Calculate the Payback Period &nbsp

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                       $1,200,000

2   Useful life of equipment                       12   years

3   Revenue the machine will generate per year                       $15,000

4   Direct operating costs associated with earning
   the revenue                       $250,000

5   Depreciation Expense per year                       $100,000



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
           Depreciation               $- 0
                       Net Income   $- 0


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

           Net Income               $- 0
           Add back Depreciation
               Annual Net Cash Inflow           $- 0

   Step 3   Compute the payback period

           Investment   =       =
           Net Annual       $- 0
           Cash Inflow

Expert Solution

jeff jeffy answered 2 months ago

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