Roger Is Considering Adding Toys to His General Store

question 384

Multiple Choice

Roger is considering adding toys to his general store. He estimates that the cost of inventory will be $6,400. The remodeling expenses and shelving costs are estimated at $2,100. Toy sales are
Expected to produce net cash inflows of $1,400, $2,300, $3,100, and $2,000 over the next four
Years, respectively. Should Roger add toys to his store if he assigns a three-year payback period to
This project? Why or why not?

• A) No; The payback period is 3.55 years.
• B) No; The payback period is 3.85 years.
• C) Yes; The payback period is 2.55 years.
• D) Yes; The payback period is 2.87 years.
• E) Yes; The payback period is 3.13 years.

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Definitions:

Discount Rate

The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility.

Initial Cost

The total expense incurred to acquire an asset or product, including the purchase price and all related fees and taxes, but excluding any subsequent maintenance or operational costs.

Cash Inflows

Money being received by a business or individual, from various sources like sales, investments, or loans.

Option To Wait

The flexibility embedded in investment decisions allowing investors to delay making an investment to obtain more information.