Calculate the Payback Period 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 $ 500,000 10 years 2 Useful life of equipment 3 Revenue the machine will generate per year 4 Direct operating costs associated with earning the revenue 25,000 S 121,000 5 Depreciation Expense per year S 50,000 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 S Step 3 Compute the payback period Investment Net Annual Cash Inflow