Question

Vernon Company has an opportunity to purchase a forklift to use in its heavy equipment rental business. The forklift would be leased on an annual basis during its first two years of operation. Thereafter, it would be leased to the general public on demand. Vernon would sell it at the end of the fifth year of its useful life. The expected cash inflows and outflows follow:

Year	Nature of Item	Cash Inflow				Cash Outflow
2018	Purchase price					$	94,800
2018	Revenue	$	38,500
2019	Revenue		38,500
2020	Revenue		27,500
2020	Major overhaul						9,700
2021	Revenue		24,500
2022	Revenue		22,500
2022	Salvage value		8,500

Required

1. a.&b. Determine the payback period using the accumulated and average cash flows approaches. (Round your answers to 1 decimal place.)

a. Payback period (accumulated cash flows) = ? years

b. Payback period (average cash flows) = ? years

Answer 1

Q.1	Payback period (accumulated cash flows): 3 Years
Year	Nature of Item	Cash Inflow	Cash Outflow	Accumulated Cash Flow
2018	Purchase price		94,800	-94,800
2018	Revenue	38,500		-56,300
2019	Revenue	38,500		-17,800
2020	Revenue	27,500		9,700
2020	Major overhaul		9,700	0	Payback year
2021	Revenue	24,500
2022	Revenue	22,500
2022	Salvage value	8,500
Q.2	Payback period (average cash flows)= 3.3 Years
Year	Nature of Item	Cash Inflow	Cash Outflow
2018	Purchase price		94,800
2018	Revenue	38,500
2019	Revenue	38,500
2020	Revenue	27,500
2020	Major overhaul		9,700
2021	Revenue	24,500
2022	Revenue	22,500
2022	Salvage value	8,500
Total		160000
Average		32000	(160000/5)
	Payback period (average cash flows)= Total cash outflow/ average inflow
	=(94800+9700)/32000
	3.3