When calculating payback period is training cost treated as

When calculating payback period, is training cost treated as initial investment cost or one time expense cash outflow? What formula is used to calculate payback period?

Solution

Training cost treated as Initial Investment Cost

- YES. The training cost treated as a part of Initial Investment Cost in capital budgeting. The Costs of training employees or staffs to use the new machines of the project shall be included as a part of Initial Investment costs.

- The cash outflows incurred for the Initial Investment includes all the costs expected to incur or incurred to ready the assets available for use.

- In addition to the cost of assets or machines, Initial Investment includes Delivery charges, Installation charges, Training costs, Etc…

Formula is used to calculate payback period

There are mainly two types of cash flows – Annual Equal cash inflows and Uneven cash flows.

Payback Period for Annual Equal cash flows

Payback Period = Initial Investment / Annual Cash inflows

Payback Period for Uneven Cash inflows.

Payback Period = Years Before Full Recover + (Unrecovered cash inflow at start of the year / Cash Inflow during the year)