Roger is considering adding toys to his general store. He estimates that the cost of inventory will be $6,400. The remodeling expenses and shelving costs are estimated at $2,100. Toy sales are
Expected to produce net cash inﬂows of $1,400, $2,300, $3,100, and $2,000 over the next four
Years, respectively. Should Roger add toys to his store if he assigns a three-year payback period to
This project? Why or why not?
A) No; The payback period is 3.55 years.
B) No; The payback period is 3.85 years.
C) Yes; The payback period is 2.55 years.
D) Yes; The payback period is 2.87 years.
E) Yes; The payback period is 3.13 years.

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to add up the net cash inflows until they equal the initial investment.

Year 1: $1,400
Year 2: $2,300
Year 3: $3,100
Year 4: $2,000

Cumulative cash inflows:
Year 1: $1,400
Year 2: $3,700
Year 3: $6,800
Year 4: $8,800

The payback period is the time it takes to recoup the initial investment, which is the end of year 3 in this case.

Payback period = 3 years + [(initial investment - cumulative cash inflow at end of year 3) / cash inflow in year 4] 
Payback period = 3 years + [(6,400 - 6,800) / 2,000] 
Payback period = 3.85 years

Since the payback period is longer than the assigned payback period of 3 years, Roger should not add toys to his store. Therefore, the best choice is B.

Roger Is Considering Adding Toys to His General Store