Profitability and return on investment: two factors for a safe investment. Payback period: formula. Investment and profit Return on cost of profit from sales

Effective business conduct implies making a profit and full coverage of the investment costs. The time period after which the entrepreneur will return the funds spent, taking into account income, is called the payback period.

Description

Payback period is a criterion that reflects the payback time of investments. Payback is the profitability of the funds invested in the project, which the investor will receive after a certain time. For example, to launch a new project, you need to invest two million rubles. The income for the year will be one million rubles. This means that it will be possible to recoup the costs of the project in two years.

Depending on the area of \u200b\u200binvestment, the payback period can be considered from different positions:

• Investments.From the point of view of an investment project, this is a time period after which the investor will be able to cover the invested costs at the expense of the profit received. Otherwise, this interval is called the payback ratio. It shows the promise of a particular project.

The most interesting are those projects, the payback ratio of which is lower. This means that the invested funds will be returned to the owner faster and the profit will be obtained in a shorter time. At the same time, a quick payback is characterized by the ability to re-invest in a short period of time.

• Capital investments.In this case, the payback ratio helps to assess the feasibility of investing in the improvement of equipment or production. It reflects the period after which the savings or income will become equal to the amount of money spent.
• Equipment.The payback period shows when the profit obtained with the help of the equipment becomes equal to the funds invested in its purchase.

Calculation of the indicator

The payback period is calculated in the following sequence:

1. The cash flow for the project is calculated, taking into account discounting and determining the period of receipt of income.
2. The amount of the cash flow is determined. This is the sum of costs for a specific period of time and the receipt of return on investment.
3. The calculation of the discounted cash flow is made before the first profit is received.
4. The payback period is calculated.

In the course of calculations, the value of the period for which the investment will be blocked is obtained. The profit will start flowing when the payback period is over. When it comes to choice, they prefer projects with a shorter period. This allows you to recoup your investment faster.

It is advisable to calculate the payback ratio for investments that are carried out using borrowed long-term funds. In this case, it is worth considering that the calculation period should differ from the loan term in a smaller direction.

Payment methods

The payback period can be calculated in two main ways:

method.Calculates the time to cover initial costs.

He is the very first in financial practice. However, it allows you to get data only if some features are taken into account:

• analysis requires projects of the same lifetime;
• financial costs are supposed to be carried out once at the start of the project;
• it will be possible to receive income from investments in equal parts.

With a simple calculation, you need to focus on the value of the payback indicator. The higher the ratio, the greater the risk associated with the investment. If the indicator is less, then investing in the project is profitable and the funds will be returned in parts in a short time. The method remains relevant due to the simplicity and transparency of the calculation. When you do not need to deeply study the issue of the riskiness of investments, this method can be used.

The downside of a simple calculation is the inability to take into account:

• constant change in the value of cash costs;
• the return on financial activities that will begin to flow when the payback point is passed.

Dynamic (discounted) calculation.This calculation method is used more often because it is more complex and accurate. The discounted ratio assumes taking into account the changing value of money. In other words, you need to take into account the dependence of funds on changes in the interest rate. Therefore, this ratio will be higher compared to a simple calculation. The convenience of the method will depend on the constancy of the cash flow. If the financial receipts are different in size, then it is advisable to use graphs and tables to solve the problem with payback.

In some cases, the payback period is calculated taking into account the price of assets upon liquidation. When it comes to investment activities, assets are formed for their further sale and the withdrawal of funds in this way. In the process of liquidation, the payback process of the project goes faster. But do not forget that the liquidation price can rise during the creation of the asset, as well as decrease due to wear and tear.

Simple method

The payback period formula looks like this in a simple way:

RR \u003d K0 / PChsg,

where PP- the number of years of recoupment (the abbreviation PP is derived from the English expression "Payback Period");

TO - the amount of investments;

IF cr - the average net profit for the year.

After applying the formula, it turns out that the project costs will be covered in 3 years. But this decision is rather approximate and does not take into account that during the project implementation period, for example, additional investments may be required.

In addition, there is another simple calculation formula. But it is accurate if the profit stream comes in equal parts. The formula looks like this:

PP \u003d IC / P + Pstr, where

IC - the amount of funds at the start of the project;

P - the average flow of funds, which can be expected to be received;

Pstr - time from project launch to reaching maximum power.

