Indicators of a simple payback period of the project are not taken into account. Investment project in Excel with examples for calculations

It is one of the important indicators in its evaluation. The payback period for investors is fundamental. It generally characterizes how liquid and profitable the project is. To correctly determine the optimality of investments, it is important to understand how the indicator is obtained and calculated.

The meaning of the calculation

One of the most important indicators in determining the effectiveness of investments is the payback period. Its formula shows for what period of time the income from the project will cover all one-time costs for it. The method makes it possible to calculate the time for the return of funds, which the investor then correlates with his economically advantageous and acceptable period.

Economic analysis involves the use of various methods in the calculation of 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 used as the main and only parameter, but is calculated and analyzed in conjunction with the rest, showing the effectiveness of one or another investment option.

The calculation of the payback period as the main indicator can be used 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 shortest return period is accepted for implementation.

Return on investment - a formula showing the number of periods (years or months) for which the investor will return his investment in full. In other words, a refund. At the same time, it should be remembered that the named period should be shorter than the period of time during which the use of external loans is carried out.

What is needed for the calculation

The payback period (the formula for its use) requires knowledge of the following indicators:

• project costs - this includes all investments made since its inception;
• net income per year is the revenue from the implementation of the project received for the year, but minus all costs, including taxes;
• depreciation for the period (year) - the amount of money that was spent on improving the project and methods of its implementation (modernization and repair of equipment, improvement of technology, etc.);
• duration of costs (meaning investment).

And to calculate the discounted return on investment, it is important to take into account:

• receipt of all funds made during the period under consideration;
• discount rate;
• period for which to discount;
• initial investment.

Payback Formula

The determination of the period for the return of investments takes into account the nature of the income from the project. If it is assumed that cash flows are received evenly throughout the life of the project, the payback period, the formula of which is presented below, can be calculated as follows:

Where T is the return on investment;

I - investments;

D is the total profit.

In this case, the total amount of income consists of and depreciation.

To understand how expedient the project under consideration is when using this methodology, it will help that the resulting value of the return on invested funds should be lower than that which was set by the investor.

In the real conditions of the project, the investor refuses it if the return period of investments is higher than the limit value set by him. Or he is looking for methods to reduce the payback period.

For example, an investor invests 100 thousand rubles in a project. Project income:

• in the first month amounted to 25 thousand rubles;
• in the second month - 35 thousand rubles;
• in the third month - 45 thousand rubles.

In the first two months, the project did not pay off, since 25 + 35 = 60 thousand rubles, which is lower than the amount of investments. Thus, it can be understood that the project paid off in three months, since 60 + 45 = 105 thousand rubles.

Advantages of the method

The advantages of the method described above are:

1. Ease of calculation.
2. visibility.
3. Possibility to classify investments taking into account the value set by the investor.

In general, according to this indicator, it is also possible to calculate the investment risk, since there is an inverse relationship: if the payback period, the formula of which is indicated above, decreases, the risks of the project also decrease. Conversely, with an increase in the waiting period for a return on investment, the risk also increases - investments may become irretrievable.

Disadvantages of the method

If we talk about the shortcomings of the method, then among them are: the inaccuracy of the calculation, due to the fact that when calculating it, the time factor is not taken into account.

In fact, the proceeds that will be received outside the return period does not affect its period in any way.

In order to correctly calculate the indicator, it is important to understand by investments the costs of formation, reconstruction, improvement of the fixed assets of the enterprise. As a result, the effect of them cannot come immediately.

An investor, when investing money in the improvement 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 flows, bringing the price of money to one point in time.

The need for such complex calculations is due to the fact that the price of money at the start date of the investment does not coincide with the value of money at the end of the project.

Discounted calculation method

The payback period, the formula of which is presented below, involves taking into account the time factor. This is the calculation of NPV - net present value. The calculation is carried out according to the formula:

where T - the period of return of funds;

IC - investment in the project;

FV - planned income for the project.

