You will need
- table showing the time (e.g. year) and appropriate capital investment in the project, calculator, Notepad and pen
Instruction
1
Make a table of the investment (investments) and projected revenues from the project for each year. For example, the company plans to implement the project "X", the value of which is estimated at 50 million rubles. In the first year of implementation, the project has required additional investments in the amount of 10 million rubles. In the second, third, fourth and fifth year it is planned that the project will bring profit in the amount of 5, 20, 30 and 40 million rubles respectively. Then the resulting table will look like the following:
The time period and the Investment and profit
0 - 50 million rubles
1 - 10 million rubles
2 + to 5 million rubles
3 + 20 million rubles
4 + 30 million rubles
5 + 40 million rubles
The time period and the Investment and profit
0 - 50 million rubles
1 - 10 million rubles
2 + to 5 million rubles
3 + 20 million rubles
4 + 30 million rubles
5 + 40 million rubles
2
Determine the discounted accumulated flow, that is, the amount of attachment that varies according to the planned income. For example, at the enterprise the project "IKS" the impact of the project or the discount rate is 10%. Calculate the accumulated discounted flow before the first positive value according to the formula:
NDP = B1 + B2/(1 + SD) + B3/(1 + SD) + V4/(1 + SD) + B5/(1 + DM) where
The NDP is the accumulated discounted flow V1-5 – attachments for a certain period of time, SD is the discount rate.
НДП1 = - 50 – 10 / (1+0.1) = - 59.1 million rubles.
In this way we hope НДП2,3,4 and so on, until a zero or positive value.
НДП2 = - 54.9 million rubles
НДП3 = - 36.7 million rubles
НДП4 = - 9.4 million rubles
НДП5 = 26.9 million rubles
Thus, investments into the project will pay off fully only in the fifth year of the project.
NDP = B1 + B2/(1 + SD) + B3/(1 + SD) + V4/(1 + SD) + B5/(1 + DM) where
The NDP is the accumulated discounted flow V1-5 – attachments for a certain period of time, SD is the discount rate.
НДП1 = - 50 – 10 / (1+0.1) = - 59.1 million rubles.
In this way we hope НДП2,3,4 and so on, until a zero or positive value.
НДП2 = - 54.9 million rubles
НДП3 = - 36.7 million rubles
НДП4 = - 9.4 million rubles
НДП5 = 26.9 million rubles
Thus, investments into the project will pay off fully only in the fifth year of the project.
3
Calculate the exact period of payback of the project according to the following formula:
T = TC + (NC/PN),
Where T – period of payback, TC is the number of years prior to payback, NS – unrecovered cost of the project at the beginning of the year of payback, that is for 5 year (last negative amount NPD), MON – cash flow in the first year of payback (40 million rubles).
In our example, T = 4 + (9.4 / 40) = 4,2 year.
In other words, the project will pay for itself in 4 years, 2 months and 12 days.
T = TC + (NC/PN),
Where T – period of payback, TC is the number of years prior to payback, NS – unrecovered cost of the project at the beginning of the year of payback, that is for 5 year (last negative amount NPD), MON – cash flow in the first year of payback (40 million rubles).
In our example, T = 4 + (9.4 / 40) = 4,2 year.
In other words, the project will pay for itself in 4 years, 2 months and 12 days.
Note
Payback period allows you to determine at the stage of development in which cases (with known costs and amount of profit) the project will be profitable.