Discounted

The discounted method of calculation is more complicated, since the cost of funds changes over time. Therefore, the calculation is based on the value of the discount rate. Formulas are used:

where DDP - discounted (dynamic) payback period;

r - discount rate;

Lº- initial investment;

CF - cash receipts in period t;

n - payback period.

It will allow you to visually consider this method.

It is required to invest in the project an amount of 170 thousand rubles. Taking into account the average 10%, the real profit for each year is calculated using the table.

It turns out that the total profit for 4 years is only 139,628.22 rubles. That is, even over this period of time, the project will not pay for itself, because 170 thousand rubles were invested. But for 5 years the amount of profit will be 176,883.49 rubles. This figure is already greater than the initial investment. Then the project will pay off in the range between 4 and 5 years of its existence.

The discounted calculation method shows the real level of investment income, which should be guided by.

There is a general formula for the payback period of investment costs:

where PP - payback period;

n - the number of time intervals;

CF t - receipt of funds in the period of time t;

Io - the amount of initial investment in period 0.

The formula reflects when sufficient return will be provided to cover the investment. This calculation characterizes the degree of financial risk. The start of a project is sometimes characterized by a loss of money, therefore, in the place of the Io indicator, in practical calculations, they put the amount of investment outflow.

As an example, consider this situation. Funds were invested in the amount of 120,000 rubles. The profitability by years was distributed as follows:

• 35,000 rubles
• 40,000 rubles
• 42,500 rubles
• 4200 rubles.

The profit for the first three years will be 35,000 + 40,000 + 42,500 \u003d 117,500 rubles. This amount is less than the initial cost of 120,000 rubles. Then it is necessary to estimate the profit for four years: 117500 + 4200 \u003d 121,700 rubles. This figure is already more than was initially invested. This means that the project will pay for itself in 4 years.

For an accurate calculation of the period, it is necessary to assume that incomes are received in equal amounts for the entire period of the project. Then the remainder is calculated as:

(1 - (121700 - 120000) / 4200) \u003d 0.6 years.

Thus, it turns out that in 3.06 years this investment project will fully pay for itself.

Pros and cons of the indicator

Like any financial indicator, the payback period has its advantages and disadvantages. The first are:

• simple calculation logic;
• visibility of the assessment of the period after which the invested funds will be returned.

Among the cons are:

1. The calculation does not take into account the income that came in at the moment when the payback point was passed. When analyzing alternative projects, the risk of miscalculations increases.
2. To assess a portfolio of investments, it is not enough to focus only on the payback period. More complex calculations will be needed.

When it comes to investments, payback and its time period is one of the important indicators. Entrepreneurs should focus on it in order to make the right decision and choose a profitable investment option for themselves.

In contact with

It is one of the important indicators in its assessment. 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 the 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 external loans are used.

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 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 review;
• 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 under consideration 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. Project income:

• 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 of 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 there are: 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 formation, reconstruction, improvement of 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 of the cash flow of 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.

This 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 receipts for the project.
3. After that, the amount of uncovered balance is divided by the amount of cash inflows of the next period of time. The main economic indicator in this case is the discount rate, which is determined in fractions of a unit 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.

The life cycle of an investment project (IP) consists of five main stages:

1. development of an investment project and construction (creation) of an object;
2. mastering technologies and reaching full capacity;
3. normal operation and return on investment;
4. generating additional profit after a one-time payback;
5. liquidation and (or) sale of assets.

The criteria for the temporal effectiveness of IP are the minimum duration of the first three stages and the maximum duration of the fourth stage. Widely used 20-50 years ago, the indicator of static payback period (CO) was not related to the time factor: it is indifferent to when the return on investment begins.

When using it, the first two stages of the life cycle of an investment project dropped out of the sphere of management and the impact of efficiency calculations, as a result of which there was a risk of delaying them and freezing investments. It also did not show the return on investment, since it was not associated with either the service life of fixed assets or their depreciation rate.

