A proposed acquisition of a forklift on January 1, 2014 will cost $86,000. The company has estimated the forklift's salvage value at the end of its estimated 5-year life to be $21,000. The following amounts have been provided by the management:
$\begin{array}{lrrrrr}&2014&2015&2016&2017&2018\
\text { Net income } & \$ 7,300 & \$ 8,700 & \$ 8,000 & \$ 5,100 & \$ 1,400 \
\text { Operating cash flows } & \$ 20,300 & \$ 21,700 & \$ 21,000 & \$ 18,100 & \$ 14,400
\end{array}$
The company's required rate of return is 7.6% and its cost of capital is 5.4%. The income tax rate is 32%. Calculate the payback period.

Question

Quizplus · Accepted Answer

The payback period is the amount of time it takes for an investment to generate enough cash flow to cover the initial investment. In this case, the initial investment is $86,000. The company has estimated that the forklift will generate the following cash flows over its 5-year life:$\begin{array}{lrrrrr}&2014&2015&2016&2017&2018\\text { Operating cash flows } & \$ 20,300 & \$ 21,700 & \$ 21,000 & \$ 18,100 & \$ 14,400\end{array}$The payback period can be calculated by dividing the initial investment by the average annual cash flow. In this case, the average annual cash flow is $19,500. Therefore, the payback period is 4.34 years.

A Proposed Acquisition of a Forklift on January 1, 2014