Jack is considering adding toys to his general store. He estimates that the cost of inventory will be $4,200. The remodeling expenses 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 (inventory) + $1,500 (remodeling and shelving) = $5,700. The cash inflows over the first three years are $1,200 + $1,500 + $1,600 = $4,300. By the end of the third year, the investment hasn't been fully paid back, indicating a payback period longer than 3 years. Since Jack's requirement is a three-year payback period, the project does not meet his criteria.

Jack Is Considering Adding Toys to His General Store