Before investing, each investor in without fail determines the period after which the investment begins to generate income (profit). To do this, the economy uses the payback indicator as a financial ratio.
Payback period is the time period after which the amount of invested (spent) funds will be equal to the amount of income received. The payback formula determines the period at the end of which the funds (costs invested in the project) will be returned to investors (shareholders and others). interested persons), while the enterprise (project) begins to make a profit.
Most often, the cost recovery formula is used when choosing one of the project options for making an investment. According to the results of calculations, the investor is more likely to prefer the project (enterprise) with the least payback ratio. The cost recovery formula in this case reflects the faster profitability of the enterprise.
Simple ROI Formula
The simplest calculation method determines the period that elapses from the moment the funds are invested (the costs are incurred) until the moment they pay off:
Cos=I/P
Z - the amount of costs (rub.),
P - profit from the project (rub.)
The payback period formula will give a more accurate result if certain conditions are met:
- Equal lifetimes of compared (alternative) projects,
- One-time investment at the start of the project;
- Uniform receipt of income from invested funds (in equal parts).
This way of calculating the payback period is the simplest and clearest to understand.
The cost recovery formula is quite informative as an indicator of the risk of investing funds. In the case when the payback time is long, we can talk about high investment risks (and vice versa).
This method, along with its simplicity, has several disadvantages:
- The value of invested funds can change significantly over a certain period of time;
- After reaching the payback point of the project, it can continue to bring the profit necessary for the calculation.
Dynamic payback formula
The dynamic (discounted) payback period is an indicator of the duration of the period that passes from the start of investments to the moment of recoupment of its costs, but taking into account the fact of discounting.
In this option, the payback period may come when the net present value becomes positive and will remain so in the future. The dynamic payback period is always a larger value than the static period, since when calculating the dynamic value of the indicator, the cost change is taken into account Money according to the time factor.
The value of the payback period
The cost recovery formula is in most cases used in the calculation capital investments. This indicator evaluates the efficiency of reconstruction and modernization of production, while reflecting the period during which savings appear and an additional amount of profit that exceeds the amount spent on capital investments.
In many cases, the payback period formula is used in the process of evaluating the effectiveness and feasibility of capital investments. In these calculations, with very large payback periods, most likely, you will have to abandon investments.
The cost recovery formula makes it possible to find out for what time period the funds invested in a certain production unit will be able to return due to the profit received from its operation.
Examples of problem solving
EXAMPLE 1
| The task | Determine the payback period for the Stroymontazh company according to the following data: Project costs - 150,000 rubles. Estimated annual income - 52,000 rubles. |
| Decision | The payback formula for solving this problem is as follows: Cos=I/P Here Soz is the payback period (years), Z - the amount of costs (rub.), P - profit from the project (rub.) Soz=150000/52000=2.88 years Output. We see that at the end of almost 3 years, the project will fully pay off the costs and begin to make a profit. The disadvantage of this formula is that it does not take into account the occurrence of additional costs. |
The economic activity of any organization in the conditions market relations requires the widespread attention of a large circle of business representatives who are interested in the results of its functioning.
Under the current conditions, enterprises will be able to survive through a real assessment of their financial condition and the possibility of potential competitors, to determine which it is necessary to carry out timely, qualitative analysis all economic activities, identify shortcomings and eliminate them in a timely manner.
Dear readers! The article talks about typical ways to solve legal issues, but each case is individual. If you want to know how solve exactly your problem- contact a consultant:
APPLICATIONS AND CALLS ARE ACCEPTED 24/7 and 7 days a week.
It's fast and IS FREE!
What does this indicator mean?
The level of profitability shows how effectively the current costs of the enterprise are used. It is calculated as a percentage, expressed by the degree of profitability, that is, the size of net profit.
In order to receive a net profit, an enterprise must carry out expedient activities, depending on the turnover of capital, the volume of products produced or sold. Profit is spent on development, provision of scientific and technical equipment, increase wages employees, the formation of budgetary funds.
