# Amortization calculation

Also known as: Refinancing statement, cash return statement, pay-off method, pay-back method

The amortization calculation is a calculation method to determine the financial advantages of a planned investment. In the amortization calculation, the refinancing costs of the investment are made visible on the basis of the purchase costs and the annual profits including depreciation.

## Definition / explanation

Durch die Amortisationsrechnung kann ermittelt werden, ab welchem Zeitpunkt eine geplante Investition seine Ausgaben wieder refinanziert hat. Die Berechnung der Amortisationsdauer kann auf zwei verschiedene Arten durchgeführt werden. Diese Berechnungsmethoden werden als statische und dynamische Amortisationsrechnung bzw. als Durchschnitts- und kumulative Methode bezeichnet.

## static and dynamic amortization calculation

Static amortization calculation - With the static calculation method, the annual surpluses are added together in a first step and divided by the useful life in a next step. This is how you get the average annual surplus. In a final step, the acquisition costs have to be divided by the average annual surplus.

The result of this calculation is the average payback period. This calculation method is useful if the financial return on an investment is roughly the same every year.

Dynamic amortization calculation - The calculation of the amortization period with the help of the dynamic amortization calculation is a little more complex. With this calculation method, the financial returns must be considered individually for each year and then added up. This is carried out until the year emerges in which the total amount corresponds to the value of the investment.

## Example of a static amortization calculation

A company wants to invest in a new machine that should cost 400,000 euros. The new machine can be used for a period of 10 years.

The depreciation process is linear. A depreciation of 40,000 euros per year can therefore be assumed. The profits generated by the machine will be around 75,000 euros per year.

This results in:

Payback period = (400,000 / (75,000 + 40,000) = 3.47

As a result, this means that the investment has paid for itself in less than 3.5 years.

## Summary

• The amortization calculation can be used to calculate the period from when an investment has been refinanced
• the calculation of the payback period can be done in two different ways
• there is a static and a dynamic amortization calculation
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