When buying a ready-made business or preparing an investment project, one has to consider a number of indicators that reflect the economic efficiency of investments. One of the fundamentally important parameters of the project is the payback period, that is, the expected number of years that is required to fully reimburse investment costs.
Instructions
Step 1
Check out the formula for calculating the payback period of the project: T (ok) = T1 + C / H; where:
T (ok) - payback period;
T1 is the number of years that precede the payback year;
С - unrecovered cost (at the beginning of the project payback year);
H - cash flow for the payback year.
Step 2
For a better understanding, study the methodology for calculating the payback period using an example. Let's say that the Alpha investment project requires an investment of 1,000 conventional units. The income stream forecast is as follows: 1 year - 200 USD, 2 years - 500 USD, 3 years - 600 USD, 4 years - 800 USD, 5 years - 900 USD. The discount rate is 15%.
Step 3
Use a calculation technique based on a temporary cash flow estimate. The point is that a simple static approach indicates that the example project will pay off in 2 years 6 months. But this period does not take into account the rate of return for investments in a specific selected area, and therefore cannot correctly reflect the time parameters of payback.
Step 4
Calculate the discounted cash flow of income for the described project. In this case, proceed from the discount rate and the period when incomes arise.
Step 5
Calculate the accumulated cash flow, which will be the simple sum of the costs and income stream for the investment project.
Step 6
Calculate the accumulated discounted cash flow until the first value with a positive status is obtained.
Step 7
Determine the payback period according to the above formula. T (ok) = 3 + 54/458 = 3.1 years. In other words, for a real reimbursement of the amount of investment costs, taking into account the time factor, it will take a significantly longer period than we received from the calculations using the simplified method.