This indicator made it possible to determine the effect of using capital investments as part of accumulated funds. The return on investment in reality is carried out in the order of simple reproduction through depreciation deductions. That is, a one-time return of capitalized investment costs (CI) occurs "automatically" even if the actual service life of fixed assets is not less than the duration of the billing period (RP), even with zero profit. In the cash flow methodology, the payback rule is adopted, according to which the payback of an individual entrepreneur occurs due to the accumulation of net income (depreciation plus profit). However, when calculating this indicator of the payback period, it should be understood that "simple", i.e. a single return in modern conditions is insufficient for expanded reproduction, and its fact does not mean that a sufficiently high efficiency of investment costs has been ensured.

When determining payback from cash flow (net income), the dynamic payback period does not show the real return on investment, since part of the accrued net income is usually spent on current consumption. Therefore, it would be wrong to imagine that by the end of the payback period, return on investment becomes a fact.

Indeed, the rule of payback is fairly conventionally established that “payback” means exactly one hundred percent equality of the income (effect) received to the investments spent or the exit of the value of the accrued (calculated on a cumulative basis) net income from minus to plus.

Often in literature payback period, payback period and return on investment are considered synonyms and are also defined uniformly. There are two main names for temporary dynamic performance indicators in various sources: payback period (term of recoupment, recoupment period) and return period (payback period, recovery period)... With a careful approach, this is one and the same indicator, while the concepts of payback and return FROM may not be entirely identical (although in English this is actually the case).

In the process of returning an investment project, several processes can be discerned.

The first - the one that corresponds to the payback rule - is the achievement by the amount of the income received to the value of the investments made. This assumes that income represents net gross profit, but the Investment Performance Appraisal Guide states that it is “incorrect to calculate the payback period based on net income after tax”.

The second process is the return of the invested funds - the possibility of the real withdrawal by the investor of the funds invested in the project back. Therefore, for a deeper analysis, it is quite possible to use several indicators of time efficiency. These indicators will differ from each other depending on how they take into account the following points:

1. What costs should be included in the volume of investments, the payback of which is determined? The payback of only the initial investment is often determined, although it is more correct to take into account additional investments during the period of operation. In addition, sometimes minor expenses related to deferred expenses are not attributed to a one-off (ie investment), but added to current operating expenses. Should we take into account the paid VAT, which is not included in the cost of non-current assets, since it has its own mechanism of return - offset, generally faster than that of capitalized IZs? Real cash flow removes these issues in many ways, but at the stage of business planning, the complex structure of IZ makes it much more difficult to predict this flow. In addition, their solution is important when analyzing the dependence of payback on the structure of IZ. When calculating static CO, the amount of losses was added to the amount of FROM before the start of the project, but when using the cash flow method, the planned losses are automatically taken into account.

2. At what expense and how is the payback:

• in accordance with the rule of payback due to the entire amount of net income (NP);
• part of the NP that remains for accumulation - the real amount that can be withdrawn from the project;
• only at the expense of depreciation charges?

In other words, what is “ROI” as such? At the same time, the option of early closure (sale) of individual entrepreneurs to accelerate payback and return on investment is not considered or remains "in reserve". Withdrawal of investment costs is possible only in the form of free funds coming to the same funds (hands) from which they were financed. Given this, what point should be recognized as the moment of the actual payback of the IP, i.e., effective?

Here we mean whether it will be a point of one-time return, provided that the payback is determined by the filling of own sources of financing (depreciation fund and accumulation fund), or a point of two or more return, if the payback is determined by net present value (NPV), which is used not only for accumulation, but also for consumption. This difference also takes into account the structure of the IZ. First of all, the fact that a part of the IZ, aimed at creating stocks (working capital), can finally be returned (withdrawn from the project) only after its completion: when the leftovers of finished products and other stocks are sold (although for the investor it is not so important what is the returned amount). Meanwhile, in projects starting with capital construction (plant, workshop) in an economic way, payback in the form of amortization accumulation begins even before the facility is put into operation and the start of product sales, together with the accrual of depreciation on construction equipment. The role of the circulation of working capital (i.e. part of the total investment) in the payback process remains to be clarified.

