Question

Benson 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. Benson 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					$	81,200
2018	Revenue	$	31,500
2019	Revenue		31,500
2020	Revenue		26,500
2020	Major overhaul						8,300
2021	Revenue		17,500
2022	Revenue		15,500
2022	Salvage value		7,100

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

Answer 1

a) Calculation of cumulative Cash Inflows:

Year Cash Inflows ($) Cumulative Cash Inflow($)

2018 31500 31500

2019 31500 63000

2020 18200 81200

As seen from the above table, payback period in this method is 3 years.

Note - Net inflows in 2020 = 26500-8300 = $18200

b) Net Inflows over 5 years period = 31500+31500+26500-8300+17500+15500+7100 = $121300

Life of the asset = 5 yrs

Hence, average cash flows per year = 121300/5 = $24260

Hence, payback period = Initial Outflow/Average cash inflow

=81200/24260 = 3.3 years

Looking forward to your upvote. Thanks!!