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%?
A) Yes, since it will pay back its initial investment in two years.
B) Yes, since the value of the cash flows into the store, in present dollars, are greater than the initial investment.
C) Yes, since the cash flows after two years are greater than the initial investment.
D) No, since the value of the cash flows over the first two years are less than the initial investment.

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash inflow. Here, $50,000/$24,000 = 2.08 years, which is more than the required payback period of 2 years or less. Therefore, the project would not be considered worthwhile under this criterion.

A Convenience Store Owner Is Contemplating Putting a Large Neon