3. How is the starting point (base point) of the payback period determined? - left on the timeline (see figure 1)? In this respect, most of the methods and researchers suffer from carelessness, as if everything here has long been unambiguous. It is taken as both "the moment specified in the task for calculating efficiency", and the beginning of the RP (without specifying whether this is the beginning or the end of the zero step), and "the beginning of the development of investments" (which point is, you can answer in different ways), and even the beginning of "working off" (as in the concept of static CO). This can partly be explained by the fact that "period" is translated from English as "cycle, circle" and "point". That is, it is more important for someone to determine the payback point, and not the payback period itself. But without finding the duration of the period, it is impossible to compare different projects (options) in terms of speed (time) payback.

Figure 1. Life cycle and indicators of return on investment project

Time in the billing period is counted from a fixed moment taken as the base period. This is most often the beginning of step zero, but it may also be the end of it. In the latter case, it is more correct to discount cash flows, since they are given at the end of each step. The most accurate approach here is that the left point should be determined by calculation, taking into account the distribution of investments at the first stages of IP.

According to the payback rule, the right-hand point of the payback period (roughly) is at the step (year) t ", which is found when solving the transcendental equation (1):

The analysis of the data given in Table 1 shows that the right point of the CO lies within the tenth step, when the value of NPDD (the last column) changes sign from “-” to “+”.

Table 1. Calculation of IP efficiency (Nd \u003d 15%)

The first one can be called the full payback period, since it additionally takes into account the time spent on the diversion of funds in construction (if any), the period of freezing the IZ before the start of return and the period of "working off". The left extreme point on the time scale can be fixed in two ways, either by the base, or by some "central" moment of the FROM.

The second indicator is CO, the left extreme point of which is the beginning of the project's return (or the moment of the last investment).

The first and second indicators are calculated in typical investment projects and in terms of equity capital and are best suited to the case when the investor and the seller are one and the same person.

A typical investment project is a project in which typical (most frequent) cash flows occur: first there is a period of investment, then a period of return without investment costs, and at the end the liquidation value of assets is taken into account. That is, in typical investment projects, the sequence and lag between investment and return are mandatory.

For the third indicator (let's call it the return period - PV), the left point is one of those considered above (here it is not so important), and the right one is the return point (TB) tв is determined by equality (2):

The period of return is determined by the period for which the amount of free funds will be received, equal in size to the original IZ, and these funds could be used for further investments both in this project and for any others. In terms of its value, PV is always greater than CO, since the right side of formula (1) is always larger than the right side of formula (2). The sum SUM (Аt + Pчнt) is the capital share of NPV (capitalized income).

The return period indicator characterizes the feasibility of the individual entrepreneur from the standpoint of the timely and full return of the advanced funds, taking into account the interest rates on the loan. The real value of PV is always of interest to a third-party investor, as well as a creditor bank, which decides to lend to the implementation of this project, or the enterprise itself, financing it from its funds and planning its further investments. (In practice, banks do not calculate RO, since they do not yet know the theory and methodology for calculating it.) If the project is 100% implemented at the expense of a loan, then the RO value will indicate the minimum loan term required to return it. Thus, in the latter case, calculating the return period is a possible way to solve the problem of determining the financial feasibility of the project. The concept of the period of return on investment, in contrast to the concept of one-time CO, takes into account the time, income and expenses that occur both before and after the payback point, based on the actual service life of fixed assets.

The rest of the indicators of CO and PV have a lot in common. Both of them are dynamic indicators, although they can be both nominal and discounted.

The use of dynamic CRM allows, as you know, to cover in the calculation the main stages of the life cycle of an investment project, including design, creation, implementation and development of an object, as well as its operation and receiving returns until the moment of a single return (or payback). Accordingly, CO can be represented as a sum of several terms. Analysis of the actual structure of CO allows to reveal the reasons for its deviation from the calculated value. When calculating CO and PV, it is necessary to take into account the lag between the implementation of capital investments and the beginning of the effect.

The calculation of CO and RO should start with the calculation of the central moment of the investment. It is necessary to find the left point of the RP, which characterizes the central moment of investment (the "center of gravity" of this process). If we take the moment of the first investment for it, then in some cases a strong lengthening of the term will be obtained.

For instance, at the initial stage, a deposit (the first part of the investment) was paid for participation in the tender (about 1% of the order value). The tender was won, but the results were approved with some delay. The implementation of the investment project and the main purchases (investments) occurred not even in the second or third, but in the fourth and fifth steps. Then the payback period, if you start counting it from the first investment, in this case will increase by several steps (years) of the forced expectation from the first investment to their main part.

