Shaw 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. Shaw 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 2008 Purchase price $48,000 2008 Revenue $20,000 2009 Revenue 20,000 2010 Revenue 14,000 2010 Major overhaul 6,000 2011 Revenue 12,000 2012 Revenue 9,600 2012 Salvage value 6,400