You already know that one of the major reasons for making an investment is to make money. In both your net income and net present value calculations, you have seen that when your results are positive you are making money on a project. But there is one more important thing to keep in mind – you don’t get to keep what you are earning until you pay off the money it took to get the project off the ground.

For example, you own a car. When you purchased the car you didn’t have enough money to by it on your own, so you took out a $2000 loan from the bank. You’ve been driving the care a few years and you are ready to sell it, but you still owe the bank $1000 on the loan. The bank will let you sell your car, but they expect to get their money back before you make a profit. The first $1000 you make on the sale of your care will go to the bank to pay off the loan. You get to keep anything beyond $1000 for yourself.

The same principle applies in investing. Your initial profits go toward paying back your start up costs. Once those are paid off, the money the investment generates is profit you can keep. The payoff point is the point in the project when you have made enough money to pay off your start up costs.

Click on the link to the left for information on how to calculate the payoff point for an investment project.