The payback period is the length of time required for the cash to be coming in from an investment to equal the amount of cash originally spent when the investment was acquired. Assumptions 1 Purchase price of equipment 2 Useful life of equipment 3 Revenue the machine will generate per year 500,000 10 years 25,000 4 Direct operating costs associated with earning the revenue 121,000 5 Depreciation Expense per year s Using the above five assumptions, calculate how many years it will take to recoup the 6 original investment. 50,000 Step 1 Find the machine's expected net income 9 Revenue Less: Diroct Onor A13 B H 31 Less: 32 Direct Operating Costs 33 Depeciation 34 Net IncomeS 35 36 37 Step 2 Find the net annual cash inflow the machine is expected to generate (convert net income to cash basis) 38 39 40 41 Net Income Add back Depreciation 42 Annual Net Cash Inflow 43 44 Step 3 Compute the payback period 45 46 B C D G H K 31 Less: 32 Direct Operating Costs 33 Depeciation 34 Net Income 35 37 Step 2 Find the net annual cash inflow the machine is expected to generate (convert net income to cash basis) 38 39 41 Net Income 42 Add back Depreciation 43 Annual Net Cash Inflow 45 Step 3 Compute the payback period 46 47 Investment 48 Net Annual 49 Cash Inflow 50