Question

Stuart Company has an opportunity to purchase a forkift to use in its heavy equipment rental business. The forklift would be leased an annual basis during its first two years of operation. T it at the end of the fifth year of its useful life. The expected cash inflows and outflows follow: hereafter, it would be leased to the general public on demand. Stuart would sell Year Nature of Item Cash InflowCash outflow 2018 Purchase price 2018 Revenue 2019 Revenue $92,000 $37,500 37,500 26,500 2020 Revenue 2020 Major overhaul 2021 Revenue 9,500 2022 Revenue 21,500 8,300 2022 Salvage value Required 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) b. Payback period (average cash flows) vears Prex1 of 41 Next >

Answer 1

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1) Payback period using accumulated cash flows Investment 92,000.00 9,500.00 Major Overhaul Total cash outflow 01,500.00 Cash Flow Accumulated Cash Flow 37,500.00 37,500.00 2 37,500.00 75,000.00 101,500.00 3 26,500.00 23,500.00 25,000.00 4 21,500.00 46,500.00 54,800.00 8,300.00 6 At the end of year 3 entity is getting recovered its total cash outflows So the Payback period is 3 Years 2) Payback period using average cash fiows Cash Flow 37,500.00 2 37,500.00 26,500.00 23,500.00 4 21,500.00 6 8,300.00 Total Cash Inflow 154,800.00 No of Years 6 Average cash flow per annum 25,800.00 01,500.00 Total cash outflow Payback period Total cash Outflow Average cash flow per annum ) (101500 25800) 3.93 Years