Eat at State is considering buying a new food truck. It will cost $65,000 but is expected to generate $20,000 in annual sales over the next 4 years. At the end of the 4th year, the truck will be sold to Eat Like a Wolverine in Ann Arbor for $5,000 (after taxes). It will require $15,000 in additional Net Working capital that will not be recovered when the truck is sold. The Dean of Food Services will only authorize the purchase if it is cash positive by the end of the 4th year. Using the payback period method, should the truck be purchased, and why?
a) Purchase the truck; the initial expenses will be recovered + an additional $5,000 by the end of Year 4
b) Do not purchase; the initial expenses will exactly be recovered in 4 years
c) Purchase the truck; the initial expenses will be recovered + an additional $20,000 by the end of Year 4
d) There is not enough information to answer the question.
