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 a.&b. Determine the payback period using the accumulated and average cash flows approaches.

Answer 1

Year	Net Cash flow	Cumulative Cash Inflow
2018	$    (56,300.00)	$                         (56,300.00)
2019	$      38,500.00	$                         (17,800.00)
2020	$      17,800.00	$                                          -
2021	$      24,500.00	$                           24,500.00
2022	$      31,000.00	$                           55,500.00

The initial cash outflow = $94,800

The amount will be recovered exactly in 3 years of time.

Payback period = 3 years