A simple understanding of how to correctly calculate the return on investment in any project:
- We define the calculation step - month, quarter, year
- We determine the calculation horizon (the number of periods specified in clause 1) - usually within the standard service life of the commissioned object + the period from the beginning of project financing to its commissioning.
- Specify investment outflow - investments in money in the project (excluding VAT) for each period. This includes the volume of capital investments + working capital gains (if any) + financial costs associated with the implementation of the project.
- We indicate the net return (net income = net profit + depreciation) for each period within the entire calculation horizon for the project.
- We specify the discount rate at which the future value of money will be reduced to the current time (this is called discounting cash flows). This rate helps to calculate the real state of affairs with payback and its total return over the entire calculation horizon, since it takes into account all the risks inherent in the project (inflation, reduced demand, project deadlines, etc.)
In the calculation process, the inflows and outflows of money are compared with the withdrawal of the accumulated balance for each period.
The period of exit of the net accumulated cash flow from «-» (minus) to «+» (plus) – this is a simple payback period, and the period of exit of the net discounted cash flow from «-»to «+» - this is the dynamic payback period. The accumulated net discounted flow at the end of the last period of the calculation horizon is net discounted income for the project.
According to this principle, the payback of any investment project should be calculated with a detailed time period within the entire calculation horizon.
If you visualize the entire payback process, it will look like this:
