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Cash Payback - Cash Payback The cash payback technique...

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Cash Payback The cash payback technique identifies the time period required to recover the cost of the capital investment from the annual cash inflow produced by the investment. Illustration 23-19 presents the formula for computing the cash payback period. Illustration 23-19 Cash payback formula Helpful Hint Net annual cash flow can also be approximated by net cash provided by operating activities from the statement of cash flows. Net annual cash flow is approximated by taking net income and adding back depreciation expense. Depreciation expense is added back because depreciation on the capital expenditure does not involve an annual outflow of cash. Accordingly, the depreciation deducted in determining net income must be added back to determine net annual cash flows. In the Tappan Company example, net annual cash flow is $26,000, as shown below. Illustration 23-20 Computation of net annual cash flow
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The cash payback period in this example is therefore five years, computed as follows.
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