Payout time

The point at which the cumulative cash flow turns positive indicates the payout time (or payback time). This is the length of time required to receive accumulated net revenues equal to the investment. This indicator says nothing about the cash flow after the payback time and does not consider the total profitability of the investment opportunity. 

The cumulative cashflow was used to derive ultimate cash surplus - the final value of the cumulative cashflow maximum exposure - the maximum value of the cash deficit payout time - the time until cumulative cashflow becomes positive. 

The shortcoming of the maximum exposure and payout time is that they say nothing about what happens after the cashflow becomes positive (i.e. the investment is recouped). Neither do they give information about the return on the investment in terms of a ratio, which is useful in comparing projects. 

This gives two choices ia interpreting calculated NRR values, ie, a direct comparison of NRR values for different options or a comparison of the NRR value of each option with a previously defined NRR cutoff level for acceptabiUty. The NPV, DTC, and NRR can be iaterpreted as discounted measures of the return, iavestment, and return rate, analogous to the parameters of the earher example. These three parameters characterize a venture over its entire life. Additional parameters can be developed to characterize the cash flow pattern duting the early venture years. Eor example, the net payout time (NPT) is the number of operating years for the cumulative discounted cash flow to sum to zero. This characterizes the early cash flow pattern it can be viewed as a discounted measure of the expected operating time that the investment is at risk. 

Payout time (PT), or payback period, is a measure of the time, usually in years, required to recover the investment in a scenario in which the time value of money is neglected. This can be represented by the general form... 

A company wants to make the largest profit it can from the money it invests. It wants to be able to compare the prospective earnings it may get from different ventures. Two of the simplest measures are the return on investment and the payout time. 

The payout time or payback period is the number of years from the time of startup it would take to recover all expenses involved in a project if all the pretax profits were used for this purpose. 

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. 

Estimate the working capital and determine the annual proceeds per dollar of outlay and the payout time for a plant producing melamine. Use the figures given in Chemical Week, Nov. 25, 1967, p. 78. These are duplicated below. Melamine sells for 26.50/lb. 

Payout time (payback period) The time to recover the fixed capital investment from profit plus depreciation. It is usually after... 

The procedure for optimum selection of insulation thicknesses is exemplified by Happel and Jordan [Chem. Process Economics, 380 (1975)]. They take into account the costs of insulation and fuel, payout time, and some minor factors. Although their costs of fuel are off by a factor of 10 or more, their conclusions have some validity if it is recognized that material costs likewise have gone up by roughly the same factor. They conclude that with energy cost of 2.5/million Btu (adjusted by a factor of 10), a payout time of 2 years, for pipe sizes of 2-8 in., the optimum thicknesses in... 

The payback period(or payout time) is the number of years from plant start-up required to recover all expenses involved in a project, if all the pre-tax profits were used for this purpose. Depreciation charges are not included in the operating costs. Expenses not incurred directly in the design and construction of the plant are excluded, the analysis is intended to demonstrate the best means of allocating the present and future resources of a company. A payback period of less than five years is usually required for a project to proceed. However, the payback period does not consider the timing of the payments or the profits earned by the plant after the payback period. 

A key reason why MPC has become a major commercial and technical success is that there are numerous vendors who are licensed to market MPC products and install them on a turnkey basis. Consequently, even medium-sized companies are able to take advantage of this new technology. Payout times of 3 to 12 months have been widely reported. 

Payout time. The payout time is also referred to as the cash recovery period and years to payout. It is calculated by the following formula and is expressed to the nearest one-tenth year ... 

If the annual cashflow varies, the payout time can be calculated by adding the cash income after income taxes for consecutive years, until the sum is equal to the total investment. The results can be reported to a fractional year by indicating at what point during the year the cashflow will completely offset the depreciable investment. 

A summary of overall costs and realizations is given in Table 8.41, annual costs and revenues in Table 8.42, and total investment costs in Table 8.43, together with payout time and rates of return on investment. The effects of changes in investment and raw material cost, product prices, and operating volume are shown in Table 8.44. 

Once the total product cost has been estimated, the design group is in a position to evaluate for management the attractiveness of the proposed process using such measures of profitability as rate of return, payout time, or present worth. These methods are fully outlined in Chap. 10. The design report, as mentioned previously, completes the preliminary design. 

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,... 

If the coil revamping is done instead of a scheduled cracking tube replacement, the effective investment costs become rather small. On this basis a payout time of 0.97 years was attained. But also in the case, where coil revamping is done without having a scheduled coil replacement, a... 

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