This indicator determines the time interval required to recoup investments in a specific production asset, be it a machine, tool or technological installation. Accordingly, the return on investment in equipment is measured by the additional income generated by the enterprise as a result of its operation.
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Alexander Kuleshov
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Data required to calculate the project's payback
To determine payback, three key factors must be considered: initial investment, average monthly net cash flow, and discount rate.
Initial investment . This is the total amount of capital planned for investment in the project. For an entrepreneur, this includes all expenses for starting a business, such as rent, purchasing raw materials and equipment, and the initial wage fund. For an investor, this represents the total amount of financial investment in the project.
Average annual or average monthly net cash flow . In fact, this is the average profit - the delta between the projected income and expenses. In further calculations, we will operate with monthly indicators, using the average monthly profit. To calculate it, you need to divide the annual projected profit by 12.
The discount rate is an economic indicator that reflects the rate of inflation and potential risks of an investment project.
Data required to calculate the project's payback
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When calculating the payback of an investment project, the discount rate is expressed as an annual percentage and is based on three key elements:
the key rate of the Central Bank;
investment risk coefficient. This project payback indicator varies from 1 to 10% per annum depending on the specifics of the industry and product. Minimum risk is associated with established sectors of the economy, such as retail. Maximum risk is typical for innovative products with uncertain market demand. As an example, we will use an average value of 5%;
percentage of lost profit. To determine this component, the investor compares the expected return on the project under consideration with alternative investment opportunities. Examples include a bank deposit with 6% per annum or government bonds with a yield of 8-10% per annum.
The sum of these three components forms the final discount rate. For example, 21% + 5% + 6% = 32%. This means that funds invested in September 2024 will depreciate by 32% in a year, taking into account inflation and investment risks.