Question

It will cost $4,200 to acquire a small ice cream cart. Cart sales are expected to be $3,400 a year for five years. After the five years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

a.4.05 years
b.0.25 years
c.6.18 years
d.0.81 years
e.1.24 years

Answer 1

The payback period for the ice cream cart, which has a cost of $4,200 and annual sales of $3,400, is calculated as 1.24 years. This is found by dividing the cost by the annual sales.

Step-by-step explanation:

The payback period for the ice cream cart can be calculated by dividing the initial investment by the annual sales. In this case, the initial investment is $4,200, and the annual sales are expected to be $3,400. To calculate the payback period, we use the formula:

Payback Period = Initial Investment / Annual Cash Inflows

Payback Period = $4,200 / $3,400

This results in a payback period of approximately 1.24 years. Therefore, the correct answer is:

e. 1.24 years