Question

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?

Answer 1

Roger should not add toys to his store if he wants to adhere to a three-year payback period. The total cash inflows from toy sales over three years ($6,800) do not cover the initial investment cost of $8,500.

Step-by-step explanation:

Let’s evaluate whether Roger should add toys to his store based on his three-year payback period. The initial costs of adding toys are the inventory ($6,400) plus remodeling and shelving expenses ($2,100), totaling $8,500. The expected net cash inflows from toy sales over the next four years are as follows:

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

Assessing whether to add toys within a three-year payback period, we sum the net cash inflows for the first three years:

Year 1: $1,400

Year 2: $2,300

Year 3: $3,100

Total inflow over three years: $6,800

Since the total cash inflows over three years ($6,800) are less than the initial investment ($8,500), Roger would not recover his investment within his desired three-year payback period. Therefore, it would not be advisable for Roger to add toys to his store if he strictly adheres to a three-year payback criterion.