To calculate the discounted CRI, two assumptions must be made. First, the investment of each step belongs to its middle (shown in the middle). Second, the resulting effect (NPV) is distributed evenly within the RP step at which the value of the increased NPV changes sign from “-” to “+”.

These assumptions contradict the initial assumption in calculating NPV that discounting brings all calculated values \u200b\u200bto the end of the step and will somewhat affect the accuracy of the CO calculation. When calculating undiscounted CRM, these assumptions are the most acceptable. Generally speaking, it is advisable to discount in all cases by the middle of a step, in this case the least error will be ensured.

So, for an accurate calculation, it is necessary to bring all point investments for the project to one point, which can be called a central or dynamic investment center (CI). TI refers to a point within the investment phase, which is a conditional point on the time scale, in which all the moments of investment are summarized (recall, it is conventionally accepted that all investments of this step belong to its middle). Accordingly, the weighting factor for the first step is 0.5, for the second - 1.5, for the third - 2.5, etc.

If necessary, refined calculations, the investment point can be determined taking into account the quarterly or monthly distribution of the IZ during the period of the object creation.

In those cases when the beginning of the zero step is taken as the base moment, the central moment (point) of the DI investment is determined by the formula (3):

Consider an example (table no. 2) of determining the dynamic investment center CI \u003d (66 * 0.5 + 58.8 * 1.5) / (66 + 60) \u003d 0.97 (step, year).

Table 2. Calculated table for determining indicators of CO and PV (all indicators are discounted), mln. Rub.

There are two practical methods for further calculating the CO: using numerical mathematics and using a special simple algorithm for calculating the integral effect (NPV). When determining NPV (Table 2), the ordinal step (year) t of the calculation period is algorithmically identified, at which the value of the accrued NPV changes sign from “-” to “+”. Its number will show the payback point, rounded up t ". In fact, it lies within this step. From it to the end of the step, there is a segment equal to NPVDt" / NPVt (fractions of a step). The exact value of the payback point of TO (taking into account the above assumptions) can be found by the formula (4):

TO \u003d t "- НЧДДt" / ЧДДt "

Let us consider in more detail t "\u003d 5 (Table 2), NPVD \u003d 28.784 million rubles, NPV \u003d 44.328 million rubles.

The exact value of the payback point for TO will be 5 - 28.784 / 44.328 \u003d 4.35. Figure 1 shows that the period required to generate NPPD \u003d 28.784 million rubles was 0.65 steps (years).

The location of the TV return point (the right point of the return period and the payback point) does not depend on where the left point was taken: in the first investment, at the beginning of the RP, or others.

As a result, the assessment of the values \u200b\u200bof the payback period (CO) is determined using the formula (5):

CO \u003d TO - QI

Determination of the return period (RO) is carried out accordingly using the formula (6):

PV \u003d TV - CI

In the above example, CO \u003d 4.35 - 0.97 \u003d 3.38 (steps, years).

PV \u003d 6 - 0.97 \u003d 5.03 (steps, years). The return point coincidentally coincided with the end of the 6th step.

The double refund period ends in the 8th year of the RP.

PV \u003d 8 - (135.674 - 124.8) / 124.8 - 0.97 \u003d 6.93 (years).

Figure 1 shows that the period of working out for CO is 2.35 steps, and the not shown period for working off for PV is exactly 4 steps.

When analyzing IP and time performance indicators, it should be borne in mind that the heterogeneity of various parts of investment costs is accompanied by the risk of their return to varying degrees. Any IZ item is equally effective in terms of the amount of profit it brings, but only depreciable costs create a depreciation fund and reduce the taxable base for income tax. VAT that is not included in the original cost of non-current assets has a credit return mechanism. Investments in working capital gains are also returned with each turnover, and can finally be released (returned) only when the project is liquidated.

Literature:

1. Investment Performance Assessment Guide. UNIDO, 1978.
2. Serov V.N. On improving the assessment of the economic efficiency of investments in industrial capital // Investments in Russia. - 2008. - No. 7.
3. Chistov L.M. Construction economics. - SPb., 2000.

Before starting to make any investments, investors must necessarily determine the period after which the investments will begin to generate income (profit). To this end, economists use the payback period as a financial ratio.

