Investment income profile targets can be established based on development cost, payback period, and a relative annual income profile.
Assume annual income is xi where i is the year number. Let pi be the relative weight for each year i relative to Year 1. For example, if Year 1 income is x then Year 3 income is p3x. The italics emphasize that the coefficients are relative to Year 1, and not the same as annual growth rates.
By definition, p1 is 1. The income generated over a five‐year period would be:
We also know the following relationships:
Therefore, the income S returned after three years is:
Therefore,
Assume a development cost of $570K and a relative income profile projection as shown in Table B.1.
Table B.1 Annual income profile.
Year | Relative income |
---|---|
Year 1 | 100% |
Year 2 | 105% |
Year 3 | 110% |
Substituting the values for p2 and p3 gives
Years 2 and 3 can be calculated as
The income for the first three years returns the development cost of $570. The forecast can be extended to any number of years by multiplying the growth rate by Year 1 income. Revenue can be estimated by dividing by the projected margins. In A margin of 80% is assumed in Table B.2, but different values could be used for each year.
This example assumes a payback period expressed in whole years. The formula can account for a partial year. For a 2.75 year payback period, the relative percent for the fractional year is multiplied by 0.75 to reflect income from the first three quarters of the third year.
Annual income for Years 2 and 3 can be calculated
The payback can be verified by
A downloadable Investment Income Profile Calculator spreadsheet is available at www.construx.com/product-flow-optimization-calculators.
Table B.2 Revenue profile based on income and margin.
Year 1 | Year 2 | Year 3 | |
---|---|---|---|
Income ($K) | 181 | 190 | 199 |
Margin (%) | 80 | 80 | 80 |
Revenue ($K) | 226 | 238 | 249 |
3.15.223.160