It is expressed in two terms:
- Absolute. It is the amount of revenue that exceeds the cost of economic activity, product manufacturing.
- Relative. Shows the rate of return.
The net profitability is calculated for the whole enterprise or its separate subdivisions, by type of product. Analysis of its indicators allows you to get the dynamics of development, production efficiency, sales of products.
Payback of different kinds with formulas
According to the instructions of the President of the Russian Federation, marginal levels of profitability in the amount of 10-20% are applied to products that, in accordance with the current legislation, set free prices - tariffs.
For goods with established rent payments in the form of excise taxes, they are determined without taking them into account.
With an increase in the share of production costs due to the use of purchased materials, semi-finished products and components exceeding 85 % it is set to the size 15 percent.
Table 1. Current indicators
| No. p / p | Name | The level of profitability as a percentage of the cost |
| 1 | Products of metallurgical, machine-building, chemical, petrochemical, woodworking, pulp and paper, light industries | 25 |
| 2 | Products of mining enterprises of all industries and logging enterprises | 50 |
| 3 | Products of mining and metallurgical enterprises, non-ferrous metallurgy and mining and chemical enterprises | 40 |
| 4 | Construction Materials | 25 |
| 5 | Tobacco, tobacco products, egg products | 40 |
| 6 | Products of other industries | 25 |
| 7 | Transportation by all means of transport | 35 |
| 8 | Transportation of passengers by air and related works, services | 20 |
| 9 | Services of supply and marketing organizations and enterprises | 50 (to distribution costs) |
| 10 | Enterprises and organizations of wholesale trade | 3 (to turnover) |
| 11 | Enterprises and organizations of retail trade | 8 (to turnover) |
Cost
Payback is economic efficiency nested authorized capital. The payback period is calculated by the formula:
T=Vzat/D, where
Vzat– the amount of invested capital;
D- the average amount of income growth for the period under consideration.
It is used when choosing the best options to carry out the activities of the enterprise relating to technical and design solutions, production technology. For various options different capital investments and operating costs are required.
ROI is calculated as:
P=Prp/S,
where Prp- profit before tax;
With- the total cost of the product that was sold.
According to the indicator, a graph of dynamics is built, showing the need to revise the cost of production, increase the cost. The volume of trade increases with an increase in profitability, if the value of costs remains unchanged, then profit increases accordingly and vice versa.
Activities
Cost recovery in production activities is calculated as the ratio of net profit and depreciation for a certain period of time to the amount of expenses spent on the sale of products, which refers to operating costs.
Her formula:
R \u003d (Pchp + Amor) / Z,
where PPP — net profit;
Amor- depreciation deductions;
W- the cost of production and sale of products.
In production activities, the profitability ratio of the organization expresses the payback of production costs, the amount of profit for each ruble spent on the production and sale of products.
Services
The provision of services in any area does not require certain production costs.
In this situation, the sold product becomes a “service”, so its cost and profit depend on the quantity.
It is necessary to form the cost of the service provided, taking into account the field of activity, calculate the projected demand, and find the gross income. From the amount gross income subtract variable and fixed costs.
The payback period for the rendered service is calculated by the formula:
Tu=Zu/Pu,
where Zoo- the costs invested in the business;
Pu- the planned profit that will be received as a result of activities for the provision of services.
The effectiveness of the services provided is calculated by the formula:
Rsd \u003d (Psd * Spvr) / Z * 100%,
where W- costs associated with the organization of services;
spvr- number of services certain period time;
PSD- profit from the sale of services.
Watch a video on the topic of profitability and profitability of the enterprise
Fixed assets
The means of labor that take part in the production process while maintaining their original form are classified as fixed assets. Also included here tangible assets used in the production or provision of services, making up the difference between the cost of fixed assets and accumulated depreciation.
They ensure the activity of the enterprise for a long time, receiving physical wear and tear, which reduces them and transfers them to the cost price through depreciation.
