in terms of accumulation of sufficient capital (one might even say, the emergence of a surplus of capital, which can not engage in their own business), private individuals and financial institutions are thinking about how to make available to temporarily free money to work, because it is self-expansion of capital isits main function.In order to understand how quickly the entrepreneur will begin to profit from the money invested is calculated payback period.That means the figure and how it is possible to calculate, we describe in this article.
Payback period indicates at what point the income from investments exceed the amount of investment itself and the project will start to make a net profit.The calculation of this indicator, it is important for investors because it gives him the opportunity to assess the riskiness of the project and the time during which he will not be able to use the resources invested.
give a simple example.If the project has invested millions of dollars, and the amount of annual income of one hundred thousand dollars, the payback period will be ten years.At first glance it may seem that the faster payback projects, the more likely it will invest the money, but in reality it is not so, and we will explain why below.
Calculation of return on investment - an important procedure, anticipates a decision on participation or refusal to participate in the I'm this or that project.Depending on what is the duration of the project, different approaches can be applied:
- If the projects are short-term (one year), calculated in the usual payback period of investments - private division of the amount invested in the monthly income.This procedure allows to calculate, when we get our money in what is called the future value.
- If the project is designed for a few years, it is advisable to calculate discounted payback period, which allows us to estimate when we will return the money invested in the current value.The difference between the current and future value lies in the fact that the money is subject to the process of inflation, that is depreciation.Thus, for a million dollars today, you can purchase a large number of real values than for the same million dollars in ten years.In order to understand where we come back amount invested in the real value at the time of investment, is calculated discounted payback period.The calculation of this indicator for short-term projects does not make sense, since more or less stable economy, inflation for the year is in the order of 5-7 per cent and under tight deadlines to change them in the best case for a few weeks, for big business it is not at all for a period,taken into account.Discounted payback conveniently calculated as follows: Simple period multiplied by the amount of units and the average rate of inflation, raised to a power equal to the number of years of investment.
Along with the cash flow, the future and the present value of money, payback period of investment is one of the most important indicators used by the investment manager.It is worth noting that a rapid payback, usually associated with greater risk - the higher the rate of return, the more dangerous moves have to do to achieve it.Thus, not every investor coveted rate of return of 300% per annum and return in four months - is too great probability that his investment will be burned up just as a result of negligence or contingencies control.Investing is a lower yield and a long payback period, by contrast, inspires more confidence.
