The rate of return on investment is a key criterion for the attractiveness of a particular investment project. The payback period allows the investor to compare different business options and choose the most suitable one that matches his financial capabilities.
Instructions
Step 1
Remember that the payback period of a project is the period of time from the initial stage (project implementation) to the moment when it fully pays off. The point of recoupment is the time after which the financial flow from the project acquires a positive value and remains so.
Step 2
The method for calculating the payback period of an investment is to determine the period that will be required to recover the initial value of the investment. The payback period is an indicator of whether or not the initial investment will be recouped over the life of the project.
Step 3
There are two ways to calculate the payback period. If the cash receipts from the project are the same for all years, then the payback period can be calculated as follows:
PP = I / CF, where:
РР - the payback period of the project, I - the initial investment in the development of the project, CF is the average annual value of cash receipts from the project.
Step 4
If the cash flow over the years is not the same, then the payback period is calculated in several stages. First, find an integer number of periods over which the accumulated amount of proceeds from the project will be closest to the initial investment, but will not exceed it. Then calculate the uncovered balance - the difference between the amount of investments and the received amount of cash receipts. Then divide the uncovered balance by the amount of cash receipts of the next period.
Step 5
Please note that these methods have some disadvantages. They ignore the difference in the value of money over time and the existence of cash flows after the payback period ends. In this regard, the discounted payback period is calculated, which is understood as the length of the time period from the initial moment to the moment of payback, taking into account discounting.
Step 6
Remember that discounting is the determination of the present value of the cash flows that we will receive in the future. In other words, it is the transfer of the future value of money to the present. At the same time, the discount rate is determined on the basis of interest on risk-free investments based on interest on borrowed capital, according to expert estimates, etc.
Step 7
The discounted payback period is the most adequate criterion for assessing the attractiveness of an investment project, since it allows some risks to be included in the project, such as a decrease in income, an increase in costs, the emergence of alternative most profitable investment areas, thereby reducing its nominal efficiency.