Payback of fixed assets is determined by the formula:
T=Os/Pch,
where OS- fixed assets of the enterprise, expressed in monetary terms;
Pch- net profit for a certain period of time.
The effective use of fixed assets is determined by the formula:
Rosn \u003d Pch / Os * 100%,
where os- the value of fixed assets;
Pch- the amount of net profit.
Deals
The profit from the transaction for the sale of products should be commensurate with the costs of its organization. In a simplified form, a condition is provided in which the payback is equal to the costs.
Payback includes total profit from all transactions:
O=P*Co,
where P– average profit per trade;
So- the number of transactions.
If a company has taken a loan from a bank for the development of an enterprise, then the bank loan is taken into account in the calculations.
You can estimate the payback period for separate types of transactions using the formula:
Tokup \u003d W / (Sper * P),
where W- costs associated with the organization of the transaction;
sper- the number of transactions for a certain period of time;
P- the average profit received as a result of the transaction.
Rsd \u003d (Psd * Sper) / Z.
Personnel
Capital investment in labor must pay off, in addition to make a profit. The payback is in direct proportion to the length of service of the employee at the employee's enterprise.
Payback of personnel is calculated by the formula:
T=Zed/Fgod,
where T- payback period;
Zed- one-time costs;
year– annual economic effect.
Enterprise for effect and increase seniority is working on:
- expedient operation of the working time fund, employee training, increase in labor productivity;
- increase the period of stay of the employee at the enterprise. Great work experience leads to a quick payback.
Consequently, in a team with a stable environment, where working time is fully used, conditions are formed for obtaining a return on funds and making a profit.
The profitability obtained from the use of personnel can be calculated by the formula:
R \u003d Pch / Kp * 100%,
where Pch- net profit;
Kp- the average number of employees on the list.
net profit
The payback period can be traced on the example of a store that has been operating for some time. To determine the payback of net profit, you need to find the amount of gross revenue outlet for the period under review. Further, the amount of profit that the organization intends to receive in the course of its activities for the same period of time is determined.
Then the net profit is:
P=W*Stz
where AT- gross proceeds from the sale of goods;
stz- current expenses.
The payback period is calculated by the formula:
Tokup=Ko/Pch
where Co.- investment in the purchase of goods;
Pch– net income net of taxes.
The profitability ratio from the sale of goods can be determined by applying the formula:
Rpr=Ppr/Vpr *100%,
where Ppr- profit received as a result of sales of products;
VPR- sales revenue.
properties
To determine the payback, it is necessary to compile a list of property that is on the balance sheet of the enterprise, indicating each of them. The depreciation cost must then be calculated individually.
The calculations contain the residual value of the property, calculated as the difference between the original cost and the depreciation amount. Depreciation is calculated according to the instructions of the Uniform norms for depreciation objects, which is given in accounting.
To determine the payback period of the property, the following formula is used:
Tim \u003d Comp / Pch,
where Composition- the value of the property of the enterprise;
Pch- net profit for the period under consideration.
Efficient use of property for a certain period of time is determined using the formula:
Rome \u003d Pch / Comp * 100%,
where Pch- net profit received as a result of the operation of the property;
Composition- the residual value of the property for a certain period of time.
General
The total payback period of funds invested in production is determined by the period of achievement of the result, which acts as a profit or a decrease in the cost of production.
The payback period is calculated in different ways, depending on the amount of incoming cash and taking into account inflation.
The overall profitability is determined as follows:
P=V/P,
where V is the total volume of capital investments;
P- average annual income to the enterprise.
According to the total payback period is set economic activity organization, its profitability, economic efficiency and feasibility of further development. Based on this assessment, improvement methods are developed to be adopted for the reorganization.
Methods for calculating the level of profitability
By balance
The activity of any organization is based on the indicator overall profitability, so most businesses are bound to ask themselves: how to calculate profitability? It is the main parameter in financial analysis.
