Payout period

Caleulation of the payout period does not, however, take into aeeount the underlying eeonomies of eash flow. The interest ealeulated in Table 4-9 is the interest for the first year. Deelining interest over time direetly translate to inereased eash flow. To illustrate this situation, assume the useful life of this projeet is the same 15 years used for depreeiation. 

There are various indicators to determine the measure of profit for a process. In the following, we describe two of these indicators return on investment and payout period. The rate of return on investment (ROI) may be calculated as follows ... 

Another profitability criterion is the payback (or payout) period which is defined as follows ... 

In determining profits for this case, no depreciation is included in the expenses. It is not necessary to assume a mature plant or to ignore startup expenses when using this method. Example 10-3 shows how to calculate the payout period for a plant that does not reach full production until the fourth year of operation. 

Often, as in the case of the return on the investment, expenses not incurred directly in the design and construction of the plant are excluded when the payout period is calculated. If the only prestartup expense considered is the fixed capital investment, a payout time of 3-5 years is reasonable. A time longer than this is considered unacceptable. 

The problem with the payout period is that it does not consider the timing of the payments or the profits earned by the plant after the payout period is over. To illustrate the importance of the former, suppose a plant has the same prestartup expenses as the one in Example 10-3. Assume it has a profit of 5,000,000 per year for the first 5 years and from then on earns 7,000,000 per year. The payout time for this plant is 5 years, the same as for the plant in Example 10-3. The return on investment of the two mature plants is the same. Yet this proposed plant has a definite advantage over the one in Example 10-3. This is illustrated in the following example. 

The importance of profits after the payout period can be shown by making a small change in Example 10-4. Suppose that plant 2 made a profit in year 6 of 5,000,000 instead of 7,000,000 and everything else was the same. Then plant 1 would result in a pretax saving of 950,000 in year 6 and would be preferable. Neither the payback period nor the return on investment method would indicate this. 

The calculations of the return on the investment and payout period follow. Those for the Net Present Value and Rate of Return are given following Chapter 11. 

Whenever the same series of calculations is repeated a number of times, even with different sets of data, the use of a computer should be considered. For instance, the calculations of the net present value is very straightforward. It can easily be done using tables, a calculator, and/or a slide rule. However, it can also be done on a computer, and this would relieve the engineer of the responsibility of repeatedly performing the calculations. This will give him some time to analyze and compare the results. Besides this, he can also obtain from the same data the payout period and the return on the investment. He could even combine this with the program for the rate of return, and obtain all the major economic indicators for the same effort previously required to obtain any single one. 

Woinsky, S. G. Use Simple Payout Period to Screen Projects. Chem Eng Prog pp. 33-37 (June, 1996). 

Cl Equipment cost in base year POP Payout period (no interest) Years... 

Payout Period Plus Interest Payout period (POP) is the time that will be required to recover the depreciable fixed capital investment from the accrued after-tax cash flow of a project with no interest considerations. In equation format... 

This model does not take into account the time value of money, and no consideration is given to cash flows that occur in a project s later years after the depreciable investment has been recovered. A variation on this method includes interest, called payout period plus interest (POP + I) and the net effect is to increase the payout period. This variation accounts for the time value of money. 

Payout Period, Veers Hrs/Yr Trip Valva 0 Integral Separate ... 

The question I ask is "Can even this be done " I would answer that it is possible if everyone really wanted to. But first some long term compromise on non-health-related air pollution standards would be necessary. Few investors will risk capital for mine development when pollution requirements could make coal mines environmentally obsolete years before their normal payout period. 

Figure 3.6a shows how costs for a new distillation system vary with the reflux ratio. It expresses the capital cost as an annual cost. This can be achieved hy dividing the capital cost by the expected payout period. A discounted cash flow (DCF) analysis is used for estimating this payout period. The capital cost shonld include the costs of auxiliaries (reboiler, condenser, vacuum equipment, pumps, piping in many cases, costs of vent systems, coolant, and heating medium handling equipment are also affected). The operating costs should include reboiler... 

Payout period, or payout time,% is defined as the minimum length of time theoretically necessaiy to recover the original capital investment in the form of cash flow to the project based on total income minus all costs except depreciation. Generally, for this method, original capital investment means only the original, depreciable, fixed-capital investment, and interest effects are neglected. Thus,... 

This method tends to increase the payout period above that found with no interest charge and reflects advantages for projects that earn most of their profits during the early years of the service life. 

The payout period for investment No. 1 is least therefore, by this method, investment No. 1 should be recommended... 

A proposed chemical plant will require a fixed-capital investment of 10 million. It is estimated that the working capital will amount to 25 percent of the total investment, and annual depreciation costs are estimated to be 10 percent of the fixed-capital investment. If the annual profit will be 3 million, determine the standard percent return on the total investment and the minimum payout period. 

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