The importance of the amortization calculation in financial analysis

The amortization calculation is an important tool for companies and investors to evaluate the profitability of investments. In this article, we will take a closer look at the amortization calculation and explain the difference between static and dynamic amortization calculation.

What is the amortization calculation?

The amortization calculation is a method of determining how long it takes for an investment to pay for itself through the income generated. It enables companies and investors to analyze and evaluate the profitability of an investment. The amortization calculation can be carried out in various ways, including the static and dynamic amortization calculation.

 

Static amortization calculation

 

The static amortization calculation only takes into account how long it takes for the initial investment to be fully amortized by the cash flows generated. No discount factors or time values of money are taken into account. This can lead to a distorted valuation as the time value of money is not taken into account.

Dynamic amortization calculation

 

In contrast, the dynamic amortization calculation takes into account the time value of money and discounts the future cash flows to their current value. This enables a more accurate assessment of the profitability of an investment. The dynamic amortization calculation is therefore often more precise and accurate than the static method.

Conclusion

The amortization calculation is an important tool for companies and investors to assess the profitability of investments. While the static payback calculation provides a simple way to calculate the payback period, the dynamic payback calculation takes into account the time value of money and allows a more accurate assessment of the profitability of an investment. It is important to understand the differences between these two methods and apply the appropriate method according to the situation.