Question

Alicia is considering adding toys to her gift shop. She estimates that the cost of inventory will be $7,500. The remodeling expenses and shelving costs are estimated at $1,500. Toy sales are expected to produce net cash inflows of $2,800, $2,900, $3,400, and $3,500 over the next four years, respectively. Should Alicia add toys to her store if she assigns a three-year payback period to this project? Why or why not?

Answer 1

Answer:

Alicia should toys to her line of business as payback is 2.97 years which is almost the same as her projection.

Explanation:

In judging whether or not Alicia should add toys to her line of business,the actual payback period on the toys business.

The payback as found in the attached is 2.97 years.

In computing the payback period, I picked before the cumulative cash turns positive,year 2 plus(cumulative cash flow in year 2/cash flows in year 3)