Jack is considering adding toys to his general store.He estimates the cost of toy inventory will be $4,200.The remodeling and shelving costs are estimated at $1,500.Toy sales are expected to produce net annual cash inflows of $1,200,$1,500,$1,600,and $1,750 over the next four years,respectively.Should Jack add toys to his merchandise if he requires a three-year payback period? Why or why not?
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 cost is $5,700 ($4,200 for inventory + $1,500 for remodeling). The cumulative cash inflows over three years are $4,300 ($1,200 + $1,500 + $1,600), which is less than the total cost. The payback period extends into the fourth year, making it 3.80 years, which exceeds the required three-year payback period.

Jack Is Considering Adding Toys to His General Store