Discounted method for calculating project payback
Posted: Sun Jan 12, 2025 4:48 am
In market conditions, cash flows are unstable and inflation affects the value of capital. The simple payback period method ignores the time factor, which is critical for long-term investments. The discounted approach takes into account the time value of money, providing a more accurate assessment of projects.
The discounted payback period (DPP) formula is as follows:
DPP = ∑ni=1 CFi / (1+r)i > IC
The key indicators are:
DPP (Discounted Pay-Back Period) — the payback period in years or months, taking into account discounting;
CF (Cash Flow) — expected cash flows for a specific interval;
IC (Invest Capital) — the volume of initial investment;
r — discount rate;
n is the calculation period (measured in years or months).
The project payback formula using the costa rica phone data discounted method is based on the concept of the time value of money. It allows one to determine the current value of future financial receipts, taking into account, for example, the value of funds received in a year in a modern equivalent.
This approach minimizes the uncertainty factor, since the cost of capital may fluctuate significantly in the future. Therefore, to forecast income in subsequent periods, it is advisable to rely on current economic parameters.
It is important to note that the discounted payback period of investments always exceeds the figure calculated by the simple method. This is explained by taking into account the time value of money in the calculations. Despite the longer period, the discounted method provides a more accurate and adequate assessment of the economic efficiency of the project in the long term.
Examples of calculating project payback
Let's look at the main ones:
Example of calculation using a simple method
Gennady plans to open a small household appliances store and invest 1,000,000 rubles in its launch.
The estimated monthly income is 400,000 rubles.
Calculation of the project's payback period using the following formula: 1,000,000 / 400,000 = 2.5 months. This means that in two and a half months the store will reach payback and start generating net profit.
Example of calculation using a simple method
Source: shutterstock.com
An alternative approach to calculating payback involves using average annual profits instead of monthly figures. This method is particularly relevant for projects with large capital investments and a long payback period.
For example, with an investment of 5,000,000 rubles and an average annual profit of 1,000,000, the project pays off in the period: 5,000,000 / 1,000,000 = 5 years.
For example, monthly profits often change. Therefore, determining and finding break-even points can be done using tables, and they can take into account such fluctuations.
Period, month 0 1 2 3
Investments, rubles -1,000,000
Profit per month, rubles 300,000 250,000 450,000
Cash flow, rubles -1,000,000 -700,000 -450,000 0
Financial analysis shows that the store will reach the break-even point in the third month of operation, after which the store will begin to make a profit.
If you add the amount of expenses to the calculation, the payback formula will be as follows:
simple payback period = total initial investment / (expected average net profit for the period - costs)
Let's assume that the initial data remains the same, but the expenses are 100,000 ruble
The discounted payback period (DPP) formula is as follows:
DPP = ∑ni=1 CFi / (1+r)i > IC
The key indicators are:
DPP (Discounted Pay-Back Period) — the payback period in years or months, taking into account discounting;
CF (Cash Flow) — expected cash flows for a specific interval;
IC (Invest Capital) — the volume of initial investment;
r — discount rate;
n is the calculation period (measured in years or months).
The project payback formula using the costa rica phone data discounted method is based on the concept of the time value of money. It allows one to determine the current value of future financial receipts, taking into account, for example, the value of funds received in a year in a modern equivalent.
This approach minimizes the uncertainty factor, since the cost of capital may fluctuate significantly in the future. Therefore, to forecast income in subsequent periods, it is advisable to rely on current economic parameters.
It is important to note that the discounted payback period of investments always exceeds the figure calculated by the simple method. This is explained by taking into account the time value of money in the calculations. Despite the longer period, the discounted method provides a more accurate and adequate assessment of the economic efficiency of the project in the long term.
Examples of calculating project payback
Let's look at the main ones:
Example of calculation using a simple method
Gennady plans to open a small household appliances store and invest 1,000,000 rubles in its launch.
The estimated monthly income is 400,000 rubles.
Calculation of the project's payback period using the following formula: 1,000,000 / 400,000 = 2.5 months. This means that in two and a half months the store will reach payback and start generating net profit.
Example of calculation using a simple method
Source: shutterstock.com
An alternative approach to calculating payback involves using average annual profits instead of monthly figures. This method is particularly relevant for projects with large capital investments and a long payback period.
For example, with an investment of 5,000,000 rubles and an average annual profit of 1,000,000, the project pays off in the period: 5,000,000 / 1,000,000 = 5 years.
For example, monthly profits often change. Therefore, determining and finding break-even points can be done using tables, and they can take into account such fluctuations.
Period, month 0 1 2 3
Investments, rubles -1,000,000
Profit per month, rubles 300,000 250,000 450,000
Cash flow, rubles -1,000,000 -700,000 -450,000 0
Financial analysis shows that the store will reach the break-even point in the third month of operation, after which the store will begin to make a profit.
If you add the amount of expenses to the calculation, the payback formula will be as follows:
simple payback period = total initial investment / (expected average net profit for the period - costs)
Let's assume that the initial data remains the same, but the expenses are 100,000 ruble