When deciding on investments in projects to potential investors assess a combination of factors.This is the situation in the investment and financial markets, and experience of the investor in a specific area, and the geopolitical situation in the region, and much more.One of the important parameters - it is payback time.It is the period during which the net profit will take a positive value.In other words, it shows the time in which the initial investment will pay off.The starting point is considered to be the beginning or the actual conduct of operations, or the time of the initial investment.Of course, each investor is interested in the fact that the payback period as short as possible.However, this option should be considered in conjunction with such parameters as, for example, the level of risk.For projects with a high level of risk the payback period should be shorter, because the investor runs the risk not only their own, but borrowed funds.It is particularly important that this period has been low, if initially limited funds are allocated, for example, to modernize aging production.
Determination of the estimated payback period, that is to achieve break-even point is not time-consuming process, and this is a big advantage of this method of evaluation of investment attractiveness of the project.However, it does not account for the distribution of investment and other factors, which does not allow a high degree of accuracy to evaluate profitability.However, during the initial assessment of the attractiveness of several projects they are often compared it over the period of payback.
The economy of Soviet times used the term "payback of capital investments", ie the period for which the effect is achieved by the production costs.This effect can be profit, as well as cost savings, if we consider single enterprise.We apply this term to the industry and to the country as a whole, while under the effect of the increase refers to the national income.The effectiveness of the project is determined on the basis of that observed standard payback period or not.
how to calculate the payback period of the project being analyzed?Currently, there are several approaches.The choice depends on whether the same amount of cash flows from the project data, as well as the fact is taken into account when calculating whether the changing value of money.
1. The simplest case - where it is assumed that the proceeds from the sale of the investment project will be the same for all the years to come.Then the payback period (abbreviated PP, from the English Payback Period) is calculated by a simple formula PP = I / CF.Where I - total volume of investments, and CF - annual revenues.
2. Phased way of calculating is used for uneven cash flows from the project.Basis for the same, but separately calculated the total number of periods and income.
3. If you take into account the changing value of money over the years of the project, we speak of the discounted payback period.Discounting is called the present value calculation of the funds expected to be received in the future.The calculation is performed at the same time taking into account the discount rate, which is determined based on the risk-free rate, followed by taking into account all the risks.The discount rate can also be calculated based on the internal rate of return, interest on borrowed capital, etc.
To summarize: the payback period is an important criterion for helping to quickly compare investment attractiveness of the number of projects, but may not be a reliable indicator of profitability and security of investments.
