Determining the payback period with uneven cash flowsRigby Company has an opportunity to p

Determining the payback period with uneven cash flows

Rigby 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. Rigby 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

2008

Purchase price

 

$24,000

2008

Revenue

$10,000

 

2009

Revenue

10,000

 

2010

Revenue

7,000

 

2010

Major overhaul

 

3,000

2011

Revenue

6,000

 

2012

Revenue

4,800

 

2012

Salvage value

3,200

 

Required

a. Determine the payback period using the accumulated cash flows approach.

b. Determine the payback period using the average cash flows approach.

 

 

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