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,$3,200,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?
A)No; The payback period is 2.93 years.
B)No; The payback period is 3.26 years.
C)Yes; The payback period is 2.93 years.
D)Yes; The payback period is 3.01 years.
E)Yes; The payback period is 3.26 years.

Question

Quizplus · Accepted Answer

The total initial investment is $7,500 (inventory) + $1,800 (remodeling and shelving) = $9,300. The cash inflows over the first three years are $2,300 + $2,900 + $3,200 = $8,400. By the end of the third year, Alicia has not yet recovered her initial investment of $9,300, indicating the payback period is longer than 3 years. To find the exact payback period, we note that by the end of the third year, Alicia still needs $900 ($9,300 - $8,400) to break even. With a cash inflow of $3,400 in the fourth year, the additional time needed to recover the full investment is $900 / $3,400 = 0.26 years. Therefore, the total payback period is 3 years + 0.26 years = 3.26 years, which exceeds her three-year payback period criterion.

Alicia Is Considering Adding Toys to Her Gift Shop