How to calculate the payback period of the project
If you decide to make financial investments in a particular project or want to start your own business, first of all you need to go through the planning stage. Only the most accurate plan for the development of a business or project will determine whether it will be profitable in the long run and whether it is worth spending your time, effort and money on its implementation.
When drafting a business plan, it becomes necessary to determine the period for which the project can pay off. A timely and, most importantly, correct calculation will help the project become more successful. There are many methods for calculating the payback period of a project.
The concept of payback period and its calculation
The payback period is understood to be the time period for which the net profit from the income received will be able to fully cover the total volume of all investments in the project since its start. In other words, this is the period of time for which all invested funds will be returned, and the business owner will start to receive a net profit.
It is important to note that before calculating the payback period, it is required to determine as accurately as possible how much investment is needed for the project. Here it is necessary to take into account absolutely all investments, since the payback period of a business project will depend on the completeness of their reflection. It is not difficult to guess that his formula contains such a value as the amount of investment, which is denoted Sinv.
The next stage after the summation of all investments is the determination of variable costs for the implementation of a business project that are expected in the future. In other words, it is necessary to calculate the approximate amount:
pay for all kinds of services;
logistics costs, etc.
The sum of variable costs is also contained in the formula for calculating the payback period and is referred to as Sp. Ed.
Then you need to take into account the fixed costs, which in the formula are referred to as Spid.izd. These are any fixed monthly fees, for example, the salary rate, rental of equipment or premises and much more.
The next stage of calculation is the determination of the profit that your investment project will bring. It is worth paying attention to the fact that profitability in various areas of business can vary significantly. Also, profits in some cases can be seasonal. For this reason, in certain months it may be minimal or may be absent altogether.
Based on the forecast, you need to calculate the possible profit obtained in one day, month, quarter or whole year. The time period is determined based on the long-term project. Profitability is designated Spr.
So, the business return on investment is calculated as follows:
Current = Sinv. / Sr. – Spost. – Sper.izd.
This is the easiest way to calculate. Using it, you can easily determine the time period for which the funds invested in business development will pay off.
Discounted payback period
In addition to the method of calculating the payback period described above, other methods are used that are more accurate. One of them is the calculation of the discounted payback period.
In this case, you will need the same data as well:
the value denoting the cash inflow (in addition to the initial investment) per unit of time;
the ratio of the amount of the initial investment to the value described above;
the ratio of the amount of the initial investment to the depreciation accrued in the same time period.
To determine the so-called break-even point of your business, it is required to express the amount of services rendered or the total volume of production in monetary terms. The value at which the amount of initial investments in a business is equal to the sum of net profit is called a break-even point.
Having an understanding of the amount of money a business will reach the break-even point and correlating the obtained value with the production capacity, it is possible to calculate the discounted payback period. If the first method is enough for you in your calculations, you may not consider the second, but the discounted payback period allows you to make a more accurate forecast.
And what is the result?
Thus, deciding to buy a ready-made business or make a solid cash investment in starting your own business, before taking such a responsible step, it is important to calculate all possible and impossible prospects to which a selected business project can lead you.
Planning is a complex of calculation methods, allowing to determine the prospects of a business project. It is not difficult to guess that it takes a lot of time to carry out all the necessary calculations.