The formula for calculating the return on costs, standard values. Simple and discounted project payback period Costs paid off

Return on costs shows the level of profit per ruble of funds spent and is calculated as a whole for the enterprise, its individual divisions and types of products. We will tell you how to determine the cost-benefit ratios, give an example of calculating and analyzing the results, and outline ways to increase profitability.

Changing the competitive environment, life cycle product and consumer demand have had a significant impact on today's business environment. To compete effectively in the marketplace, companies need to continually change their products and shorten their time to market. At the same time, it is necessary to analyze the effectiveness of the use of material, labor and other resources on an ongoing basis. One of the indicators characterizing the efficiency of the main activity of the enterprise is the cost-benefit ratio.

Cost-benefit formula

In general terms, return on costs is defined as the ratio of profit to costs for the reporting period. In this case, the costs include costs that, according to the rules accounting generate profit. Three indicators are used depending on the direction in which the return on costs is to be calculated:

1. The effectiveness of the organization of the main and auxiliary production estimated through the formula for recoupment of the cost of goods and services produced. Calculation formula in in this case as follows:

Return on Cost \u003d Gross Profit / Cost of Sales

Return on Cost \u003d Line 2200 / Line 2120 + Line 2210 + Line 2220

3. Efficiency of total costs enterprises can be estimated using the formula:

Return on costs \u003d Profit before tax / Cost of sales + Selling expenses + Administrative expenses + Interest payable + Other expenses

Or according to the data of the statement of financial results:

Return on Cost \u003d Line 2300 / Line 2120 + Line 2210 + Line 2220 + Line 2330 + Line 2350

Example of calculating cost benefit

Table 1. Cost-benefit analysis and profitability of sales enterprises

In the example presented, the volume of activity has decreased, but the profitability indicators have increased. Return on costs on sales increased by 8.3% to 12.1% versus 3.8% in the previous period. That is, in reporting period from one ruble spent, the enterprise receives 8.3 kopecks more than last year. The return on sales rose to 10.8%, i.e. the enterprise receives 10.8 kopecks from one ruble of sales.

It will also be helpful: Types of profitability and their calculation

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Factors influencing cost effectiveness

It is important to understand what factors influenced the change in profitability indicators. This will allow you to make timely and informed management decisions and improve efficiency.

Changes in profitability indicators can be caused by the following deviations:

1. Variation of variable costs (by materials, by labor costs);
2. Overhead deviations;
3. Sales deviations (by price, by sales volume).

Total Variable Material Cost Variance is a measurement of the difference between the target material costs for actual production and the actual material costs incurred. This deviation is divided into price and usage deviations:

• by price is the difference between what the cost of actually purchased materials should be and what it was in reality.
• by use - this is the difference between the standard amount of materials that should have been used for the actually produced number of units of product and the actually spent amount of material resources.

The total variance of variable labor costs shows the difference between the standard direct labor costs and the actual ones. This deviation may be caused by the difference between what the cost of actually paid hours of labor should be, and what it was in reality. Also, the deviation in labor costs can be caused by a change in productivity. That is, the difference between how many hours should have been worked and how many hours were worked.

Sales variances can be caused by price and volume factors:

• sales price variance is the change in revenue caused by the deviation of the actual sales price from the budget;
• sales variance by volume in units of sale is calculated as the difference between actual and budget sales.

Sample variance analysis

Based on the data from the example presented above, you can calculate the impact of influencing factors on the change in the profitability of sales:

1. Sales deviations have resulted in lower ROI:

((1 880 160 -2 602 400) / 1 880 160) – ((2 700 000 – 2 602 400) / 2 700 000) = - 42%

2. Variations in the cost price have led to an increase in the profitability of sales:

(1 880 160 – 1 677 640 / 1 880 160) – (1 880 160 – 2 602 400) / 1 880 160) = 49,2%

The sum of these two factors gives a favorable change in the profitability of sales:

49,2% - 42% = +7,2%.

The results of factor analysis show that the decrease in the cost of goods sold had the greatest impact on the level of profitability of sales than the change in the volume of sales.

