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
2319
presents
the formula for computing the cash payback period.
Illustration 2319 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 2320 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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 Fall '11
 
 Net Present Value, cash payback period, cash payback

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