Final answer:
The payback period for Garrison Rentals to recover the cost of the van, after considering revenue and straight-line depreciation, is 3 years.
Step-by-step explanation:
The question asks us to calculate the payback period for Garrison Rentals after purchasing a van for $54,000 with a useful life of three years and no salvage value. Since depreciation is the only expense and Garrison uses straight-line depreciation, the annual depreciation expense is $54,000 / 3 = $18,000. The expected revenue from the van is $36,000 per year. To calculate the payback period, we divide the initial investment by the annual cash inflow:
Payback Period = $54,000 / ($36,000 - $18,000)
= $54,000 / $18,000
= 3 years
The payback period is 3 years, meaning it will take Garrison Rentals 3 years of revenue to recover the cost of the van.
The payback period is the amount of time it takes for an investment to generate enough cash flows to recover its initial cost. In this case, the van costs $54,000 and is expected to generate $36,000 in revenue per year. To determine the payback period, we divide the initial cost by the annual revenue: $54,000 / $36,000 = 1.5 years. Therefore, the payback period for this investment is 1.5 years.