November 29, 2009 
This entry was posted on Sunday, November 29th, 2009 at 10:42 pm and is filed under Accounting, Accounts Payable, How To. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Often in business you will have to purchase software, equipment or hardware. It can be questionable as to whether or not you should make this purchase at this time. If you have an accounts payable department they can run a calculation for payback of purchases. This will determine how long it will take to pay itself back in reduced costs or increased revenue. This information can be developed by simple payback analysis.
Simple payback period is determined by dividing the cost of a project or investment by the average annual improvement in cash flow. For example, an undertaking that costs $4,000 and generates $1,000 per year added to the bottom line will pay itself back in four years.
To address payback period, it is first necessary to gather information about the project’s cost, likely benefits and expected life. Costs are the easy part; it’s simple enough to learn the exact cost of a new piece of equipment, for example, and it’s not difficult to determine the costs of installation and operation. However, benefits and expected life can be another matter.