Lacunae in Copybook PBP Definition:
a) The "total capital investment" in the above definition might be construed as a combination of fixed capital and working capital. While the power distribution projects are classically field augmentation schemes, the role of working capital is insignificant. Therefore, it is significant to know for clarity of concepts which payback deals exclusively along with "fixed capital" and not the working capital that is recoverable at the end of project life theoretically.
b) The fixed investments are frequent misunderstood as sum of purchase cost of assets and erection costs thereof and overlook other aspects of project cost leading to underestimation of costs.
c) Total advantages are normally not subjected to corrections for financial costs and taxes. There were historical purposes for it since so far money was to come from the Government having practically no costs to it; the Utilities continuing under spiralling losses were never taxpaying entities. But now it would be essential to account for these aspects as the new investments would be expected to be based on sound economic fundamentals conforming to a viable business model. Becoming viable and profitable would be a necessity for utilities rather than coincidence. Thus, advantages have to be computed along with due considerations to these aspects.
So, corrections overcoming these lacunae in copybook PBP definition have to be made. The desired formula for payback period is given below.
Desired PBP formula
PBP = Total fixed capital expenses/ ( Net benefits / yr)