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18 October, 07:27

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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  1. 18 October, 11:16
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    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.
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