When you start a business or a new project within an existing business, it is extremely important for you to understand one thing: when your project will pay off.

The moment your project has paid off, you will prove to yourself and the whole world that it was worth investing in it. Moreover, you will prove to yourself that you are an entrepreneur!

Initial investments have already returned and now you can make a profit with peace of mind!

Before you start calculating the payback of the project

Before proceeding with the calculation of the payback of the project, let us ask ourselves the question: how is the payback measured?

The question is, of course, stupid. It is clear that not in meters or decibels.

Payback of the project is ALWAYS measured in time: days, months, quarters, years.

For projects with start-up investments of up to 1 million rubles, it makes sense to measure the payback in months. For larger projects - in years.

After completing hundreds of trainings with aspiring entrepreneurs, I realized one simple thing: all complex formulas and calculations do not work in real life. Moreover, they do not work in small businesses.

Therefore, I will try to discard the complex economic terminology and explain it in an extremely understandable language.

"Ingredients" for calculating the payback of the project

The project payback is an integral indicator. This means that in order to calculate it, you need to know a number of other indicators - these are the amounts income, expenses, profits, start-up investments.

Income - this is the money that you receive (or plan to receive) from your clients after the launch of the project. Customers will pay this money for goods sold or services rendered.

Expenses - this, on the contrary, is the money that you pay to your suppliers of goods and services. These include expenses for raw materials, materials, work performed, rent payments. Also taxes, wages, insurance premiums - all this refers to the concept of expenses

Profit \u003d income - expenses

As simple as that. Therefore, to calculate the profit for the month, you need:

1. add up the whole parish money - income;
2. add up the entire expense of funds - expenses;
3. calculate the difference between the first and the second

If we are talking about a project, then we mean future income, expenses and profits. Planning is desirable monthly.

What is the difference between costs and start-up investments when calculating the payback of a project?

In addition to the concepts of income, expenses and profit, one more indicator appears in the calculation of the project payback - initial investment amount or investment amount.

Initial investment is the amount of money that needs to be invested in order to start earning and receive income from the project.

What is usually required to start a project:

• buy equipment;
• renovate the premises;
• buy furniture and office equipment;
• buy an initial stock of goods in a sufficient range;
• go through state registration;
• get a license;
• obtain permission for the type of activity from the supervisory authorities

All this needs to be done to start a business and start making money. Let me emphasize that these investments must be made even before you start making money from the project.

Difficulties always begin when it becomes necessary to separate costs and start-up investments.

A simple example: rental payments for premises (rent or start-up investment?)

You rented a room and now it needs to be renovated. It will take about two months before you start a business and start selling. Where should the rent payments for the first two months be attributed: to start-up investments or to expenses?

There is one simple rule: all expenses are related to start-up investments until the moment you launched the project and began to receive income from it.

Starting a business and getting the first income is a kind of watershed.

All that came before was initial investment. Everything after is expenses.

Therefore, in our example, rent payments for the first two months must be attributed to the start-up investment. It was necessary to rent the premises in order to start earning income in two months.

After the first income is received, rent payments become expenses. You pay them monthly.

So, you need to remember a simple rule: all the expenses that you will pay before receiving the first income from the project must be attributed to the initial investment. All expenses after this point can be attributed to current expenses.

The formula for calculating the payback of the project

To calculate the payback, it is necessary to compare all the profit received from the beginning of the project with the amount of start-up investments.

At that moment, when the amount of profit accumulated from the beginning of the project implementation exceeds the amount of start-up investments, the project will pay off.

A project payback period of 6 months means that the profit received in 6 months is greater than the amount of initial investment. But the profit received in 5 months does not yet exceed it.

To calculate the payback, you can:

Option 1. Calculate profit on a monthly basis, and then cumulatively for each month, comparing the amount of accumulated profit with the amount of initial investments.

An example of calculating the payback of a project

For example, let's take a simple life situation: you want to buy an apartment and rent it out. In principle, this is also a business project. The goal of this project is to make money.

