Question

10. Sankey Corporation is considering purchasing a machine. The cost of the machine is

$100,000. Its useful life is estimated to be 5 years and will have no residual values at the end of

its useful life. The machine would produce a product annually with the following financial

results:

Revenue 200,000

COGS 80,000

Gross Profit 120,000

Depreciation 20,000

Other Expenses 40,000

Net Income 60,000

Additional question: How to find annual net cash inflow for the cash payback period?

Answer 1

Net income generated by the asset is not the actual cash flow from asset. If we add depreciation to net income then that amount becomes net cash inflow from asset.

Net income is calculated after considering Non-cash expense of Depreciation so we need Cash income which is Net income plus depreciation.

Payback period is calculated on net cash inflow during the year instead of net income.

Calculation of net cash inflow
Net income	$ 60,000.00
Add: Depreciation	$ 20,000.00
Net cash Inflow	$ 80,000.00

Payback Period
Choose Numerator	/	Choose Denominator	=	Payback Period
Investment required	/	Net cash inflow	=	Payback Period
$   1,00,000.00	/	$      80,000.00	=	1.25 Years