A B D E F 1 K M C Calculate the Payback Period 4 5 6 The payback period is the length of time required for the cash to be coming in from an investment 7 to equal the amount of cash originally spent when the investment was acquired. 8 9 10 Assumptions 11 $ 1 Purchase price of equipment 12 350,000 13 10 years 14 2 Useful life of equipment 15 $ 10,000 16 3 Revenue the machine will generate per year 17 8 4 Direct operating costs associated with earning the revenue $ 75,000 9 0 $ 15,000 5 Depreciation Expense per year Using the above five assumptions, calculate how many years it will take to recoup the original investment. Step 1 Find the machine's expected net income Revenue Less: Direct Operating Costs Depeciation Net Income $ Step 2 Find the net annual cash inflow the machine is expected to generate (convert net income to cash basis) Net Income Add back Depreciation Annual Net Cash Inflow $ Step 3 Compute the payback period years Investment Net Annual Cash Inflow A B D E F 1 K M C Calculate the Payback Period 4 5 6 The payback period is the length of time required for the cash to be coming in from an investment 7 to equal the amount of cash originally spent when the investment was acquired. 8 9 10 Assumptions 11 $ 1 Purchase price of equipment 12 350,000 13 10 years 14 2 Useful life of equipment 15 $ 10,000 16 3 Revenue the machine will generate per year 17 8 4 Direct operating costs associated with earning the revenue $ 75,000 9 0 $ 15,000 5 Depreciation Expense per year Using the above five assumptions, calculate how many years it will take to recoup the original investment. Step 1 Find the machine's expected net income Revenue Less: Direct Operating Costs Depeciation Net Income $ Step 2 Find the net annual cash inflow the machine is expected to generate (convert net income to cash basis) Net Income Add back Depreciation Annual Net Cash Inflow $ Step 3 Compute the payback period years Investment Net Annual Cash Inflow