How to determine the payback period of capital cost

Payback - one of the indicators reflecting the economic performance of the company. It characterizes how well and successfully used investment.

The essence of the payback period of capital investments

In economic analysis there are different approaches to the definition of the payback period. This figure is used in the framework of a comparative analysis in the determination of the most favorable option for investment. It should be noted that it is only used in complex analysis, make the payback period for the main parameter of efficiency is not quite right. Definition of payback period as a priority is only possible if the company is focused on rapid return on investment.

On the other hand, under other equal conditions, preference is given to projects that have the shortest payback period.

During implementation of the project with borrowed money, it is important that the payback period was shorter than the period of use of external borrowings.

The indicator is a priority in that case, if the investor's principal is the most rapid return on investment, for example the choice of ways of financial improvement of bankrupt enterprises.

Under the payback period is the period during which the reimbursed capital costs. This is achieved due to additional income (for example, more efficient equipment) or savings (for example, the introduction of energy efficient production lines). If we are talking about the country, then compensation is due to the increase in national income.

In practice, the payback period is the time period during which the profits of the company, secured capital investment equal to the investment amount. It can different - a month, a year, etc. Importantly, the payback period did not exceed normative values. They differ depending on the specific project and industry focus. For example, to upgrade equipment at the enterprise normative one, and in the construction of the road is another.

The calculation of the payback period should be performed with respect to the time lag between capital investments and the effect of them, as well as changes in prices and other factors (inflation, rising cost of energy, etc.). According to this approach, the payback period - the time period through which when considering a discount rate would level a positive cash flow (discounted income) and negative (discounted investment).

The calculation of the payback period

In its simplest form, the payback period is calculated as the ratio of capital investments to profit from them. However, this approach does not account for the temporal estimation of the investment costs. This leads to nekorrektno, a conservative estimate of the payback period.

More correct is the analysis of investment projects taking into account inflation, alternative investment options, maintenance of the loan capital.

Therefore, the payback period is equal to the sum of the number of years that preceded the year of payback, and relationships unrecovered cost at start of year payback to cash flow during year of payback. The calculation algorithm is as follows:

- calculation discontinuing cash flow based on discount rate;
- calculation of cumulative discounted cash flow as the sum of costs and revenues on the project - it is calculated before the first positive value.

It only remains to substitute these values into the formula.