1) We estimate starting investments

Initial investments in this case \u003d apartment cost + repair cost + furniture cost \u003d 5,000,000 rubles

2) Estimate the average monthly profit

Income \u003d the amount of monthly rent \u003d 50,000 rubles per month

Expenses \u003d the amount of utility bills + the amount of the current repair of the apartment (based on an average of a month) \u003d 10,000 rubles

Average monthly profit \u003d income - expenses \u003d 40,000 rubles per month

3) We calculate the payback of the project

Here is such a long-term project. Therefore, no one buys real estate in order to make money. Real estate serves rather to save money.

How to calculate the payback of your project?

Let's move on to the most important question - how to calculate the payback of your project. In order to solve this problem, you can use several ways:

Method 1... Take a sheet of paper and calculate. This method is the fastest and easiest. It is suitable for very simple projects like the one we just calculated (apartment purchase project).

Method 2... Calculate everything in excel. This method is longer and less simple. This method is suitable for those who know how to use excel, write formulas, customize tables. I used this method a lot in the past.

Method 3... Take advantage. Much easier than customizing formulas in excel. It can be used to calculate projects of almost any complexity. Now I only use this method.

Calculation of the project payback

Economic activity of any organization in conditions market relations requires the widespread attention of a large circle of business representatives who show interest in the results of its functioning.
Surviving enterprises in the current conditions will allow real estimate its financial condition and the capabilities of potential competitors, to determine which it is necessary to conduct a timely, high-quality analysis of all economic activities, identify shortcomings and eliminate them in time.

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What does this indicator mean?

The level of profitability shows how effectively the current costs of the enterprise are used. It is calculated as a percentage, expressed by the degree of profitability, that is, the amount of net profit.

To get a net profit, an enterprise must carry out expedient activities that depend on the capital turnover, the volume of production produced or sold. The profit is spent on development, provision of scientific and technical equipment, increasing wages employees, the formation of budgetary funds.

It is expressed in two indicators:

• Absolute. It amounts to the amount of revenue in excess of the cost of economic activity, production of products.
• Relative... Shows the level of profitability.

The net profitability is calculated for the whole enterprise or its separate divisions, by type of products. Analysis of its indicators allows you to get the dynamics of development, production efficiency, sales of products.

Payback of different kinds with formulas

According to the instructions of the President of the Russian Federation, marginal levels of profitability in the amount of 10 - 20% are applied to products, which, in accordance with the current legislation, are free prices - tariffs.

For goods with fixed rent payments in the form of excise tax, they are determined without taking them into account.

With an increase in the specific weight of the cost of production due to the use of purchased materials, semi-finished products and components exceeding 85 % it is set in size 15 percent.

Table 1. Current indicators

Cost

The payback is economic efficiency nested authorized capital. The payback period is calculated by the formula:

T \u003d Vzat / D,where

Vzat- the amount of invested capital;
D- the average amount of income growth over the period under consideration.

It is used when choosing best options for the implementation of the company's activities related to technical and design solutions, production technology. Different options require different capital investments and operating costs.

Return on cost is calculated as:

P \u003d Prp / S,

where Prp- profit before tax;
FROM - the total cost of the products that have been sold.

According to the indicator, a graph of dynamics is built, showing the need to revise the cost of production, an increase in cost. The volume of goods turnover increases with an increase in profitability, if the value of costs remains unchanged, then profit accordingly increases and vice versa.

Activities

Return on costs in production activities is calculated as the ratio of net profit and amortization for a certain period of time to the amount of expenses spent on selling products, which is related to operating costs.
Its formula:

R \u003d (Pchp + Amor) / Z,

where PPP - net profit;
Amor - depreciation deductions;
Z - expenses for the production and sale of products.

In production activities, the profitability ratio of the organization expresses the payback of production costs, the amount of profit for each ruble spent on the production and sale of products.

Services

The provision of services in any area does not require certain production costs.

In this situation, the “service” becomes the product sold, so its cost and profit depend on the quantity.

