Question

Alicia is considering adding toys to her gift shop. She estimates the cost of new inventory will be $9,500 and remodeling expenses will be $850. Toy sales are expected to produce net cash inflows of $1,300, $4,900, $4,400, and $4,100 over the next four years, respectively. Should Alicia add toys to her store if she assigns a 3-year payback period to this project?

Answer 1

Answer:

Yes she should.

Explanation:

The cash flow analysis is as shown below

                                       Outflow      Inflow        Balance

Year 0 Total investment      (10,350.00)  -          (10,350.00)

Year 1 Cash inflow                        -     1,300.00       (9,050.00)

Year 2 Cash inflow                        -     4,900.00      (4,150.00)

Year 3 Cash inflow                        -     4,400.00       250.00  

Year 4 Cash inflow                        -     4,100.00       4,350.00

From the cashflow above, the business is in a net income position at the end of the 3rd year. As such, if she assigns a  3-year payback period to this project, she should add toys to her store.