How to calculate the payback?

Starting any business or investing your money in a particular project, you need to plan it as accurately as possible. Only in this case, it is possible to determine whether the project will be profitable and whether it is worth spending your time, money and energy on it. Making a business plan, you need to determine how long the project will pay off. Properly and on time, the calculation will help make the project more successful. There are many ways to calculate the payback of a project.

Payback calculation

The payback period is usually called the time during which the net profit from it will fully cover the total amount of all investments made in it. That is, this is the period for which all investments will be returned, and investors will receive a net profit. That is why, before calculating the payback period, it is necessary to fully calculate how much approximately the investment will be made to the project. Be sure to consider absolutely all investments, since depending on their volume, the term may differ significantly.The amount of investment in the calculation formula we denote as Sinv.

After determining the investment, think about exactly what variable costs for the project are waiting for you. That is, calculate the possible amounts of depreciation of equipment, payment of fees and taxes, employee salaries, obtaining licenses, payment of various fees and taxes, logistics costs, payment of various services, etc. This indicator should be designated as S per ed, that is, the sum of variable costs.

Next, consider what fixed costs are waiting for you. They must be designated as Spost ed. The fixed costs can include any fixed monthly fee: equipment rental, salary rate, etc.

The next step is to determine the profit from the project. Keep in mind that in different areas of business profitability can be very different. Also, in certain cases, profits may be seasonal, so in certain months it may not be or it will be minimal. Based on your forecast, calculate what the profit per day, month, year or quarter will be. The period of time must be determined depending on the length of the project in time.Profitability should be designated as S pr.

The simplest formula for calculating the project payback is as follows:

Top = S inv / (S pr - S post ed. - S per ed)

Discounted payback period

In addition to the above method of calculating payback, there are other, more accurate methods. One of these is the discounted payback period.

To calculate it, you will need all the above data, as well as the inflow of funds per unit of time in addition to the initial investment and the ratio of the amount of the initial investment to this number and depreciation for the same period of time.

To determine the break-even point of a business, you need to express in terms of money the total volume of production or the amount of services rendered, at which the amount of net profit will be equal to the amount of the initial investment.

Knowing at what amount of money you will reach the break-even point of your business, correlate this figure with the power of your production. Based on this, you can calculate the discounted payback period.