Buy equipment or keep outsourcing? Compare the cash commitments
Compare equipment purchase and outsourcing using volume, timing, fixed and variable costs, and disposal proceeds.
An outsourced unit can appear expensive, while buying equipment requires money upfront and introduces fixed staffing, maintenance and idle-capacity risks. Compare the options over the same output, quality, delivery requirements and time horizon, including yearly cash payments, the initial investment and any disposal proceeds. Then change the demand assumptions and recalculate.
Lower cumulative payments over three years do not by themselves show that the business can fund the initial purchase. The difference is not automatically accounting profit or a tax saving.
Compare the first three years
Assume a business needs a standard component and both options meet its quality and delivery requirements. Output is equal in each year and the equipment's available capacity is 650,000 units a year. Figures are in renminbi on the same VAT-inclusive cash basis. For this calculation, financing, income tax, changes in recoverable taxes, price changes and other outflows are excluded. At the end of year three, the equipment is expected to sell for RMB 600,000 after disposal costs; this is an estimate, not a guaranteed sale.
| Cash item | Buy | Outsource |
|---|---|---|
| Initial purchase and setup | RMB 6.0m | None |
| Annual fixed staff and upkeep | RMB 2.0m | None |
| Variable cost per unit | RMB 6 | RMB 14 |
| Year 3 net resale proceeds | RMB 0.6m | None |
At 600,000 units a year, variable cash spending with the equipment is 600,000 × RMB 6 = RMB 3.6m a year. Adding RMB 2.0m of annual fixed spending gives RMB 5.6m per year. Three-year undiscounted net cash spending is:
RMB 6.0m + (RMB 5.6m × 3) − RMB 0.6m = RMB 22.2m.
Outsourcing costs 600,000 × RMB 14 = RMB 8.4m a year, or RMB 25.2m over three years. Under these assumptions, buying has RMB 3.0m less undiscounted net cash spending, but it also needs RMB 6.0m at the start. Check that this payment is affordable alongside working capital needs.
Lower utilization can reverse the result
Keeping the other assumptions unchanged, reduce demand to 400,000 units per year:
| Item | Buy | Outsource |
|---|---|---|
| Annual variable cost | 400,000 × RMB 6 = RMB 2.4m | 400,000 × RMB 14 = RMB 5.6m |
| Three-year undiscounted net cash spending | RMB 6.0m + (RMB 2.0m + 2.4m) × 3 − RMB 0.6m = RMB 18.6m | RMB 5.6m × 3 = RMB 16.8m |
Outsourcing is then RMB 1.8m less over three years. With the same annual volume in each year and all the other stated amounts fixed, the two totals meet at 475,000 units per year:
(RMB 6.0m + RMB 2.0m × 3 − RMB 0.6m) ÷ [3 × (RMB 14 − RMB 6) per unit] = 475,000 units a year.
That threshold is specific to these assumptions. Minimum orders, tiered outsourcing prices, changing annual volume or insufficient equipment capacity require a fresh calculation. The assumed capacity is 650,000 units a year; do not extend the RMB 6 unit cost beyond it without considering extra capacity.
Put the missing commitments on one timeline
| Check | What to include for each option |
|---|---|
| One-time outlay | Buy: equipment, freight, installation, training and site changes. Outsource: tooling, samples, integration, deposits or transition costs. |
| During operation | Buy: staff, energy, upkeep, spares, insurance, downtime and quality losses. Outsource: minimum orders, volume tiers, rush charges, transport, quality claims and price changes. |
| Payment timing | Buy: deposit, delivery and acceptance payments, loan repayments. Outsource: prepayment, reconciliation, credit terms and deposit return. |
| At the end | Buy: sale proceeds net of disposal costs, removal and restoration. Outsource: termination costs and handover of tools and data. |
Include future cash items that actually change between the choices. Items equal under both choices can be shown separately as common costs. An amount already paid and unrecoverable is not a second future cash outflow simply because it was spent in the past.
Keep discounting, depreciation and tax distinct
The table makes the undiscounted comparison transparent. For a decision with material timing differences, map expected cash flows to when they occur and discount them using a rate consistent with those flows; place disposal proceeds at their expected receipt date. If comparing after-tax flows, include applicable taxes and the timing of actual recoveries, rather than treating an unverified incentive as guaranteed cash.
Cash paid for equipment and accounting depreciation answer different questions. When the cash comparison already includes the equipment purchase, do not add non-cash depreciation as another purchase payment. For entities applying China's enterprise accounting standards, Accounting Standard No. 4 — Fixed Assets addresses useful life and estimated residual value and their review. Entities using another framework should apply their own rules; accounting and tax treatment can differ.
Finally, compare low, base and high demand, minimum cash balances, capacity, supplier reliability and delivery risk. Continue with supplier payment terms or the cash-planning example, or contact CaiGeek, an AI financial assistant for small and medium-sized businesses.
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