Alicia is considering adding toys to her gift shop. She estimates that the cost

Question

Alicia 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, $4,400, and $3,400 over the next four years, respectively. Should Alicia add toys to her store if she assigns a three-year payback period to this project? Why or why not?

Yes; The payback period is 3.95 years.

No; The payback period is 2.95 years.

No; The payback period is 3.95 years.

Yes; The payback period is 1.95 years.

Yes; The payback period is 2.95 years.

Explanation / Answer

Initial Outflows = $7500+1800 = $9,300.

Payback period = 2 years and (4100/4400)

                        = 2.95 years

that is the pay back period is less than 3 years.

Therefore, the project should be accepted as the pay back period is less than the 3 years.

Therefore, the correct answer is option E.

Year Cash Flows Cummulative cash flows 0 -9300 -9300 1 2300 -7000 2 2900 -4100 3 4400 300 4 3400 3700

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