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How to determine the payback period of a project


It is customary to start a business project with a business plan, an integral part of which is the calculation of the project’s payback period and its profitability. Payback is the period of time that is necessary for the investment costs to be covered by the project’s income. The calculation of this value is, of course, relative and dynamic.

The calculation of the payback of the project must begin with finding the discounted value of income.

Money becomes cheaper over time, so the future cash flow calculated under current conditions (for example, product prices) should be discounted in the future. The results of the calculations are best presented in the form of a table. The discounted value of income can be obtained by dividing this value by (1 + discount rate) to the power corresponding to the number of years for which we discount.

The discount rate depends on many factors, including inflation, and therefore an approximate value is taken for calculations in the average range from 10 to 15%. Suppose the initial investment in the project is 200 thousand rubles, but you should not think that the project will pay off in 2 years. If we take into account the discount rate of 15%, then the payback period of the project will be a little longer. If an annual income of 100 thousand rubles is expected, then the discounted income in the first year of the project is 100 / 1.15 = 87 thousand rubles. In the second year of the project, the discounted income must be calculated as follows: 100/1.15^2=75.6 thousand rubles, and accordingly, in the third year of operation, the calculation will be as follows: 100/1.15^3=50.4 thousand. rub.

Now you need to understand in what year of work the project will pay off. To do this, it is necessary to consistently add the value of discounted income for each year to the value of the initial investment, taken with a minus sign. As soon as the value becomes positive, this will mean that you have found the year when the project began to generate income, and accordingly paid off.

In the above example, for the first 2 years at the end of the period, the calculation value is negative: -200+87+75.6=-37.4 thousand rubles, and taking into account the data for 3 years, it is already positive: -200+87+75, 6+50.4=13 thousand rubles That is, the period until the payback is 2 years.

The formula for calculating the payback period is as follows: T = period until the payback + cash flow at the time of payback / discounted cash flow in the payback year. Accordingly, the calculation should look like this: T u003d 2 + 37.4 / 50.4 u003d 2.74 years. That is, the project, taking into account the decrease in the cost of money over time, should pay off in 2 years 9 months.

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