Updated: Jun 27
When thinking about a new business venture, it's essential to consider the upfront investment costs, compared to the expected cash flows that will result from sale of the new products or services. Our CEO, Dr. Thomas P Seager, teaches a course at Arizona State University called Engineering Business Practices, and this kind of financial analysis is one of the cornerstones of the class.
There's even a term for it in business, call return on investment.
There are many different ways to measure return on investment, and the calculations can get pretty complicated. However, the simplest way is called "payback period".
Measured in units of time, the simple payback period answers the question, "How long will it take for my profits to equal my initial investment?"
Good businesses will typically fund new capital investments that have a simple payback period of less than three years.
For a business that is selling whole body cold water immersion as a service, the simple payback period on a Prism Forge is less than six months.
Let's go through the calculations.
The first thing we need to know is, "How many people can plunge per day?"
A typical plunger coming straight from a infrared sauna into the Forge will add about +0.5F/min to the water temperature. So a 3 minute plunge might raise the water temperature by 1.5F (or melt an equivalent amount of ice).
We call this the "thermal load."
By contrast, the Prism Forge can cool water at a rate of about -1.5F per hour.
We call this the "cooling capacity."
When we divide the cooling capacity by the thermal load, we get a good estimate of how many minutes of plunge the Forge can handle every day.
The answer is 72 total minutes.
Keep in mind that all this plunging is going to happen during the day. At night, the Forge will build ice to store cold for the heavy load of plungers that arrive during the day.
The busiest times are usually first thing in the morning (before work) and early in the evening (after work).
To translate 72 minutes of plunge into daily revenue, we have to have a sense of how much each customer is going to pay.
Cryotherapy is expensive, because the machines that release liquid nitrogen into the cryo-chamber cost about $100,000. But cryotherapy does give us a sense of how much customers will pay for a whole body cold exposure experience.
$40/session is a conservative estimate. Some cryo centers charge more, but they all offer package discounts.
Suppose we intend to charge $40 for a 3 min plunge, but we make a conservative allowance for package discounts and unsold plunge slots so that we only collect 50% of our price target.
That's $20 per 3 minute plunge, which is good value to customers, considering the myriad health benefits of cold exposure.
That makes our revenue 480/day.
To calculate marginal daily profits, we must subtract operating costs from daily revenues. These costs include rent to pay for the facility housing the Forge, electricity to power it, and the labor costs necessary to pay an attendant.
Until we have real accounting data from an operating business, we're going to use 50% of revenues as a way to estimate costs. That means our marginal profit is only $240/day.
Now we can calculate the Simple Payback Period, in terms of the number of business days required to recoup the investment in a Stainless 6 Forge, by dividing the cost of the Forge by the marginal profit per day.
The calculation looks like this, and it shows that we can expect the full price of the Forge to be paid off in only 75 days.