A Convenience Store Owner Is Contemplating Putting a Large Neon

question 58

Multiple Choice

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%?

• A) Yes, since it will pay back its initial investment in two years.
• B) No, since the value of the cash flows over the first two years are less than the initial investment.
• C) Yes, since the cash flows after two years are greater than the initial investment.
• D) Yes, since the value of the cash flows into the store, in present dollars, are greater than the initial investment.

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Definitions:

Inventory Requirements

The specific amount of stock that a company needs to have on hand to meet customer demand and support production processes.

Sunk Cost

A past expense that has already been incurred and cannot be recovered, which should not influence future business decisions.

Concession Stand

A vendor booth or stall that sells snacks, drinks, and other small items at events, in public places, or in entertainment venues.

Erosion

In a financial context, erosion refers to the gradual reduction of assets or earnings, primarily due to costs, wear and tear, or obsolescence.