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Why is depreciation left out when net cash flow is worked out for a payback calculation?
AIt is charged after the payback period ends
BIt is not a cash payment made by the company
CIt is already inside the purchase price paid
DIt is treated as a financing cost, not a cost
Answer & Solution
Correct answer: B. It is not a cash payment made by the company
1. Net cash flow is all cash revenue generated minus all cash expenditure paid.
2. Depreciation moves no cash, since it only spreads a cost already paid.
3. It is therefore excluded from the payback calculation.
4. The average rate of return, by contrast, works from income figures that are struck after depreciation.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.8 Capital Investment Analysis_
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