This is taken into account and therefore the planned income is discounted using the discount rate. This rate includes project risks. Among them are the main ones:

• inflation risks;
• risks of non-profit.

All of them are defined as percentages and summarized. The discount rate is determined as follows: + all project risks.

If the flow of money is not the same

If the revenue from the project is different every year, the cost recovery formula discussed in this article is determined in several steps.

1. First, it is necessary to determine the number of periods (moreover, it must be an integer) when the amount of profit on a cumulative total becomes close to the amount of investments.
2. Then it is necessary to determine the balance: from the amount of investments, we subtract the amount of the accumulated amount of income from the project.
3. After that, the value of the uncovered balance is divided by the value of cash inflows of the next period of time. The main economic indicator in this case is the discount rate, which is determined in fractions of a unit or as a percentage per year.

conclusions

The payback period, the formula of which was discussed above, shows for what period of time a full return on investment will occur and the moment will come when the project will begin to generate income. The investment option with the shortest return period is selected.

For the calculation, several methods are used, which have their own characteristics. The simplest is to divide the amount of costs by the amount of annual revenue that the funded project brings.

With the development and consolidation of business, regular forms of management are inevitably strengthened. This means that management is built from top to bottom from strategy to current regulation of processes, the development of activities and capital investments acquires a systemic, orderly character. Investment decisions are made comprehensively with deep study and on an alternative basis. When choosing promising project tasks, first of all, it is necessary to calculate the payback period of the project and compare it with other options.

Payback Logic

The evaluation of any investment project should be comprehensive. Not one, but a group of significant indicators is taken into account: NPV, IRR, PI, MIRR and PP (DPP). This is due to the fact that each project task is a multifaceted and complex phenomenon. And it is impossible to single out a single estimated indicator. However, in order to make a certain judgment, one should be guided by the adequacy of the level of generated profit in the post-investment phase. In addition, it is desirable to be able to choose among several options for calculating capital investments for each strategic direction.

Strategic planning events are held annually in developed companies, which result, among other things, in plans for strategic investment initiatives, some of which are converted into projects. This is preceded by the evaluation procedures, which are discussed. It is known that in the logic of economic calculation, the time scale of an investment project is divided into three main periods.

1. Investment stage.
2. The stage of return on investment.
3. The stage of obtaining profit from investments.

In this regard, in addition to profitability, one should also take into account the period after which the project will begin to bring the planned profit to investors. This period is called the payback period. Interestingly, theoretically, all investors are aware that the success of the project is determined by long-term prospects. Practically, subconsciously and explicitly, there is a desire to start receiving benefits as early as possible. This is not only characteristic of our country, it is quite natural that this happens all over the world.

Psychologically, it is difficult to navigate a long period of waiting for a financial result. This is all the more relevant in modern event flows, in which it is very difficult to build reliable long-term forecasts. In this regard, business people who are able to follow a large-scale strategic plan have a special potential. Such businessmen are able to concentrate capital around the project, go for long-term low operating cash flow values. They, possessing great personal power, literally feel the investment backlog, but they are very serious about the analytical support of their feelings and intentions.

It is necessary to objectively look at the composition of the estimated indicators, among which one of the first is the payback period, and it is not the most important. However, in some cases this indicator is significant. The calculation of this criterion is important when the company's management is concerned about the liquidity of the business and minimizing business risks. This issue is especially relevant for sectors of the economy in which technological changes occur rapidly. An example of a business in telecommunications or medicine is a weighty confirmation of this. Projects with a shorter payback period are the most liquid and the least risky.

Methods for calculating the payback period

A simple payback period (PP, payback period) can be calculated in two ways, depending on how evenly the planned investment income is distributed over time. If the cash flow from operating activities as a result of the project comes in evenly, then the payback can be easily calculated as the quotient of dividing the amount of one-time investments by the size of the incremental (annual) cash flow or profit.

But more often than not, cash flow is uneven. Therefore, to calculate the indicator, the calculation of the number of steps (years) is used, during which the cumulatively accumulated operating cash flow will exceed the amount of initial investments. The formula for the PP indicator (simple payback period) in two versions is presented below.

