Calculate the Payback Period The payback...

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Finance

Calculate the Payback Period

The payback period is the length of time required for the cash tobe coming in from an investment
to equal the amount of cash originally spent when the investmentwas acquired.


Assumptions

1   Purchase price of equipment                     $1,200,000

2   Useful life of equipment                     12   years

3   Revenue the machine will generate peryear                      $15,000

4   Direct operating costs associated withearning
   the revenue                     $250,000

5   Depreciation Expense per year                     $100,000



Using the above five assumptions, calculate how many years it willtake to recoup the
original investment.

   Step 1   Find the machine's expected netincome

          Revenue
          Less:
           Direct OperatingCosts
          Depreciation              $- 0
                      NetIncome   $- 0


   Step 2   Find the net annual cash inflow themachine is
       expected to generate (convert netincome to cash
       basis)

           NetIncome              $- 0
           Add backDepreciation
              Annual Net Cash Inflow          $- 0

   Step 3   Compute the paybackperiod

          Investment   =      =
           NetAnnual       $- 0
           CashInflow

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Transcribed Image Text

Calculate the Payback Period The payback period is the length of time required for the cash tobe coming in from an investment to equal the amount of cash originally spent when the investmentwas acquired. Assumptions 1 Purchase price of equipment $1,200,000 2 Useful life of equipment 12 years 3 Revenue the machine will generate peryear $15,000 4 Direct operating costs associated withearning the revenue $250,000 5 Depreciation Expense per year $100,000 Using the above five assumptions, calculate how many years it willtake to recoup the original investment. Step 1 Find the machine's expected netincome Revenue Less: Direct OperatingCosts Depreciation $- 0 NetIncome $- 0 Step 2 Find the net annual cash inflow themachine is expected to generate (convert netincome to cash basis) NetIncome $- 0 Add backDepreciation Annual Net Cash Inflow $- 0 Step 3 Compute the paybackperiod Investment = = NetAnnual $- 0 CashInflow