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Hi John,
I’m afraid I have a rather simple question about payback period. Question 86 in the BPP F9 Practice & Revision Kit for exams in September 2016, December 2016, March 2017 and June 2017 is a simple question requiring the calculation of a payback period, however the answer includes depreciation as an annual cash inflow. I was of the understanding that depreciation is a not a cash flow and is not included in the calculation of payback period. The initial investment is recorded as the cash outflow for the purchase of the equipment and the annual cash inflows are the sums of money that make the payback. Why have the included the depreciation allocated to each period as a cash inflow?
I’m sorry if I’m being stupid, but I just can’t get my head around it.
Many thanks in advance.
Chris
The figures given in the question are the profits, which are after charging the depreciation expense.
Depreciation is not a cash flow, and so it needs removing. If the depreciation is removed then the cash ‘profit’ (which is what we need) will be higher than the profit after depreciation.
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