*equipment*. It will engage directly the cost of acquisition, and costs associated with installation and commissioning. For example, if you plan to acquire an additional pipeline, which will allow to redistribute the workload, the parameter "Capital investments" calculate the price of the device, the amount of delivery, the cost of installation and start-up. However, if all the preparations was carried out by a staff member of the company, and therefore the organization was able to avoid additional costs, over and above the purchase cost to add nothing.

*of equipment*. For example, if a new furnace in a month is to bake 500 loaves of bread and sold at a price of 20 p per unit of product, and raw material costs from the calculation of a loaf will be 5 R, then gross profit will be equal to R 7500 (7500 = (20 R – 5 R) * 500). While the costs of the salary Fund are not taken into account, but if the service

*equipment*is employed additional staff, payments for newly hired employees need to be considered. Tax deductions should be ignored – they will in any case depend on the total amount of income. Thus, gross income is the difference between the sales price and production costs in trade – the amount of allowances.

**of return**; – capital expenditures; VD – gross income.When calculating the period

**of payback**can take any length of time. If you select quarter, the amount of gross income is also taken per 3 calendar months.

*of equipment*, because according to popular wisdom, "Saved – then earned".

# Advice 2: How to calculate the payback period

## Calculation of simple payback period

Method simple payback period is one of the easiest ways of evaluation of the project. To calculate this index it is enough to know the net cash flow for the project. Based on this calculated balance of accumulated cash flows. When choosing among several investment projects to implement the adopted project, whose payback period is the least.

Assume that the initial investment in the project amounted to 180 million rubles. The project will be implemented within 5 years, it will annually generate cash flows:

1 year: 40 million rubles

2 year: 30 million rubles

3 year: 50 million rubles

4 year: 70 million rubles

5 year: 90 million rubles

It is necessary to calculate the simple payback period.

Using the data presented, it is necessary to make the analytical table. The payback period for the project is calculated by summing the annual cash flows as long as the amount of future cash inflows is equal to the magnitude of the initial investment costs.

The table shows that the balance of the accumulated cash flow takes positive in the period between 3rd and 4th year of implementation of the investment project. To calculate the exact payback period will help the following formula:

In this example, the payback period is: 3 years 10 months

The main disadvantage of this method is that the calculation is not used, the procedure of discounting, and thus does not take into account the decrease in the value of money over time.

## The calculation of the discounted payback period

Discounted payback period is the period for which the discounted cash flows to cover the initial costs associated with the investment project. Discounted payback period is always less than simple, as over time, the value of cash is always decreasing. The procedure of discounting allows to take into account when calculating the cost of capital employed.

Assume that the initial investment in the project amounted to 150 million rubles. The discount rate is 15%. The project will be implemented within 3 years, it will annually generate cash flows:

1 year: 30 million rubles

2nd year: 120 million rubles

3 year 15 million rubles

It is necessary to calculate discounted payback period.

The presented data it is also necessary to make the analytical table. In the first stage is calculated discounted cash flow in each period. Discounted payback period for the project is calculated by summing the annual discounted cash flows as long as the amount of future cash inflows is equal to the magnitude of the initial investment costs.

The table shows that the balance of the accumulated discounted payback period does not take a positive value, therefore, in the framework of the project payback is achieved.