[keslea]

Hi, I am working on a project and I am confused about how to complete my project. The following is an example similar to my project which provides me with a solution manual. I am trying to figure out the calculation of the Payback period.

Cost of new equipment $200,000
Expected life of equipment in years 5
Disposal value in 5 years $40,000
Life production - number of cans 10,000,000
Annual production or purchase needs 1,000,000
Initial training costs 10,000
Number of workers needed 3
Annual hours to be worked per employee 2300
Earnings per hour for employees $8.50
Annual health benefits per employee $1,500
Other annual benefits per employee-% of wages 18%
Cost of raw materials per can $0.20
Other variable production costs per can $0.10
Costs to purchase cans - per can $0.50
Required rate of return 10%
Tax rate 35%

Answer Payback Period: 200,000+10,000/87690 = 2.4 years
I don't understand were the 10,000 comes from in the investment. I am guessing the initial training costs? I am not great with numbers, someone please help.

[ArcSine]

The purpose of the payback calculation is to see how long it takes the incremental cash savings from an investment to repay the upfront costs of the investment.

The initial training costs should be considered part of the 'upfront investment', and hence are added to the 200K for purposes of the payback calculation.

[keslea]

Thank you.