How to determine the payback period of the project

When buying a ready business or the preparation of an investment project has to consider a number of indicators showing economic efficiency of investments. One of the fundamentally important parameters of a project is the term of its payback, that is the expected number of years required for the full recovery of investment costs.

Instruction

1. Review the formula for calculating the period ofa recoupment of the project:T(s) = T1 + S / N;where:
   T (OK) period of recoupment;
   T1 – the number of years that precede the year of recoupment;
   – Unrecovered cost (beginning-of-year payback of the project);
   N – cash flow per year payback.
2. For a better understanding study the method of calculating the term ofa payback with an example. Suppose that the investment project "alpha" requires investments in the amount of 1,000 conventional units. The forecast revenue stream as follows: 1 year – $ 200.e. 2 year – 500.e. 3 year – 600.e. 4 year 800.e. 5 year 900.e. The discount rate is 15%.
3. Use a method of calculation based on a provisional assessment of cash flow. The fact that a simple static approach indicates that given as an example, the project will pay back in 2 years and 6 months. But this term does not take into account the rate of return for investment in a particular chosen field, and therefore can not be a true representation of temporal parameters of payback.
4. Calculate the discounted cash flow revenues for the project. The proceeds from the discount rate and the period when the income arises.
5. Calculate the accumulated cash flow, which will be the simple sum of costs and flow of revenues on the investment project.
6. Accumulated discounted cash flow to calculate the first value with a positive status.
7. Define the term of recoupment according to the above equation.T (OK) = 3 + 54/458 = 3.1 years.In other words, for the real compensation the amount of the investment expenses taking into account the time factor will need significantly more timethan we got when calculating the simplified method.