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Calculation of simple payback

Method of simple payback - it is one of the easiest ways to evaluate the project. For the calculation of this indicator is sufficient to know the net cash flow for the project. In view of this indicator is calculated net of accumulated cash flow. When choosing between several investment projects to the implementation of the adopted project that the payback period will be the smallest.

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

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.

With the use of the data submitted 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 sum of cash inflows equals the value of the initial investment costs.

How to calculate the payback period

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

How to calculate the payback period

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

The main drawback of this method is that the calculation does not apply the discount procedure, and therefore does not take into account the decrease in the value of money over time.

Discounted payback period

Discounted payback period - the period for which the discounted cash flows cover the initial costs associated with the investment project. Discounted payback period is always less than the simple, because over time the cost of funds has always decreases. The procedure allows to take into account the discount rate when calculating the cost of capital employed.

Assume that the initial investment for the project amounted to 150 million rubles. The discount rate is 15%. The project will be implemented over three years, it will annually generate cash flow:

1 year: 30 million rubles

2 year: 120 million rubles

3 year 15 million rubles

It is necessary to calculate discounted payback period.

Using the data presented must also make the analytical table. The first stage is calculated discounted cash flow in each period. Discounted payback period of the project is calculated by summing the annual discounted cash flows as long as the sum of cash inflows equals the value of the initial investment costs.

How to calculate the payback period

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 return is reached.

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