It is necessary to form the cost of the service provided, taking into account the field of activity, calculate the projected demand, and find the gross income. Subtract variable and fixed costs from gross income.
The payback period for the rendered service is calculated by the formula:

Tu \u003d Zu / Pu,

where Zu- costs invested in the business;
Poo- the planned profit, which will be received as a result of activities for the provision of services.
The effectiveness of the services provided is calculated by the formula:

Rsd \u003d (Psd * Spvr) / З * 100%,

where Z- costs associated with the organization of services;
Spvr- the number of services for a certain period of time;
Psd- profit from the sale of the service.

Watch a video on the topic of profitability and profitability of the enterprise

Fixed assets

The means of labor that take part in the production process while maintaining their original form are classified as fixed assets. This also includes tangible assets used in the production or provision of services that make up the difference between the value of fixed assets and accumulated depreciation.

They ensure the activities of the enterprise for a long time, receiving physical depreciation, which reduces them and transfers them to cost through depreciation.

The payback of fixed assets is determined by the formula:

T \u003d Os / Pch,

where OS - fixed assets of the enterprise, expressed in cash;
Pch- net profit for a certain period of time.
The efficient use of fixed assets is determined by the formula:

Rosn \u003d Pch / Os * 100%,

where Wasps- the amount of fixed assets;
Pch- the amount of net profit.

Transactions

The profit from the sale of products should be commensurate with the costs of organizing it. In a simplified form, a condition is provided in which the return on investment is equal to the cost.
Payback includes total profit from all transactions:

O \u003d P * Co,

where P - average profit from one deal;
Co - the number of transactions carried out.

If the company took out a bank loan for the development of the enterprise, then the bank loan is taken into account in the calculations.

You can estimate the payback period for separate types of transactions using the formula:

Topup \u003d З / (Spur * P),

where Z- costs associated with the organization of the transaction;

Spur- the number of transactions for a certain period of time;

P- the average profit received as a result of the transaction.

Rsd \u003d (Psd * Spur) / Z.

Staff

Capital investment in labor force should pay off, in addition to make a profit. The payback is in direct proportion to the employee's length of service at the employee's given enterprise.

Payback of personnel is calculated by the formula:

T \u003d Zed / Fgod,

where T- payback period;

Zed- one-time costs;

Fgod- the annual economic effect.

To obtain the effect and increase the length of service, the enterprise works on:

• expedient exploitation of the working time fund, improvement of the employee's qualifications, increase in labor productivity;
• an increase in the period of an employee's stay at the enterprise. Long work experience leads to a quick payback.

Consequently, in a team with a stable environment where working time is fully used, conditions are created for obtaining a return on funds and making a profit.

The profitability obtained from the use of personnel can be calculated using the formula:

P \u003d Pch / Kp * 100%,

where Pch- net profit;
Kp- the average number of personnel on the list.

Net profit

The payback period can be traced to the example of a store that has been operating for some time. To determine the payback of net profit, it is necessary to find the size of the gross revenue of the outlet for the period under consideration. Next, the amount of profit that the organization intends to receive in the course of its activities for the same period of time is determined.

Then the net profit is equal to:

P \u003d B * Stz

where IN- gross proceeds from the sale of goods;
Stz- current expenses.

The payback period is calculated by the formula:

Tokup \u003d Ko / Pch

where To- investments for the purchase of goods;
Pf– net income net of taxes.
The coefficient of profitability from the sale of a product can be determined using the formula:

Ppr \u003d Ppr / Vpr * 100%,

where Ppr- profit received as a result of product sales;
Vpr- proceeds from sales.

Property

To determine the payback, it is necessary to draw up a list of property that is on the balance sheet of the enterprise, indicating each of them. Then the depreciation cost should be calculated individually.

The calculations contain residual value property, calculated as the difference between the original cost and depreciation. Wear is calculated according to guidelines Uniform norms depreciation objects, which is provided in accounting.

To determine the payback period of the property, the formula is applied:

Tim \u003d Sost / Pch,

where Comp- the value of the property of the enterprise;
Pch- net profit for the considered period of time.

Effective use of property for a certain period of time is determined using the formula:

Rome \u003d PC / Comp * 100%,

where Pch- net profit received as a result of property exploitation;
Comp- the residual value of the property for a certain period of time.