Book profit margin is calculated using the formula:
R=Pb/F*100%,
where Pb- the total amount of profit on the balance sheet;
F- the average annual cost of fixed assets, intangible assets and material working capital.
In order to establish how much an organization has developed over a certain period of time, in addition to the general one, it is necessary to find values that characterize the profitability of turnover and capital turnover.
In conditions market economy the turnover indicator has received the greatest use: the higher the profit, the greater it is. The number of turnovers of capital is expressed by the ratio of gross proceeds, that is, turnover, to the value of its capital. An increase in the number of turnovers of capital leads to an increase in the gross proceeds of the organization.
To conquer your niche in the market means to get an increase in profits. Learn how to achieve this through
Even the color of the ink matters when filling out work book. The subtleties of its filling are presented in this
How to write a change order staffing? Find out directly
By EBITDA
To establish the capabilities of the enterprise, to determine the value of the business, the EBITDA index is used, which means gross profit without deducting interest accrued on it, dividends, before taxes, depreciation.
The initial data for calculating the indicator are qualitative and undistorted accounting data.
These numbers are obtained from financial report compiled in accordance with IFRS. With the help of the coefficient, the operating results of the enterprise are evaluated, which is closest to the operating cash flow.
The EBITDA calculation reflects the profitability of the company's sales, future cash and earnings for the reporting period. The calculation helps to evaluate the return on investment and self-financing reserves.
EBITDA calculation is carried out according to the formula:
E \u003d P (U) days + (% purchase + Aon),
where P(U)day– profit (loss) before taxation;
%purchase- Percentage to be paid;
And he– depreciation deductions of fixed assets and intangible assets.
The calculation of the EBITDA margin is calculated as:
EBITDA margin = EDITDA / Sales revenue
EBITDA is earnings before interest, taxes and depreciation.
If there was a loss
If for last year the enterprise suffered a loss, then the profitability index does not need to be calculated, but the payback of products can be calculated.
To do this, use the formula:
Oprod=B/Sprod
where AT- proceeds from the sale of products;
Sprod- cost of goods sold.
Ways to increase the indicator
Many factors influence the level of profitability in sales of products. The main ones are:
- growing cost;
- decrease in product sales.
To increase it in the first case, a rigorous analysis of the costs included in the cost of production is carried out. Based on the data obtained, ways to increase profitability are modeled, studies of the possibility of reduction. Based on the audit, the following decisions should be made:
- on the basis of the analysis, identify significant and rising expenditure items;
- reduce costs as much as possible without compromising production;
- clearly distinguish between fixed and variable costs in order to calculate the profitability threshold, which corresponds to the volume of turnover without loss, but also without profit;
- to analyze the profitability of separate types of products, based on profit margin, to examine the possibility of replacing the range of products;
- review marketing activities, improve product quality, develop a sales plan for products using promotional activities.
Payback is a value that determines the time during which the costs of creating a business will pay off. The result obtained gives a general idea of the expediency of starting the project. Let's take a closer look at what is meant by this term, how to calculate the indicator, concrete examples payback calculation.
To calculate the payback, it is necessary to determine the amount that will be needed to start the project (1), and the expected profit for each month or the first year of its existence (2).
- Purchase or rental of equipment, furniture, appliances.
- Purchase/rent/renovation of the premises where the activity will be carried out.
- Obtaining appropriate permits (license, registration of IP, etc.)
- Purchase of goods to start sales (in case you will not provide services).
- Hiring employees and their employment.
Example. You want to open a shawarma shop in Moscow. Let's calculate the approximate amount that is needed to start a business:
- Purchase of a trading stall - 250.000 rubles.
- Purchase of equipment (grill, refrigerator, coffee machine, etc.) - 100.000 rubles.
- Obtaining the necessary permits from the market administration or tax service, electricity wire - 100.000r.
- Buying ingredients for shawarma, additional goods(water, tea, coffee) - 30.000 rub.