The formula for calculating PP in conditions of uneven project revenue

If necessary, it is possible to calculate the payback period more accurately, literally, with hundredths of a "makeweight" to the number of steps of the project period. At the same time, one should abstract away from the potential unevenness of the profitable part within the step following the last period of uncovered investments. In the development of the formula shown above, in this case, the method given in the article on is applied. There is also an example of a tabular form, filling which, without formulas and complex models, you can easily derive the value of PP.

Unlike a simple method, with an integrated approach to assessing the effectiveness of investments, the payback period is calculated taking into account the time factor. In this case, the cash flows are reduced to the cost estimate of the start of the project. And the discounting of flows is most competently performed with a focus on the WACC indicator. Due to the nature of the discounting mechanism, the reduced payback period (DPP, discounted payback period) is always greater than the simple period, that is, DPP≥PP. The payback period formula takes the following form.

Formula for calculating DPP

The payback period is a very easy and quick indicator that participants in an investment project can use at different stages of its implementation, from conception to the moment of evaluating the results after completion. It performs well in combination with other performance indicators and in terms of comparing several investment decisions. In any case, this criterion allows the investor to realize that considering the project, he can choose a safer model of capital investments, without even taking into account the size of future profits.

Before making any investments, investors necessarily try to find out when investments will start to make a profit.

For this, such a financial ratio as the payback period is used.

concept

Depending on the purpose of financial investments, one can distinguish some basic concepts of payback period.

For investment

The payback period is the period of time after which the amount of invested funds will be equal to the amount of income received. In other words, in this case, the coefficient shows, what time will be required in order to return the invested money and start making a profit.

Often the indicator is used to select one of the alternative projects for investment. For the investor, the project with the lower coefficient value will be more preferable. This is due to the fact that it will become profitable faster.

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For capital investments

This indicator allows you to evaluate efficiency reconstruction, modernization of production. In this case, this indicator reflects the period during which the resulting savings and additional profit will exceed the amount spent on capital investments.

Often, such calculations are used to assess the effectiveness and feasibility of investments. If the value of the coefficient is too high, you may have to abandon such investments.

Equipment

The payback period of the equipment allows you to calculate how long the funds invested in this production unit will be returned at the expense of the profit received from its use.

Calculation methods

Depending on whether the change in the cost of funds over time is taken into account when calculating the payback period or not, traditionally allocate 2 calculation methods this ratio:

1. simple;
2. dynamic (or discounted).

Easy way to calculate is one of the oldest. It allows you to calculate the period that will pass from the moment of investment to the moment of their payback.

Using this indicator in the process of financial analysis, it is important to understand that it will be sufficiently informative only if following conditions:

• in the case of comparing several alternative projects, they must have an equal life;
• investments are made at a time at the beginning of the project;
• income from the invested funds comes in approximately equal parts.

The popularity of this calculation technique is due to its simplicity, as well as complete clarity for understanding.

In addition, a simple payback period is quite informative as investment risk indicator. That is, its greater value allows us to judge the riskiness of the project. At the same time, a lower value means that immediately after the start of its implementation, the investor will receive consistently large income, which allows maintaining the level of the company at the proper level.

However, in addition to these advantages, a simple calculation method has a number of shortcomings. This is because in this case not taken into account the following important factors:

• the value of cash changes significantly over time;
• after the project has achieved payback, it can continue to be profitable.

That is why the calculation of the dynamic indicator is used.

Dynamic or discounted payback period The project is called the duration of the period that passes from the beginning of investments to the time of its payback, taking into account discounting. It is understood as the onset of a moment when the net present value becomes non-negative and remains so in the future.

It is important to know that the dynamic payback period will always be longer than the static one. This is due to the fact that in this case, the change in the value of cash over time is taken into account.

Next, consider the formulas used in calculating the payback period in two ways. However, it is important to remember that if the cash flow is irregular or the amounts of receipts are different in size, it is most convenient to use calculations using tables and graphs.

