Question

A convenience store owner is contemplating putting a large neon sign over his store. It would cost​ $50,000, but is expected to bring an additional​ $24,000 of profit to the store every year for five years. Would this project be worthwhile if evaluated using a payback period of two years or less and if the cost of capital is​ 10%?

Answer 1

Answer:  No, since the value of the cash flows over the first two years are less than the initial investment

Explanation:

value of cash flows for the first two years = $48,000 (24,000x2)

Initial Investment = $50000

Because the additional $48,000 profit during the two year payback is not grater than the $50,000 purchase, they should not put the large neon sign up.