The project pay-off formula is one of theimportant indicators when assessing it. The payback period for investors is fundamental. He as a whole characterizes the extent to which the project is liquidated and paid. To correctly determine the optimality of investments, it is important to understand how the indicator is obtained and calculated.
One of the most important indicators in determiningefficiency of investments - payback period. Its formula shows for what time period the income from the project will cover all the one-time costs for it. The method makes it possible to calculate the time of repayment of funds, which then the investor correlates with its economically viable and acceptable period.
Economic analysis involves the use ofdifferent methods in calculating the above indicators. It is used if a comparative analysis is carried out to determine the most profitable project. It is important at the same time that it is not applied as the main and only parameter, but is calculated and analyzed in conjunction with the rest, showing the effectiveness of a particular investment option.
Calculation of the repayment period as the main indicator can be applied if the company is aimed at a quick return on investment. For example, when choosing ways to improve the company.
Other things being equal, the project with the smallest return period is accepted for implementation.
Return On Investment - a formula that demonstratesnumber of periods (years or months) for which the investor will return its investments in full. In other words, this is the period of the refund. It should be remembered that this period should be shorter than the length of time during which external loans are used.
The payback period (the formula of its use) assumes knowledge of such indicators:
And to calculate the discounted return on investment, it is important to take into account:
The determination of the period for the return of attachments occurstaking into account the nature of the net income income of the project. If it is understood that the cash flows flow evenly throughout the project's lifetime, the payback period, the formula of which is presented below, can be calculated as follows:
T = I / D
Where T - the period of investment return;
And - investments;
D - the total amount of profit.
In this case, the total amount of income is composed of net profit and depreciation.
Understand how relevant thethe project using this technique will help that the amount received for the return of the invested funds should be lower than that set by the investor.
In the real working conditions of the project, the investor refuses it if the return period of investments is higher than the limit value set by it. Or he is looking for ways to reduce the payback period.
For example, the investor invests 100 thousand rubles in the project. Income from the project:
In the first two months the project did not pay off, as 25 + 35 = 60 thousand rubles, which is lower than the amount invested. Thus, it can be understood that the project paid off in three months, as 60 + 45 = 105 thousand rubles.
Advantages of the method described above are:
В целом по этому показателю возможно вычислить и risk of investment, since there is an inverse relationship: if the payback period, the formula of which is indicated above, is reduced, the risks of the project are also reduced. Conversely, with the growth in the payback period of investments, the risk increases - investments may become irrevocable.
If we talk about the shortcomings of the method, then among the allocate: inaccuracy of the calculation, because in its calculation, the time factor is not taken into account.
In fact, the proceeds that will be received abroad for the period of return, in no way affect its term.
In order to correctly compute the indicator,it is important under investments to mean costs for the formation, reconstruction, improvement of fixed assets of the enterprise. Because of this, the effect of them can not occur momentarily.
An investor, when investing inperfection of any direction, is obliged to understand the fact that only after some time he will receive a non-negative value of the cash flow of capital. Because of this, it is important to use dynamic methods in calculations that discount the flows, leading the price of money to one point in time.
The need for such complex calculations is caused by the fact that the price of money on the date of the beginning of investments does not coincide with the value of money at the end of the project.
Payback period, the formula of which is presented below, assumes taking into account the time factor. This is the NPV calculation - the net present value. The calculation is carried out according to the formula:
T = IC / FV,
where T is the period of the refund;
IC - investment in the project;
FV - projected revenue for the project.
Here, the cost of future money is taken into account, and therefore the planned income is discounted using a discount rate. This rate includes the risks of the project. Among them we can identify the main:
All of them are determined in percentages and are summed up. The discount rate is defined as follows: risk-free rate of return + all risks for the project.
If the income from the project is different each year, the cost recovery, the formula of which is considered in this article, is determined in several steps.
Payback period, the formula of which wasdiscussed above, shows for what period of time there will be a full return of investments and there will come a time when the project will start to yield income. Choose the type of investment, in which the return period is the smallest.
To calculate, use several methods that have their own characteristics. The simplest is the division of the amount of costs by the amount of annual revenue that the funded project brings.