DEFINITION

Payback period is a period of time, after which the amount of funds invested will be equal to the amount of income received.

In other words, in this case, using the payback period formula, the period is determined, after which the money invested in the project will return to the investor and the project will begin to make a profit.

Often payback formulais used to select one of the alternative projects as an investment. The investor will choose the project with a lower payback ratio. The formula for the payback period will show that the enterprise will become profitable faster.

A simple calculation method has been used for a long time and makes it possible to calculate the period that passes from the moment of investment until the time of their payback.

This formula for the payback period will be accurate only if the following conditions are met:

• When comparing several alternative designs, they must have equal lifetimes;
• All investments must be made at the same time at the start of the project;
• Income from invested funds is received evenly and in equal parts.

This method of calculating the payback period is the simplest and clearest to understand.

The simple formula for the payback period is quite informative as an indicator of the risk of an investment. If the value of the payback period is large, then this indicates a high risk of investment and vice versa.

This method, along with its simplicity, has several disadvantages:

• The value of cash can change significantly over time;
• After the moment of reaching the payback of the project, he is able to continue to bring profit, which must be calculated.

Dynamic (discounted) payback period the project is an indicator of the duration of the period from the beginning of the investment to the moment of its payback, taking into account the fact of discounting.

The payback period in this case occurs when the net present value becomes positive and remains so and further. The dynamic payback period is always greater than the static payback period. This is due to the fact that the calculation of the dynamic indicator takes into account the change in the value of funds over time.

Payback period value

The payback period formula is most often used to calculate capital investments. This indicator can assess the effectiveness of reconstruction or modernization of production, reflecting the period during which emerging savings and additional profits will exceed the amount that was spent on capital investments.

Often, the payback period formula is used to assess the effectiveness and feasibility of an investment. Moreover, if the value of the coefficient is very large, then such investments, most likely, must be abandoned.

When calculating the payback period of equipment, you can find out for what period of time the funds invested in a given production unit will be returned due to the profit that is obtained from its use.

Examples of problem solving

EXAMPLE 1

The economic activity of any organization in the conditions of market relations requires the widespread attention of a large circle of business representatives who show interest in the results of its functioning.
Enterprises to survive in the current conditions will allow a real assessment of their 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 capital turnover, the volume of production produced or sold. The profit is spent on development, provision of scientific and technical equipment, an increase in staff salaries, and the formation of budget funds.

It is expressed in two indicators:

• Absolute. It is the amount of proceeds exceeding the cost of economic activity, production.
• Relative... Shows the level of profitability.

The net profitability is calculated for the whole enterprise or its separate subdivisions, according to the type of output. 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, the 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 share 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 the economic efficiency of the invested 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 for the period under consideration.

It is used in the selection of the best options for the implementation of the enterprise'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 amount 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, which 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 transaction for 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.
The payback includes the 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 should pay off, in addition to bring 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, improving the qualifications of an employee, increasing 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 the working time is fully used, conditions are formed 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 return on 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 goods can be determined using the formula:

Rpr \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 the residual value of the property, calculated as the difference between the original cost and the depreciation amount. Depreciation is calculated according to the instructions of the Uniform Norms for Depreciation Objects, which is provided in the accounting records.

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 accounting for inflation.

The overall profitability is determined as follows:

P \u003d V / P,

where V- the total volume of investment;
P- average annual receipts to the enterprise.

According to the general payback period, the economic activity of the organization, its profitability, economic efficiency and the feasibility of further development are established. 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 tangible working capital.

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\u200bcharacterizing 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 turnovers of capital 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 the enterprise, the EBITDA index is used to determine the value of the business, which means gross profit without deducting interest accrued on it, dividends, before taxes, and depreciation deductions.

The initial data for calculating the indicator are high-quality and undistorted accounting data.

These figures are obtained from the financial statements prepared 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 deducting interest, tax 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 you can calculate the payback of the product.

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

Many factors affect the level of profitability on sales of products. The main ones are:

• growing costs;
• decrease in sales of products.

In order to increase it in the first case, a scrupulous analysis of the costs laid down by the cost of production is carried out. On the basis of 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;
• review marketing activities, improve product quality, develop a product sales plan using promotional activities.