General

The total payback period of funds invested in production is determined by the period of achievement of the result, which acts as a profit or a decrease in the cost of production.

The payback period is calculated in different ways depending on the volume of incoming funds and taking into account inflation.

The overall profitability is determined as follows:

P \u003d V / P,

where V- the total amount of capital investments;
P- average annual receipts to the enterprise.

By total time cost recovery is established by the economic activity of the organization, its profitability, economic efficiency and the feasibility of further development. Based on this assessment, improvement methods are developed to be adopted for reorganization.

Methods for calculating the level of profitability

Balance

The activity of any organization is based on an indicator of overall profitability, so most enterprises must ask themselves the question: how to calculate profitability? It is the main parameter when conducting financial analysis.

The profitability on balance sheet profit is calculated using the formula:

P \u003d Pb / F * 100%,

where Pb- the total amount of profit on the balance;
F - the average annual cost of fixed assets, intangible assets and material circulating assets.

In order to establish how much the organization has developed over a certain period of time, in addition to the general one, it is necessary to find values \u200b\u200bthat characterize the profitability of turnover and capital turnover.

In a market economy, the turnover indicator is most used: the higher the profit, the greater it is. The number of capital turnovers is expressed by the ratio of gross receipts, that is, turnover, to the value of its capital. The increase in the number of capital turnover leads to an increase in the gross revenue of the organization.

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By EBITDA

To establish the capabilities of an enterprise, to determine the value of a business, the EBITDA index is used, which means gross profit without deducting interest accrued on it, dividends, before taxes, and depreciation.

The initial data for calculating the indicator are qualitative and undistorted accounting data.

These numbers are derived from financial reportcompiled in accordance with IFRS. The ratio is used to assess the operating results of the company, which is closest to the operating cash flow.

The EBITDA calculation reflects the profitability of the company's sales, the cash coming and earned for the reporting period. The calculation helps to estimate the ROI and self-financing reserves.
EBITDA is calculated using the formula:

E \u003d P (Y) dn + (% purchase + Aon),

where P (U) dn- profit (loss) before tax;

% purchase- Percentage to be paid;

And he- depreciation charges for fixed assets and intangible assets.

The calculation of the EBITDA margin is calculated as:

EBITDA margin \u003d EDITDA / Sales revenue

EBITDA is profit without deduction of interest, taxes and depreciation costs.

If there was a loss

If over the past year the company has suffered a loss, then the profitability index does not need to be calculated, but the payback of the product can be calculated.

To do this, use the formula:

Oprod \u003d W / Sprod

where IN- proceeds from the sale of products;

Sprod- cost of goods sold.

Ways to increase the indicator

There are many factors that influence the level of profitability in product sales. The main ones are:

• growing cost;
• decrease in sales of products.

In order to increase it in the first case, a scrupulous analysis of the costs included in the cost of production is carried out. Based on the data obtained, ways of increasing profitability are simulated, and the study of the possibility of reduction. Based on the audit, the following decisions should be made:

• on the basis of the analysis, identify significant and growing expenditure items;
• reduce costs as much as possible without sacrificing production;
• clearly distinguish between fixed and variable costs in order to calculate the threshold of profitability, which corresponds to the volume of turnover without loss, but also without profit;
• to analyze the profitability of separate types of products, based on profit margins, to examine the possibility of replacing the range of products;
• revise marketing activities, improve product quality, develop a product sales plan using promotional activities.

The payback period of an investment project is the most popular indicator for assessing the feasibility of an investment.

The simplicity of the calculation and its clarity contributes to this popularity. Indeed, if the investor is informed that in a year his investments will be returned to him, and then he will receive dividends from the project, he understands that it is worth investing in the project, without even being interested in the size of the dividends.

Being a static indicator, it shows the investor, with an accuracy of a month, the return period of his investment in the project.

This indicator is also used to select an investment option; out of several options, preference is given to the project with the shortest payback period.

