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?

Question

Danica Rivers

Business

23 February, 05:29

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?

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Answers (1)

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Alissa Murphy · Answer 1

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.