Thus, to open your own shawarma you need more than 500,000 rubles.
The second indicator is expected profit from the project. You won’t be able to find out the exact figure, but focusing on the statistics of the success of a particular business in your city, you can understand how much you will earn approximately per month.
Example. Let's return to the business project for the sale of shawarma. On average, in Moscow, one portion costs 200 rubles, taking into account additional costs (tea, coffee, water), the buyer leaves the seller 250 rubles. When a kiosk operates in a 12-hour shift, the average number of customers per day is 30–35. We calculate the average profit per month:
(250 * 30) * 30 = 225 thousand rubles of monthly profit.
Where 250 is the average check of the buyer; 30 - the number of customers daily; 30 is the average number of days in a month.
The formula for calculating the payback of a business?
To calculate the payback of a business project, economists use the following formula:
INV / R = CURRENT,
- where INV are the initial costs required to start a business;
- R - expected profit (per month);
- TOK - the final payback period of the project.
Important! It is worth noting that within a few months after opening a business, additional expenses will need to be paid (rent of premises, equipment, employee salaries). These costs must be taken into account when calculating the payback of the business.
Below we will consider specific examples of the payback of business projects in various areas.
Business with a quick and long payback
| With a quick payback | With a long payback |
| Nail extension.
To open such a business, you need to spend about 150,000 rubles. The costs include the rent of the premises and the purchase of equipment. In the future, it is necessary to spend up to 10,000 rubles to maintain the project. But considering that the average income of a nail extension master is 50-70 thousand rubles. monthly, the business will pay off in 3-4 months. We calculate according to the formula: 150,000 / 50,000 = 3 months. Considering monthly expenses, the return on investment will take approximately 4 months. |
Renting out housing.
Suppose you buy an apartment in the Moscow region, St. Petersburg for 3.5 million rubles, and then rent it out for 40,000 rubles / month. You do not need to spend money on maintaining this business (except for small household expenses), however, its payback will be slow. Based on the calculations (3.500.000 / 40.000 = 87.5 months), the investment will pay off only after 7-8 years if the apartment is constantly rented out, which is unlikely. Total: payback period - 10-12 years, taking into account downtime and minor repairs. |
Average business payback
According to experts, on average, a business pays off within 6-12 months. This is the average time for profitable projects, which include:
- Sale of food and fast food.
- Provision of services in the field of beauty, cosmetology.
- Repair of clothes and shoes.
- Production of keys.
- Making hand soap.
- Organization of sports trainings, author's courses.
For more complex projects that require significant investments (for example, opening an expensive restaurant or jewelry store), the payback period can be several years. This indicator is individual and depends on the demand for the product or service provided, the location and traffic of the outlet.
Business payback by regions
Depending on the city in which you plan to start your own business, its specifics and start-up capital, the payback period may vary. Let's look at a few examples.
In the first case, business clothing repair shop.
| Moscow | Moscow region |
The following expenses will be spent on organizing a business:
Thus, the starting capital for opening a clothing repair shop is 120,000 rubles. According to statistics, the average profit for such a business is 50,000 rubles / month. We count according to the formula: 120,000 / 50,000 = 2.4 (payback in the region of 2–3 months). |
In the cities of the Moscow region (Podolsk, Dmitrov, Serpukhov), renting a room will cost less - about 50,000 rubles. for the first three months. You will have to spend about 10,000 rubles on additional expenses, 20,000 rubles on threads, needles and other tools for repairs. It turns out that to organize a sewing business, you need a capital of 80,000 rubles. At the same time, income will also be less - about 35,000 rubles / month. Payback calculation according to the formula: 80,000 / 35,000 = 2.2 (2-3 months). |
Now let's look at how quickly business pays off in St. Petersburg and the region. For example, let's take a business selling coffee to go(Eng. Coffee To Go) is a popular option for earning money in megacities.