The payback period of the investment project is the ratio of the initial investment in the project to the average annual profitability of the project. If there are several investors, then each also calculates the payback period of his investments in the investment project, i.e. the ratio of his investment in a project to his average annual income in this project.

The calculation of the payback period of the investment project is carried out according to the formula:

• PP - payback period in years;
• Io - initial investment in the project in rubles;
• CFcr is the average annual project income in rubles.

Since it is not always possible to determine the average annual income, the calculation of the payback of an investment project is carried out according to the formula:

• CFt is the receipt of income from the project in the t-th year;
• n is the number of years.

The payback period can be calculated in months or even days.

Below is an example of calculating the payback period for a restaurant investment:

The change from red (losses) to green (profit) in the final calculation line shows the payback period of this project, which is 7 months.

If the cash flow from the investment is not relevant, i.e. During the project evaluation period, there are years that bring a loss, then the calculation of payback becomes impossible.

It will not reflect the true return on investment.

The above figure does not take into account the value of money over time. Money in each specific period has its own price, which depends on many factors; inflation in the country, cost of loans, economic efficiency, etc. Therefore, in calculating the efficiency of investments, the cost of money in future periods is taken into account and their value is brought to a specific point in time (time of assessment). This process is called discounting. Payback can be calculated taking into account discounted cash flows. This specifies the payback period and is determined by the formula:

DPP \u003d n if

• DPP - payback period, taking into account the cost of money;
• r - Discount factor in the form interest rate recalculation of cash flows in the amount of the present value of money.

From the calculation formulas of the discounted payback period, it can be seen that it will always be greater than the static payback period. The calculation below demonstrates this:

DPP is equal to 8 months.

Both of these indicators (PP and DPP) have a common disadvantage, they do not include cash flows after the investment return period. And cash flows after the return on investment can change the investor's opinion about the effectiveness of the project. Therefore, return on investment indicators are auxiliary indicators when assessing efficiency. investment projects, where the main indicators are the present net worth of the investment project (NPV), the internal rate of return on the investment project (IRR) and the rate of return on investment (PI).

If two or more projects have the same basic indicators, the payback period of the investment project is used to make the final decision on the choice of option.

But sometimes it is more important for an investor to get his investments in a project in short time, then the main indicator is the payback period.

The payback period essentially depends on the start of the investment and the availability of "windows" in the investment process. Stops of this kind (technological and forced) in the process of implementing an investment project increase the payback period. For example, in the process of investing in a facility under construction, the time between the pre-investment costs and the costs of the actual construction can be up to two years, which significantly increases the payback of the project.

In general, the indicators of the payback period of investment projects are useful and necessary elements for calculating the indicators of their effectiveness. Their calculation is not difficult and does not require complex methods, therefore, despite their shortcomings, they will continue to serve as a guide for assessing and determining the feasibility of investment projects.

Is one of important indicators when evaluating it. The payback period for investors is fundamental. It generally characterizes how liquid and profitable the project is. To correctly determine the optimum investment, it is important to understand how the indicator is obtained and calculated.

The meaning of the calculation

One of the most important indicators in determining the effectiveness of an investment is the payback period. Its formula shows for what period of time the income from the project will cover all the one-time costs for it. The method makes it possible to calculate the time of return of funds, which the investor then correlates with his economically profitable and acceptable period.

Economic analysis involves the use of various methods in calculating the above indicators. It is used if a comparative analysis is carried out to determine the most profitable project. At the same time, it is important that it is not used as the main and only parameter, but is calculated and analyzed in conjunction with the rest, showing the effectiveness of one or another investment option.

The calculation of the term of return of funds as the main indicator can be applied if the company is aimed at a quick return on investment. For example, when choosing ways to improve the company.

All other things being equal, the project with the shortest return period is accepted for implementation.

Return on investment is a formula showing the number of periods (years or months) for which an investor will return his investment in full. In other words, a refund. It should be remembered that the named period should be shorter than the period of time during which the use of external loans is carried out.

