Jack is considering adding work jeans and T-shirts to the items he stocks in his general store provided that his payback period is less than 2.5 years. He estimates that the initial cost of
Inventory will be $6,750. The remodeling expenses required for this addition are $18,200. Jean and
T-shirt sales are expected to produce net cash inﬂows of $10,200, $14,500, and $16,600 over the
Next three years, respectively. Jack _____ add the jeans and T-shirts to his offerings as the payback
Period is _____ years.
A) should; 1.67
B) should; 2.02
C) should; 3.67
D) should not; 2.02
E) should not; 3.67

Question

Quizplus · Accepted Answer

The total initial investment is $6,750 + $18,200 = $24,950. The cumulative cash inflows over the first two years are $10,200 + $14,500 = $24,700. By the end of the second year, Jack has almost recovered his initial investment. In the third year, he needs an additional $250 to break even, which takes approximately 0.02 years ($250/$16,600). Therefore, the payback period is 2.02 years.

Jack Is Considering Adding Work Jeans and T-Shirts to the Items