Method for calculating the simple payback period

When calculating, a formula of the form is used:

Example 1

Suppose that a certain project requires investments in the amount of 150,000 rubles. It is expected that the annual proceeds from its implementation will amount to 50,000 rubles. It is necessary to calculate the payback period.

Substitute the data we have into the formula:

RR = 150,000 / 50,000 = 3 years

Thus, the investment is expected to pay off within three years.

The formula proposed above does not take into account that in the process of project implementation, not only the inflow of funds, but also their outflow may occur. In this case, it is useful to use the modified formula:

RR = K0 / FCsg, where

PChsg - received on average per year. It is calculated as the difference between average income and expenses.

Example 2

In our example, we will additionally introduce the condition that in the process of project implementation there are annual costs in the amount of 20,000 rubles.

Then the calculation will change as follows:

PP = 150,000 / (50,000 - 20,000) = 5 years

As you can see, the payback period when taking into account costs turned out to be longer.

Similar calculation formulas are acceptable in cases where revenues are the same over the years. In practice, this rarely occurs. Much more often the amount of inflow changes from period to period.

In this case, the calculation of the payback period is carried out somewhat differently. There are several steps in this process:

1. there is an integer number of years for which the amount of income will be as close as possible to the amount of investment;
2. find the amount of investments that are not yet covered by inflows;
3. considering that investments during the year go evenly, they find the number of months required to achieve the full payback of the project.

Example 3

The amount of investment in the project is 150,000 rubles. During the first year, an income of 30,000 rubles is expected, the second - 50,000, the third - 40,000, the fourth - 60,000.

Thus, for the first three years, the amount of income will be:

30 000 + 50 000 + 40 000 = 120 000

For 4 years:

30 000 + 50 000 + 40 000 + 60 000 = 180 000

That is, the payback period is more than three years, but less than four.

Let's find the fractional part. To do this, calculate the uncovered balance after the third year:

150 000 – 120 000 = 30 000

30,000 / 60,000 = 0.5 years

We get that the return on investment is 3.5 years.

Calculation of the dynamic payback period

Unlike simple, this indicator takes into account the change in the value of cash over time. For this, the concept of discount rate is introduced.

The formula takes the following form:

Example

In the previous example, we introduce one more condition: the annual discount rate is 1%.

Calculate the discounted income for each year:

30,000 / (1 + 0.01) = 29,702.97 rubles

50,000 / (1 + 0.01) 2 = 49,014.80 rubles

40,000 / (1 + 0.01) 3 \u003d 38,823.61 rubles

60,000 / (1 + 0.01) 4 \u003d 57,658.82 rubles

We get that for the first 3 years of receipts will be:

29,702.97 + 49,014.80 + 38,823.61 = 117,541.38 rubles

For 4 years:

29,702.97 + 49,014.80 + 38,823.61 + 57,658.82 = 175,200.20 rubles

As with a simple payback, the project pays off in more than 3 years, but less than 4. Let's calculate the fractional part.

After the third year, the uncovered balance will be:

150 000 – 117 541,38 = 32 458,62

That is, until the full payback period is not enough:

32,458.62 / 57,658.82 = 0.56 years

Thus, the return on investment will be 3.56 years. In our example, this is not much more than with a simple payback method. However, the discount rate we adopted was too low: only 1%. In practice, it is about 10%.

Payback period is an important financial indicator. It helps the investor to assess how expedient the investment in a particular project.

The following video lecture is devoted to the basics of financial planning, investment plan and payback period:

The start of any business begins with a calculation. The investor must know when the cost of the project will pay off and he will start making a profit. How to calculate the payback of the project and how is it measured? The payback of a project is measured in time. Knowing the calculation algorithm, you can find out the time during which all the costs invested in the project will be covered in full. Small investments can pay off within a few months, large projects will cost investors several years of waiting for a full payback. Let's calculate the payback on the example of one investment project - the acquisition of real estate (apartment) for the purpose of renting it out. To calculate, you need to know the cost of the project, monthly income and expenses.

