H 12 14 10 years 16 B 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. 10 Assumptions 1 Purchase price of equipment $ 500,000 2 Useful life of equipment 3 Revenue the machine will generate per year $ 25,000 4 Direct operating costs associated with earning 19 the revenue $ 121,000 21 5 Depreciation Expense per year S 50,000 25 Using the above five assumptions, calculate how many years it will take to recoup the 26 original investment. 27 28 Step 1 Find the machine's expected net income 18 29 30 31 Revenue Less: Direct Onerating costs A13 B c D H 31 32 33 Less: Direct Operating costs Depeciation 34 Net Income S 35 36 37 38 Step 2 Find the net annual cash inflow the machine is expected to generate (convert ne income to cash basis) 39 40 $ 41 42 Net Income Add back Depreciation Annual Net cash Inflow $ 43 44 45 Step 3 Compute the payback period 46 D G . K 31 32 Less: Direct Operating Costs Depeciation 33 34 Net Income $ 35 37 38 39 41 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 $ 42 43 $ 45 + 46 47 48 Investment Net Annual Cash Inflow 49 50