## Video: ❶ How To Determine The Payback Period Of The Project

It is customary to start a business project with drawing up a business plan, an integral part of which is the calculation of the payback period of the project and its profitability. Payback is the period of time required for the investment costs to be covered by the project's revenues. The calculation of this quantity is, of course, relative and dynamic. Location: Location: Calculation of the payback of the project must begin with finding the discounted value of income.

Money depreciates over time; accordingly, the future cash flow calculated on the basis of current conditions (for example, product prices) should be discounted in the future. It is better to arrange the calculation results in the form of a table. The discounted income value can be obtained by dividing this value by (1 + discount rate) to the extent corresponding to the number of years for which we are discounting.

The discount rate depends on many factors, including inflation, and therefore an approximate value in the average range of 10 to 15% is taken for calculations. Let's say the initial investment in the project is 200 thousand rubles, but you shouldn't think that the project will pay off in 2 years. Taking into account the 15% discount rate, the payback period of the project will be slightly longer. If an annual income of 100 thousand rubles is expected, then the discounted income in the first year of the project is 100 / 1.15 = 87 thousand rubles. In the second year of the project, the discounted income must be calculated as follows: 100 / 1.15 ^ 2 = 75.6 thousand rubles, and, accordingly, in the third year of operation, the calculation will be as follows: 100 / 1.15 ^ 3 = 50.4 thousand. rub.

Now you need to understand in what year the project will pay off. To do this, the value of the discounted income for each year must be added to the value of the initial investment, taken with a minus sign. As soon as the value becomes positive, this will mean that you have found the year when the project began to generate income, and accordingly paid off.

In the above example, for the first 2 years at the end of the period, the calculation value is negative: -200 + 87 + 75.6 = -37.4 thousand rubles, and taking into account data for 3 years, it is already positive: -200 + 87 + 75, 6 + 50.4 = 13 thousand rubles. That is, the period until the payback is 2 years.

The formula for calculating the payback period is as follows: T = the period until payback + cash flow at the time of payback / discounted cash flow in the year of payback. Accordingly, the calculation should look like this: T = 2 + 37.4 / 50.4 = 2.74 years. That is, the project, taking into account the decrease in the cost of money over time, should pay off in 2 years 9 months.