What is amortization?
In economics, amortization is the process in which the investment costs for an object or service are covered by the income that the object or service will generate in the future. The term is used to describe the profitability of an investment and to make investment decisions.
When does an investment pay for itself?
The amortization period of an investment depends on the capital invested and the monthly or annual amounts. The formula for a static or linear amortization period is as follows:
An investment of € 100,000 amortizes after 6.7 years with an annual return of € 15,000.
Dynamic investments, in which interest, depreciation etc. are also included in the calculation, have the following formula:
The average profit also includes depreciation and imputed interest.
In this chart, the amortization point is in month 9. The time between month 5 and month 9 is called the amortization period. Here the investment is still a loss. However, after the amortization has taken place, the investor is in the profit zone.
Digital investments
Digital transformation requires investments in digital tools. Examples:
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Acquisition of work-supporting systems such as ERP, CRM, PIM, intranet or collaboration tools
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Digitalization of internal company processes
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Industry 4.0 or the Internet of Things (IoT)
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Online marketing tools
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Development of new business models through the use of digital technologies
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Development of new products for mobile customers
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and much more.
Amortization calculations in these sometimes complex areas are much more difficult to prepare than, for example, for the purchase of an additional vehicle for the fleet.
Experienced agencies and management consultancies can support you with this amortization calculation.
Sources:
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