How to calculate the payback of a project

Project development, as a rule, ends with a calculation of its payback. If for some reason the project is considered unpromising, its economic indicators change (for example, material costs are reduced). How can one calculate the payback of a project and what will be required for this?

You will need

calculator, pen, notebook, economic indicators of the project

Instruction manual

1

Calculate the payback period of the project, that is, the time interval after which the project begins to make a profit. T = K / P, where

T is the payback period, K is the annual capital investment, P is the project profit. For example, in the first year of the project, the company procured new equipment worth 15 million rubles. In the second year of the project, the enterprise overhauled the workshops to improve the work of the department. 2 million rubles were spent on repairs. In the first year, the profit from the project amounted to 5 million rubles, and in the second - 17 million rubles. If the cash flows during the year, quarter or month are not the same, it is worth calculating the payback period for each of the above time intervals. In the first and second year it will be respectively:

T1 = 15/5 = 3 years

T2 = 2/17 = 0.11 years or about a month later the project will pay off with a similar amount of profit.

2

Calculate a simple rate of return or an indicator that indicates how much of the investment is paid back from the profit. PNP = PE / IZ, where

EOR - simple rate of return, PE - net profit, IZ - investment costs.

According to our example, a simple rate of return in the first and second year will be, respectively:

PNP1 = 5/15 = 0.33 million rubles, PNP2 = 17/2 = 8.5 million rubles. In other words, in the second year of the project, it can be argued that the investment paid off, the project is recognized as promising.

3

Compare the results according to a simple rate of return and payback period. In our example, in the second year of the project, investments begin to work for profit. After about two years and one month, the project will fully pay for itself, which means that it can be argued that investments in the project were not made in vain.

note

Often these indicators are not enough to calculate the payback of complex projects that are being implemented in stages and in different areas (for example, construction and sale of goods). In this case, indicators are calculated for each specific type of activity and taking into account changes in cash receipts in a separate reporting period.

Assessment of the economic efficiency of investment projects