Question

It will cost $6,000 to acquire an ice cream cart. cart sales are expected to be $3,600 a year for three years. after the three years, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years. if you want the project to produce positive cash flows in 3 years (i.e., the payback period cannot be more than three years), should the cart be purchased

Answer 1

The ice cream cart, costing $6,000, is expected to produce $3,600 in annual sales for three years, totaling $10,800 in revenue. This surpasses the initial cost within the three-year payback period, making the purchase a sound financial decision.

Step-by-step explanation:

To determine whether the ice cream cart should be purchased, we must consider if the cart can pay back its acquisition cost within the desired payback period of three years. With an initial cost of $6,000 and annual sales of $3,600, the total revenue over three years would be $10,800 ($3,600 per year times three years). As the cart's revenue exceeds its cost within three years, the purchase would result in positive cash flows within the designated payback period.The payback period is the length of time required to recover the cost of an investment. In this case, it is crucial to compare the total cost of the cart with the total expected revenue within the three-year window. Since the cart will generate a total revenue of $10,800 over three years, it will be enough to cover the initial cost of $6,000, resulting in an excess of $4,800. Therefore, the cart purchase meets the requirement of having a payback period of no more than three years, this implies that the investment would be recuperated and produce additional cash flows.Conclusion Given that the ice cream cart is expected to generate sufficient revenue to cover its acquisition cost well within the three-year payback period, it would be financially prudent to proceed with the purchase as it will produce positive cash flows within the given timeframe.