Barker Company has an opportunity to purchase a forklift to use in its heavy equ

Question

Barker 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. Barker would sell it at the end of the fifth year of its useful life. The expected cash inflows and outflows follow.

Determine the payback period using the average cash flows approach. (Round your answer to 1 decimal place.)

Year   Nature of Item Cash Inflow Cash Outflow 2015   Purchase price $ 72,000 2015   Revenue $ 30,000 2016   Revenue 30,000 2017   Revenue 21,000 2017   Major overhaul 9,000 2018   Revenue 18,000 2019   Revenue 14,400 2019   Salvage value 9,600 a. Determine the payback period using the accumulated cash flows approach. b.

Determine the payback period using the average cash flows approach. (Round your answer to 1 decimal place.)

Explanation / Answer

a.

b.

3.29

Thus, Payback period is 3.29 Years.

Year Revenue Accumulated revenue 2015 30,000.00 30,000.00 2016 30,000.00 60,000.00 2017 21,000.00 81,000.00 2018 18,000.00 99,000.00 2019 24,000.00 1,23,000.00 1,23,000.00 Total Investment 81,000.00 Payback Period 3 Years

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