A convenience store owner is contemplating putting a large neon sign over his store. It would cost $50,000, but is expected to bring an additional $24,000 of profit to the store every year for five years. Would this project be worthwhile if evaluated using a payback period of two years or less and if the cost of capital is 10%?

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the initial investment to be recovered from the cash flows. In this case, the project generates $24,000 per year, so it would take more than two years to recover the $50,000 investment, making it not worthwhile under a two-year payback period criterion.

A Convenience Store Owner Is Contemplating Putting a Large Neon