What is needed for the calculation

The payback period (the formula for its use) assumes knowledge of the following indicators:

• project costs - this includes all investments made from its inception;
• net income per year is the proceeds from the implementation of the project received for the year, but after deducting all costs, including taxes;
• depreciation for the period (year) - the amount of money that was spent on improving the project and methods of its implementation (modernization and repair of equipment, improvement of technology, etc.);
• duration of costs (meaning investment).

And to calculate the discounted return on investment, it is important to take into account:

• receipt of all funds made during the period under consideration;
• discount rate;
• the period for which to discount;
• initial investment size.

Payback formula

The investment return period is determined taking into account the nature of the receipt of the project. If it is assumed that cash flows come evenly throughout the entire duration of the project, the payback period, the formula for which is presented below, can be calculated as follows:

Where T is the investment return period;

And - attachments;

D is the total amount of profit.

In this case, the full amount of income consists of depreciation and amortization.

To understand how expedient the project in question is when using this methodology, it will help that the resulting value of the return period for the invested funds should be lower than that set by the investor.

In the real conditions of the project, the investor abandons it if the return period of the investment is higher than the limit value set by him. Or he is looking for ways to reduce the payback period.

For example, an investor invests 100 thousand rubles in a project. Income from the project:

• in the first month amounted to 25 thousand rubles;
• in the second month - 35 thousand rubles;
• in the third month - 45 thousand rubles.

In the first two months, the project did not pay off, since 25 + 35 \u003d 60 thousand rubles, which is lower than the investment amount. Thus, it can be understood that the project paid off in three months, since 60 + 45 \u003d 105 thousand rubles.

Method advantages

The advantages of the method described above are:

1. Simplicity of calculation.
2. Visibility.
3. The ability to classify investments taking into account the value set by the investor.

In general, according to this indicator, it is possible to calculate the investment risk, since there is an inverse relationship: if the payback period, the formula for which is indicated above, decreases, the project risks also decrease. Conversely, with the increase in the waiting period for the return on investment, the risk also increases - the investment may become non-returnable.

Disadvantages of the method

If we talk about the shortcomings of the method, then among them they distinguish: the inaccuracy of the calculation, since the time factor is not taken into account when calculating it.

In fact, the proceeds that will be received outside of the return period do not in any way affect its term.

In order to correctly calculate the indicator, it is important by investment to mean the costs of the formation, reconstruction, improvement of the fixed assets of the enterprise. As a result, the effect from them cannot come instantly.

An investor, when investing money in the improvement of any direction, must understand the fact that only after some time he will receive a non-negative value cash flow capital. Because of this, it is important to use dynamic methods in calculations that discount flows, bringing the price of money to one point in time.

The need for such complex calculations is due to the fact that the price of money at the start of the investment does not coincide with the value of money at the end of the project.

Discounted calculation method

The payback period, the formula of which is presented below, assumes that the time factor is taken into account. This is the calculation of NPV - Net Present Value. The calculation is carried out according to the formula:

where T is the refund period;

IC - project investment;

FV is the planned income for the project.

It takes into account and therefore the planned income is discounted using the discount rate. This rate includes project risks. Among them, the main ones can be distinguished:

• inflation risks;
• risks of non-receipt of profit.

All of them are determined as a percentage and are summed up. In this case, the discount rate is determined as follows: + all project risks.

If the flow of money is not the same

If the proceeds from the implementation of the project are different each year, the cost recovery, the formula of which is discussed in this article, is determined in several steps.

1. First, you need to determine the number of periods (moreover, it must be an integer), when the amount of profit on an accrual basis becomes close to the amount of investments.
2. Then it is necessary to determine the balance: from the amount of investments we deduct the amount of the accumulated amount of proceeds from the project.
3. After that, the amount of uncovered balance is divided by the amount of cash inflows of the next period of time. Main economic indicator in this case, the discount rate, which is determined in unit fractions or as a percentage per year.

conclusions

The payback period, the formula of which was discussed above, shows for what period of time a full return on investment will occur and the moment will come when the project will begin to generate income. The option of investments is chosen, which has the shortest return period.

For the calculation, several methods are used, which have their own characteristics. The simplest is to divide the amount of costs by the amount of annual revenue that the funded project brings.