Princess Unikitty is considering adding toys to her gift shop. She estimates tha
ID: 2643328 • Letter: P
Question
Princess Unikitty is considering adding toys to her gift shop. She estimates that the cost of inventory will be $7,500. The remodeling expenses and shelving costs are estimated at $1,800. Toy sales are expected to produce net cash inflows of $2,300, $2,900, $3,200, and $3,400 over the next four years, respectively. Should Princess Unikitty add toys to her store if she assigns a three-year payback period to this project? Why or why not?
No; The payback period is 2.93 years.
No; The payback period is 3.26 years.
Yes; The payback period is 2.93 years.
Yes; The payback period is 3.01 years.
Yes; The payback period is 3.26 years.
Please show all work!
Explanation / Answer
Answer:
Total initial cost incurred =7500+1800 = $9300
Cash inflow in year 1 = $2300
Cash inflow in year 2 = $2900
Cash inflow in year 3 = $3200
Total cost recovered till end of year 3 = 2300+2900+3200 = $8400
Cash inflow in year 4 = $3400
Cost to be recovered in year 4 = 9300-8400 = $900
Time taken to recover $900 = 900/3400 =0.26
Hence the payback period = 3.26
Princess Unikitty add toys to her store if she assigns a three-year payback period to this project, Unfortunately the payback period is more than three year (3.26) Hence Princess Unikitty should not add toys to her store.
Final Answer:
No; The payback period is 3.26 years.
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