Payback period of the project. Formula.

Starting investments. The cost of real estate is 3,000,000 rubles, repairs and furniture - 1,000,000 rubles. Total - 4,000,000 rubles.

Average monthly profit. The cost of monthly rent is 24,000 rubles. Comm. services and cosmetic repairs 4,000 rubles. Total - 20,000 rubles.

Project payback. 4,000,000 / 20,000 = 200 months = 16 years 7 months.

Management

Having on hand data on the investment project, you can begin to calculate its payback. Starting investments - 4,000,000 rubles. The net monthly income depends on the income and expenses of the project. Rent is 24,000 rubles - this is income. Com. services and cosmetic repairs is 4,000 rubles - this is an expense. The net profit of the project per month is 20,000 rubles.

The project is up and running successfully. Now it remains to find out how long it will take to return all investment funds. According to the payback formula for the project, this will take 16 years and 7 months. The date is relative, as it depends on the regularity of the monthly profit throughout the entire payback period of the project.

As a result of the calculation, the payback turned out to be 16 years 7 months, rounded up and we get 17 years. Is it a lot or a little? To do this, you need to find out as a percentage of the annual return on investment. The calculation is made according to the formula 100% / 17 years = 5.88%.

The entrepreneur's decision about the benefits of a particular project is made on the basis of payback and the annual percentage of return on investment. The shorter the payback period, the faster the investor will begin to receive a net profit. The higher the annual percentage of return, the more profitable and promising the project.

note

Payback depends on a stable, monthly income of the project. Before you start investing in a project, you need to make sure that the monthly income will come in all the time. You should find out the level of competition in this niche, what demand is there for a potential project. Based on these findings, you can find out the prospect of the project and make an appropriate decision.

Investment risks depend on the payback period. The lower the payback of the project, the lower the risk of losing investment. The greater the payback of the project, the higher the investment risk. Experienced entrepreneurs know how to calculate the payback of a project so that high-yield investments have minimal risks.

Useful advice

It is better for novice investors to choose such projects that immediately begin to pay for themselves. Buying real estate and renting it out starts to generate income immediately. But the construction of real estate will not begin to pay off immediately, but only after the commissioning of the facility.

Beginners should not immediately invest in large, investment projects, even if they have free funds. It is better to buy several small objects that will quickly pay for themselves. The money received from small investment projects can be used to purchase larger ones.

Question: How to calculate the payback of the project with a high level of inflation?
Answer: When calculating the payback, include the average inflation rate in the country in the monthly expenses. If the calculation is based on annual expenses, then we increase them by the average annual inflation rate in the country.

Question: How to calculate the payback of the project if the project brings profit only seasonally?
Answer: Such investment projects as real estate in seaside resorts have a special payback calculation. It is produced according to the average annual calculation. All income received for the year minus annual expenses are calculated.

Question: How to quickly launch a project after the start of investment, because its payback depends on it?
Answer: All delays in the start of the project must be taken into account and included in the calculation of its payback. Delay times may vary.

Instruction

To begin with, determine the amount that the company is willing to allocate for the purchase of new equipment. Include directly in it the cost of acquisition, as well as the costs associated with installation and commissioning. For example, if you plan to acquire an additional conveyor that will redistribute the load, then in the “Capital Investments” parameter, calculate the price of the device, the amount of delivery, installation and commissioning. However, if all the preparatory activities were carried out by a staff member of the company, and therefore the organization managed to avoid additional costs, then nothing needs to be added in addition to the purchase costs.

Calculate the amount of gross income received from the use of equipment. For example, if 500 loaves of bread are baked in a new oven per month and sold at a price of 20 r per unit of goods, and the cost of raw materials per loaf is 5 r, then the gross profit will be equal to 7500 r (7500 = (20 r - 5 p) * 500). At the same time, the costs of maintaining the salary fund are not taken into account, but if additional personnel are hired to maintain the equipment, then payments to newly hired employees must be taken into account. Tax deductions should be ignored - in any case, they will depend on the final amount of income. Thus, - is the difference between the selling price and the cost of production, in trade - the amount of allowances.

