of €250,000 that want to pay for a €480,000 machine from own funds. The free room is €250,000, the dip is €525,000 without VAT. That does not fit: the shortfall in April is €275,000, still without the VAT.

When this does not apply

For a company with €1.5 million of cash and no bank debt, this article is an exercise in precision: the dip of €434,375 fits comfortably and solvency stays where it was. The payback period of 3.2 years is then a perfectly good decision measure. Even if the old machine breaks down and the choice has become "invest or stop supplying", the year-one cash planning is still needed; the decision itself is then already made.

The model also assumes a saving that comes in fully from July. With a machine that adds capacity instead of saving costs, the yield depends on the order book. According to the S&P Global flash PMI of 23 September 2026, new orders in European manufacturing are growing at the fastest rate in over four years; if you order a machine on that wave for work that is not there yet, you are counting on a saving that only comes when the orders come. Then year one gets deeper than €434,375 and year two later than plus 150,000.

And the model works with one machine. At suppliers that buy three machines and a building in one year, we see that each separate calculation is right, while nobody has added them up: three times a dip of €116,321 with bank financing is €348,963 in the same year, plus three times the start-up months.

What you can do yourself before you sign

The proper method is a monthly cash flow forecast for the whole company, with the investment as a separate line, including the existing loans, the VAT returns and tax. That is what we make for clients, so we have an interest in it. The do-it-yourself version is smaller and covers most of the risk.

Make an investment budget on a monthly basis: twelve columns for the months of the first year. For each month fill in what the supplier invoices (deposit, balance), what comes on top (foundation, transport, installation and training, €30,000 in the example), what the changeover costs in lost contribution (€15,000), the VAT on each invoice and the month in which it comes back, and the saving with a start-up percentage per month (50 and 75 percent in the example, full after that). Add it up cumulatively. The lowest number in that row is the dip you must be able to carry. In the example that is €625,800 in April, and the calculation takes a quarter of an hour.

The supplier is the second lever. A deposit of 10 percent instead of 30 percent makes a difference of €96,000 in January in this example; a final instalment of 10 percent after acceptance shifts €48,000 to the month in which the machine is already running. In our practice suppliers are willing to move on this with a company that can show the calculation.

The VAT deserves a line of its own, because the pre-financing is €70,560 for four months for a quarterly filer. If you switch to monthly returns in the year of a large investment, you get that money back weeks earlier; whether that is possible is a question for your accountant.

You test the form of financing against the dip: in this example the bank loan costs €54,432 of interest over the term and takes €318,054 out of the year-one dip. Those two numbers side by side are the calculation the choice turns on.

Record the start-up months in the investment proposal. Write down which start-up percentage you expect per month (50 percent in May and 75 percent in June in the example) and from which month the saving counts in full, and compare that with the monthly figures. If the machine stays stuck at 60 percent in July, that is a signal that Terwiesch and Bohn's ramp-up is taking longer than planned, and then the cash payback period shifts too.

In the budget the investment belongs on a cash basis, next to the depreciation. The profit and loss account shows minus €7,675 in year one. A budget that steers on that will never see the dip of €434,375 coming. How to steer a growing company on cash instead of profit is covered in the article on the installation company that got stuck at the bank.

Tax and legal: the questions for your adviser

This article describes the tax rules as the Dutch Tax Administration and the KvK publish them and does not give tax or legal advice. The questions that come out of the worked example and that you put to your accountant or tax adviser: does the investment count for the small-scale investment allowance in the year of the order or of payment, given that the Tax Administration defines investing as entering into the obligation; does spreading over two years pay off, so that each part stays below the €398,236 threshold; is the machine on the Energy List and does the notification to RVO have to go out before the order; and is the lease contract called "operational" also an operational lease in the annual accounts, given who bears the economic risk.

Frequently asked questions about payback period and cash flow for a machine investment

How do I calculate the payback period of a €480,000 machine?

Divide the purchase price by the annual saving: 480,000 divided by 150,000 is 3.2 years. If you want to know when cash is really back at zero, add the additional costs to the purchase price (€45,000 in the example) and calculate the first-year saving with the lead time and the start-up months included (€90,625 instead of 150,000). That gives 3.9 years from the order.

Why is my cash flow in the first year much worse than the payback period suggests?

Because the payback period compares the purchase price with a full year of savings, while in the first year the deposit, the balance, installation, training and lost production are all paid before the machine is up to speed. In the example, cash flow in year one is minus €434,375 and the profit and loss account minus €7,675.

Which costs come on top of the purchase price of a machine?

In the worked example these are the costs of getting the machine running (foundation, transport, installation, connection, training and commissioning: €30,000) and the lost contribution during three weeks of lower output at the changeover (€15,000). Together €45,000 on a machine of 480,000, just over 9 percent. With a new technology we see that percentage turn out higher, mainly because of a longer start-up.

Do I have to pre-finance the VAT on a machine investment, and for how long?

Yes, except with operational lease you pay the VAT with the invoice and get it back through your return. In the example a quarterly filer advances €70,560 for about four months. With operational lease the VAT is charged per instalment, as the KvK describes, and there is no peak.

What is better for a manufacturing company: own funds, a bank loan, financial lease or operational lease?

That depends on the dip you can carry and on your credit terms. In the example the bank loan brings the year-one dip from 434,375 to €116,321 against €54,432 of interest over the term. Financial lease and operational lease bring the dip down further (€37,895 and €43,475), but over the term cost €76,800 and €114,000 respectively more than own funds, and with operational lease the machine is not yours afterwards.

Is operational lease on the balance sheet, and what does that do to my solvency?

Under Dutch accounting standards (RJ 292) the lessee accounts for an operational lease as an expense in the income statement and does not recognise a right of use on the balance sheet, as Crowe Peak describes. Solvency stays the same on paper, 35 percent in the example, while the bank loan takes it to 32.9 percent and financial lease to 32.4 percent. The payment obligation of €9,900 per month does still exist, and a bank that asks for the lease contract will include it.

What is DSCR and why does the bank ask for it with an investment?

DSCR is the debt service coverage ratio: operating cash flow divided by interest plus repayment in the same year. We see 1.2 to 1.3 as the floor in covenants. A bank loan adds €65,946 of repayment and interest in year one (€92,870 in year two), while the extra operating cash flow in year one is only €67,625 and only reaches 150,000 from year two. That is why year one is the year in which the ratio is tightest.

How much lost production should I allow for when changing over to a new machine?

Terwiesch and Bohn (2001) describe that a new process has lower yields and production rates during ramp-up and that learning costs capacity; they give no percentage. For a replacement machine with familiar operation we allow four to six weeks of start-up and for a new technology two to three months, in the example 50 percent in the first month and 75 percent in the second; full output after that. Record those percentages in the investment proposal, so you can test them against the monthly figures.

Further reading: work in progress that the bank does not count, the installation company that gets stuck at the bank through growth, postponing a heat pump for the higher EIA and cash flow as a brake on growth. New: Why a food producer with €400,000 profit has €60,869 less in the bank.

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