| Saint Petersburg | Leningrad region |
Basic expenses for starting a business:
In total, at least 115 thousand rubles are needed to start a business. On average, such a project can earn up to 40 thousand rubles a month. We count according to the formula: 115,000 /40,000 = 2.8. Thus, the business will pay off in about 3 months. |
In cities Leningrad region renting a room will cost less: an average of 3 thousand rubles a month for a small room. Total - 9 thousand rubles for rent for 3 months. Equipment and raw materials to start selling will cost the same amount as in the case of St. Petersburg: statistics show that prices do not differ much. To start selling, you need to have at least 109 thousand rubles. At the same time, incomes will be less than in the metropolis, since the demand for coffee to go in small cities is small. On average, earnings will reach 30 thousand rubles a month. We calculate the payback using the formula: 109 000 /30 000 = 3.6. The investment will pay off in 3-4 months. |
Ekaterinburg. For example, let's take the concept of a mini-cafe with an area of 100 squares and 40 seats. For Yekaterinburg, the cost plan will be something like this:
- Staff. For shift work, you need to hire at least 4 waiters, 4 cooks, an administrator, a cashier, a cleaner. Staff costs in this scenario will cost 250-300 thousand rubles.
- Purchase of equipment and furniture for internal use (refrigerators, slicers, kitchen tables, etc.) - 400 thousand rubles.
- Room rent per month - 60 thousand rubles.
- Purchase of furniture and decorative elements for the premises - 250 thousand rubles.
- Preparation of documentation and obtaining all necessary permits - 25 thousand rubles.
In total, to open a small cafe in Yekaterinburg, you need to invest at least 1,210,000 rubles.
The average check for a visitor is 800 rubles. Provided that 30 people visit the cafe daily, the revenue will be 24,000 rubles every day. To determine the monthly income, we multiply this amount by the average number of days in a month (24,000 * 30), we get 720,000 rubles.
- Payment of wages - 250,000 rubles;
- Premises rental - 60,000 rubles;
- Utilities - 10,000 rubles.
Monthly expenses amount to 320,000 rubles. This amount is subtracted from net profit (720,000 - 320,000), we get 400,000 rubles of net earnings every month.
Taking into account the fact that we initially spent 1,210,000 rubles to launch the project, its payback is 4–5 months.
Timing parameters are one of key indicators when calculating any project. A potential investor needs to evaluate not only the prospects of a new line of business, but also the terms of its life, periods of investment and return on investment.
Simple payback period of the project
What is it and why is it needed
The simple payback period of a project is the period of time over which the amount of net cash flow(all the money that came minus all the money that we invested in the project and spent on expenses) from the new project will cover the amount of funds invested in it. Can be measured in months or years.
This indicator is basic for all investors and allows you to make a quick and simple assessment to decide whether to invest in a business or not. If a medium-term investment is expected, and the payback period of the project exceeds five years, the decision to participate is likely to be negative. If the investor's expectations and the payback period of the project coincide, the chances of its implementation will be higher.
In cases where the project is financed by loans, this indicator can have a significant impact on the choice of the loan term, on the approval or refusal of a loan. Usually, credit programs have tight time frames, and potential borrowers it is important to conduct a preliminary assessment for compliance with the requirements of banks.
How is the simple payback period calculated?
The formula for calculating the indicator in years is as follows:
PP= Ko / KF sg, where:
- PP - simple payback period of the project in years;
- Ko - the total amount of initial investments in the project;
- KFсг - average annual cash receipts from a new project when it reaches the planned production / sales volumes.
This formula is suitable for projects that meet the following conditions:
- investments are made at a time at the beginning of the project;
- the income of the new business will flow relatively evenly.
Calculation example
Example #1
It is planned to open a restaurant with a total investment of 9,000,000 rubles, including funds planned to cover possible business losses during the first three months of operation from the date of opening.
PP = 9,000,000 / 3,000,000 = 3 years
Simple payback period this project is equal to 3 years.
