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28 September, 23:32

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%?

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  1. 29 September, 00:01
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    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.
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