FTTH Business Guide - AWT.be

Key performance indicators
There are a number of measures that are used in finance to look at a set of cash
flows (money out and money in). We will begin by describing these relatively
simple measures.
Payback is a very simple and commonly used measure. Let’s consider a simple
example. In year 1 the company will invest €10,000 in the project. From then on
the net difference between the money out (expenditure) and money in (revenues)
provides a cash flow result in each year as shown below:
YEAR
1 2 3 4 5 6 7
CASH FLOWS -10,000 2,000 2,500 2,500 3,000 3,000 3,500
Payback tells you how long it is before the initial investment is matched by the
cash flow in. To calculate the payback, you simply work out the cumulative cash
flow from the start of the project to each particular year as shown:
YEAR
1 2 3 4 5 6 7
CASH FLOWS -10,000 2,000 2,500 2,500 3,000 3,000 3,500
CUMULATIVE TOTAL -10,000 -8,000 -5,500 -3,000 0 3,000 6,500
The cumulative total remains negative until year 5 when the total positive cash
flows equal the total cash out. The payback period is therefore five years in the
example above.
If the cash flow goes negative in some years, the approach does not change. You
still look for the year (or month in a more detailed analysis) that the cumulative
positive cash flow is greater than the cumulative total of negative cash flows.
Payback is sometimes used as a quick check on a project, but it does have
drawbacks. First, this approach essentially ignores all cash flows after the payback
period. This may not seem a problem at first but if, in the example above, there
was a large cash outflow in year 6, the payback measure would ignore it.
Second, the payback method does not consider the cost of money, such as the
interest rate on a loan. For example, if a company invests €100 million in a project
and does not receive pay back for 20 years, then that is not as good an investment
as if they put the money into a bank and received interest on it.
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