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Dear John,
Could you please tell me what is the treatment of depreciation in calculation of payback period?
In your example in lecture notes there is no depreciation at all but now I have came across a question where depreciation was added to cash inflow value. Is it because in the question they specified that depreciation is charged on straight line basis? So do I ignore it if it’s not mentioned anywhere in the question?Regards
The payback period is calculated on the cash flows, and depreciation is not a cash flow.
Without seeing the example you are referring to, I can only imagine that you are given the profits each year, in which case you would add back the depreciation to get the net cash flow each year.
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