Jack is considering adding toys to his general store. He estimates that the cost of inventory will be $4,200. The remodeling and shelving costs are estimated at $1,500. Toy sales are expected to produce net cash inflows of $1,200,$1,500,$1,600,and $1,750 over the next four years,respectively. Should Jack add toys to his store if he assigns a three-year payback period to this project?
A) Yes; because the payback period is 2.94 years.
B) Yes; because the payback period is 2.02 years.
C) Yes; because the payback period is 3.80 years.
D) No; because the payback period is 2.02 years.
E) No; because the payback period is 3.80 years.

Question

Quizplus · Accepted Answer

The total initial investment is $4,200 + $1,500 = $5,700. The cumulative cash inflows over the first three years are $1,200 + $1,500 + $1,600 = $4,300, which is less than the initial investment. By the end of the fourth year, the cumulative cash inflows are $4,300 + $1,750 = $6,050, which exceeds the initial investment. Therefore, the payback period is between 3 and 4 years, specifically 3.80 years, which exceeds the three-year payback period Jack requires.

Jack Is Considering Adding Toys to His General Store