Substitute the found indicators into the formula: T \u003d K / VD, where T is the payback period; K - capital investments; VD - gross income. When calculating the payback period, you can take any time interval. If a quarter is selected, then the amount of gross income is also taken from the calculation for 3 calendar months.

Instead of the profitability indicator, you can substitute the amount of savings that will become possible after the introduction of an additional piece of equipment, because according to popular wisdom, "Saved means earned."

It is fundamentally wrong to think that only economists and businessmen should have the ability to calculate payback. Each family invests money in apartments, houses, cars and bank deposits. All this can grow in price after a while and bring benefits to their owners. Therefore, you can talk about the return on investment with friends, and with colleagues, and with neighbors in the landing. And there is nothing surprising if they do not know the phrase "return on investment", because not everyone is given to be economists and businessmen.

You will need

• - calculator
• - pen
• - paper

Instruction

For domestic use, the payback calculation is extremely simple and unpretentious. To calculate the payback, you need to divide the amount of invested funds by the amount of profit received. The resulting value will show the period of time during which the payback will come.
For example, we bought an apartment on the ground floor of a residential building for 3,000,000 rubles. We spent another 600,000 rubles on repairs, bureaucratic procedures and the arrangement of the adjacent territory. After that, having submitted an advertisement, they handed over this premises to the tenant, who will pay monthly utilities and the amount of 40,000 rubles.
Thus, our investments amounted to 3,600,000 rubles. And monthly from the project - 40,000 rubles. Full payback will require our premises to be rented for (3,600,000 / 40,000) 90 months, or 7.5 years.

Use a calculation methodology based on a time estimate of the cash flow. The fact is that a simple static approach indicates that the project given as an example will pay off in 2 years 6 months. But this period does not take into account the rate of return for investments in a particular chosen one, and therefore cannot correctly reflect the time parameters of payback.

Calculate the accumulated cash flow, which will be the simple sum of the costs and income stream of the investment project.

Calculate the accumulated discounted cash flow until the first value with a positive status is obtained.

Determine the payback period according to the above .T (ok) \u003d 3 + 54/458 \u003d 3.1 years. In other words, for the real reimbursement of the amount of investment costs, taking into account the factor, a significantly longer period will be needed than we received when calculating the simplified method.

note

The payback period is recommended to be calculated for projects that are financed by long-term liabilities. The result of calculating the payback period should not be less than the period of use of borrowed funds, which is established by the loan agreement.

Sources:

• Assessment of investment projects
• project payback period example

The rate of return on invested funds is a key criterion for the attractiveness of an investment project. The payback period allows the investor to compare different business options and choose the most suitable one, corresponding to his financial capabilities.

Instruction

In this example, the payback period will be: 3 years 10 months

The main disadvantage of this method is that the calculation does not apply the discounting procedure, and therefore does not take into account the decrease in the value of money over time.

Calculation of the discounted payback period

The discounted payback period is the period over which discounted cash flows cover the initial costs associated with an investment project. The discounted payback period is always less than the simple one, since the value of money always decreases over time. The discounting procedure allows you to take into account the cost of capital used in the calculations.

Suppose that the initial investment for the project amounted to 150 million rubles. The discount rate is 15%. The project will be implemented within 3 years, it will annually generate cash flows:

1 year: 30 million rubles

2nd year: 120 million rubles

3rd year: 15 million rubles

Using the data presented, it is also necessary to compile an analytical table. The first step is to calculate the discounted cash flow in each period. The discounted payback period for a project is calculated by summing the annual discounted cash flows until the sum of the cash inflows equals the initial investment cost.

The table shows that the balance of the accumulated discounted payback period does not take a positive value, therefore, within the framework of the project, the payback will not be achieved.