How long will it take to recoup our original investment? For example, if we invest $1,000,000 in starting a new clinic, how long will it take to make back our original investment of $1,000,000? To determine the payback time, we need to examine cash flows for the business over a period of years.
Often, we are making an investment decision based on two or more choices, therefore, let's consider two options: Remodeling and expanding an existing clinic adjacent to the Medical Center (A) or buying new clinic space in a growing area that could be a 'feeder' into the Medical Center (B).
In the excel sheet below, you can see that Clinic A pays back the $1,000,000 at the end of three years, whereas Clinic B takes a bit longer (About 2/3 of the way through year four).
Often, we are making an investment decision based on two or more choices, therefore, let's consider two options: Remodeling and expanding an existing clinic adjacent to the Medical Center (A) or buying new clinic space in a growing area that could be a 'feeder' into the Medical Center (B).
In the excel sheet below, you can see that Clinic A pays back the $1,000,000 at the end of three years, whereas Clinic B takes a bit longer (About 2/3 of the way through year four).
Even though our investment is paid back sooner if we choose Clinic A, is this the best option? What other information do we need to make a well informed investment decision?
In examining the cash flows from Clinic B, it looks like that Clinic has the potential to make more money in the long run. And, a simple payback method does not take into account the time value of money.
Next we will examine how the value of money changes over time and then some tools to make a more informed investment decision over time.
In examining the cash flows from Clinic B, it looks like that Clinic has the potential to make more money in the long run. And, a simple payback method does not take into account the time value of money.
Next we will examine how the value of money changes over time and then some tools to make a more informed investment decision over time.