Determining the payback period with uneven cash flows Melton 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. Melton would sell it at the end of the fifth year of its useful life. The expected cash inflows and outflows follow.

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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Year Nature of Item Cash Inflow Cash Outflow Purchase price Revenue $72,000 2012 $30,000 30,000 21,000 2012 Revenue 2013 Revenue Major overhaul Revenue 2014 2014 9,000 18,000 14,400 9,600 2015 Revenue 2016 Salvage value 2016