Wherein this indicator must be distinguished from the full return on investment period, which includes the payback period of the project + the period of business organization + the period until reaching the planned profit. Suppose that in this case, the organizational work to open a restaurant will take 3 months and the period of unprofitable activity at the start will not exceed 3 months. Therefore, for scheduling the return of funds, it is important for the investor to take into account these 6 months before the start of receiving the planned profit.
Example #2
The example considered earlier is the most simplified situation, when we have a one-time investment, and the cash flow is the same every year. In fact, there are practically no such situations (inflation, and the irregularity of production, and a gradual increase in sales since the beginning of the opening of production and retail space, and the payment of a loan, and seasonality, and cyclicity economic downturns and lifts).
Therefore, usually to calculate the payback period, the calculation of the cumulative net cash flow is done. When the indicator accumulatively becomes equal to zero or exceeds it, during this period of time the project pays off and this period is considered a simple payback period.
Consider the following background information for the same restaurant:
| Article | 1 year | 2 year | 3 year | 4 year | 5 year | 6 year | 7 year |
| Investments | 5 000 | 3 000 | |||||
| Income | 2 000 | 3 000 | 4 000 | 5 000 | 5 500 | 6 000 | |
| Consumption | 1 000 | 1 500 | 2 000 | 2 500 | 3 000 | 3 500 | |
| Net cash flow | - 5 000 | - 2 000 | 1 500 | 2 000 | 2 500 | 2 500 | 2 500 |
| Net cash flow (cumulative) | - 5 000 | - 7 000 | - 5 500 | - 3 500 | - 1 000 | 1 500 | 4 000 |
Based on this calculation, we see that in the 6th year the cumulative net cash flow indicator goes into plus, therefore, with a simple payback period this example will be 6 years (and this is taking into account the fact that the investment time was more than 1 year).
How to Calculate Simple Payback in Excel
The above examples are easy enough to calculate with a regular calculator and a piece of paper. If the data is more complex, tables in Excel will come in handy.
Calculation of example No. 1
Payment simple term payback looks like this:
Table 1: calculation formulas.
Calculation of example No. 2
For a more complex version of calculating a simple payback period, the calculation in Excel is done as follows:
Table 1: calculation formulas.
Table 2: calculation results:
A similar calculation technique is used to calculate the discounted payback period, which will be discussed in the next chapter.
Discounted payback period
What is it and why is it needed?
The simple payback period of the project does not take into account the change in the cost of funds over time. Given the current inflation, 1 million rubles can buy much more today than in 3 years.
The discounted payback period allows you to take into account inflationary processes and calculate the return on investment, taking into account purchasing power Money.
How is the discounted payback period calculated?
The calculation formula will look like this:
Calculation example
Despite the much more complex appearance formulas for the discounted payback period, its practical calculation is quite simple.
The first thing to do is to calculate the future cash receipts from new business, taking into account the discount rate.
Returning to our restaurant example, let's use a discount rate of 10%.
Discounted cash receipts for 4 years after the opening of the business will be equal (by years):
The amount of cash receipts for 3 years in total will be 7,460,605 rubles, which is insufficient to return investments in the amount of 9,000,000 rubles.
The uncovered part will amount to 1,539,395 rubles. Divide this amount by cash receipts in year 4:
1,539,395/2,049,040 = 0.75 years
Thus, the discounted payback period for this project is 3.75 years.
The total income for 4 years will amount to 9,509,645 rubles, which will allow you to return the investment and get a net profit of 509,645 rubles.
How to Calculate Discounted Payback Period in Excel
To calculate the discounted payback period of the project, you can use mathematical formulas in Excel.
To add a second table with the calculation of the discount factor, where the discount factor is calculated by the formula = DEGREE, which is located in the Formulas-mathematical formulas- DEGREE section.
The calculation of the discounted payback period is as follows:
Table 3: calculation formulas.
