How to calculate the payback period of a project

For the successful implementation of their own business, an important point is competent planning, which requires the mandatory calculation of the payback period of the project. This indicator is necessary when writing a business plan and searching for investors, because this item is of particular interest to them. How to calculate the payback period of a project?

You will need

calculator, investment amount, variable and fixed costs, planned profit, notebook and pen

Instruction manual

1

Calculate the required amount of investment. The project payback period is a period of time for which the net profit from the investment project will be able to fully cover the entire volume of investment in the project. This indicator is referred to as "S inv."

2

Calculate the variable and fixed costs. Constant costs include those that do not change their meaning, that is, the salary of employees (salary), rental of premises, etc. Variables include, on the contrary, such costs, the amount of which depends on extraneous factors - employee bonuses, electricity costs and the like. These indicators are designated as "S post. Ed." And "S per. Ed." Respectively.

3

Determine the amount of planned revenue. At this indicator, the scope of activity, seasonality and other factors. This indicator is usually designated as "S vyr."

4

Calculate the net profit received from the project. To do this, use the following formula.

S ol = S vyr- (S post. Ed. + S per. Ed.)

It should be remembered that the indicators for different years will not be the same. If the business is developing successfully, then the costs increase (requires more space, more staff, etc.), but the revenue and, accordingly, the profit also do not stand still.

5

Find a breakeven point. This point is the moment when all the money invested in the project pays off. It is this time that will be the payback period of the project, that is, when all the investments made in the project have returned. To calculate this indicator, you need to use the following formula

S inv - S ol

When the answer is zero - the project will be considered fully paid off. If the project is large-scale, then in a year it will not reach the breakeven point, therefore, indicators should be calculated immediately for several years.

6

When developing a business plan for a project, it should be remembered and understood that the payback period of a project is not calculated separately from other indicators. It is always associated with a measure of fair value and with an internal rate of return (IRR).