Tootie Clothing Store is considering opening a new store. The expected purchase price is $270,000, expected annual revenues are $150,000, and expected annual costs are $90,000, including $22,500 of depreciation. The store has a payback period of approximately:

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to divide the initial investment by the annual cash inflows. In this case, the initial investment is $270,000 and the annual cash inflow is $150,000 - $90,000 = $60,000.

Payback period = $270,000 ÷ $60,000 = 4.5 years

Therefore, the payback period for the new store is 4.5 years, making answer choice D correct. However, we also know that payback period is a simple and conservative method of evaluating a project's viability, so it's best to consider additional methods of financial analysis to make an informed decision on whether or not to open the new store.

Tootie Clothing Store Is Considering Opening a New Store