Table 4: calculation results:
The payback period plays a major role in the evaluation of investment projects, along with profit indicators. Especially in Russia, where the risks of losing capital are high, it is important for every investor to understand when the project will “become a plus”. Read how to calculate the payback period of the project and not miscalculate.
What is the payback period of a project?
The payback period has a fairly simple and understandable definition - this is the number of periods (years, months), after which the total cash flow from the project will become zero.
It is important that after the project payback period has passed, the total cash flow must remain positive throughout the entire calculation period. That is, if the project “became a plus”, and after several periods “rolled into a minus”, then the payback period of the project has not yet passed.
However, why are there so many disputes and incorrect calculations regarding the payback period of projects?
In fact, there are two payback periods for the project - simple and discounted, and there are even more formulas for calculating them. Let's start with the basics - with formulas.
Download and get to work:
How to accurately calculate the payback period of an investment project using Excel
Payback period investment project- one of key indicators the effectiveness of investments, by which you can determine their feasibility, choose between several investment objects, etc. To quickly and accurately determine it, you need to:
- understand what initial data and in what form will be required for calculations;
- develop a special form in Excel.
An example of calculating a simple payback period
The project manager got tired of office slavery and decided to become a self-employed taxi driver. The idea of getting a free schedule tempted him, but before making a final decision, he made a calculation investment attractiveness project.
To get started, he needs: to purchase a car for 720,000 rubles, a license and other equipment for 30,000 rubles. Thus, the initial investment, according to his calculation, will amount to 750,000 rubles in the first month. To buy a car, you will have to take out a loan at 16% per annum for 5 years and pay 345,600 percent rubles on it. He did not take into account the depreciation of the car.
Working 8 hours a day, he will be able to receive a net income (minus the cost of gasoline, interest on the loan and the share of the aggregator) of 100,000 rubles per month.
The manager built a spreadsheet in Excel
|
Months |
||||||||
|
Investments |
||||||||
|
Cash flow |
||||||||
|
Total cash flow |
Based on the results of the calculations, he realized that the payback period for his personal project would be eight months. That is, only by the eighth month he will start earning directly.
Comparing such results with his salary of 60,000 rubles in the office, and considering that in 7 months he will have time to earn 420,000 rubles, he decided to postpone his dismissal, but for now, save for buying a car not on credit.
Discounted payback period
If it is enough for an entrepreneur to calculate the payback period of the project, then professional investors know that the income from the project, which is equivalent to the amount of money invested in the project, is not a zero income, but a loss. The investor always evaluates the attractiveness of the project in comparison with other investments, for example, opening a deposit in a bank, buying valuable papers, alternative business projects.
Thus, the investor forms his own discount rate - the threshold value of interest at which he is ready to invest.
The technique that helps to take into account the depreciation of the investor's money is called discounting.
Where DCF is discounted cash flow,
CF - cash flow in the n-th period,
The discounted payback period of the project is the number of periods (months, years) after which the project will pay off, taking into account the discounted cash flows. In articles and literature, you can find other names for the discounted payback period - Discounted Payback Period, DPP, payback period.
The formula for calculating the discounted payback period:
That is, the formula for calculating DPP is the same as PP, only the terms differ.
An example of calculating the discounted payback period
A private investor received a project for a new fitness center for consideration. The creators of the project are interested in receiving 152 million rubles, 102 of them are planned to be received in the first year, 50 in the second. The planned income from the project will be 20 million rubles in the first year and 30 million rubles in the remaining periods. Entrepreneurs calculated the payback period of the project to be 4 years 5 months. Is such a project interesting for an investor if he has an alternative to investing money at 15% per annum with the same risks?
The investor's accountant compiled an Excel spreadsheet using the POWER function to determine the discounted cash flow.
We see that using the threshold rate of 15%, the payback period of the project is no longer 4 and a half years, but 8 years. Further, the investor assesses the risks: what can happen in the country's economy, in the fitness services market and in his own plans for 8 years, and is he ready to risk the money invested for such a period? In Russia, the answer to this question is most often negative.
