Errors in calculating the project payback period

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Even minor errors in the analysis of an investment project can seriously complicate the work of the financial director. In an optimistic scenario, the actual indicators will be significantly lower than predicted.

Errors in calculating the project payback period

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In a pessimistic scenario, in a few years it ameriplan email leads may turn out that the project concept was initially unviable and resources were wasted. Let's take a closer look at what miscalculations lead to erroneous decisions and how to avoid them.

Incorrect assumptions
Often, errors in calculating the project's payback period arise already at the investment planning stage. It is necessary to pay attention to a number of inaccuracies that can negatively affect the results of the analysis:

an incomplete list of investments, including erroneous construction estimates and unaccounted for design costs;

incorrect assessment of customs duties and fees (when importing equipment);

incorrect calculation of VAT refunds, as well as the investments themselves, without taking into account VAT or customs duties;

erroneous presentation of all investment costs as one-time (for example, in the first month of project implementation) without taking into account possible deferrals from equipment suppliers, construction and design organizations.

Misdetermination of the discount rate
A significant miscalculation in assessing payback is an inaccurate calculation of the discount rate. Difficulties arise when calculating the weighted average cost of capital (WACC). The use of balance sheet proportions of borrowed and equity funds is not always correct, since for non-public companies the balance sheet valuation of equity capital may differ significantly from its market value.

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Reducing the project payback period
Business plans always indicate the projected payback period of the investment project. However, the calculation on paper often differs significantly from reality, and the return of the initial investment is delayed for a long time.

It is impossible to determine with absolute accuracy which business has the shortest payback period and in which cases investments are returned the fastest. Many factors influence this indicator. The main problem is unforeseen costs not taken into account by the entrepreneur in the business plan. In addition, financial difficulties may arise.

Reducing the project payback period

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The payback period of the project may increase due to an ineffective advertising campaign, human factor and other reasons. However, the entrepreneur has the opportunity to influence this indicator and reduce it. How to achieve this?

Manage financial income effectively. It should be used for project development, not for personal purposes. The optimal solution would be to invest in advertising and optimization of business processes.

Use resources rationally at the initial stage. It is important to approach this issue wisely, without saving on everything. In the manufacturing business, for example, you cannot skimp on the quality of raw materials and materials. But you can save on expensive equipment for the CEO's office.

Attract specialists from outsourcing companies instead of hiring marketers, designers, accountants, cleaning staff and others.

Expand the range of products with growing demand. Introduce related products.

Increase your customer base through effective marketing, promotions and loyalty programs.