Question

Lily Products Company is considering an investment in one of two new product lines. The investment required for either product line is $540,000. The net cash flows associated with each product are as follows: Year Liquid Soap Body Lotion 1 $170,000 $ 90,000 2 150,000 90,000 3 120,000 90,000 4 100,000 90,000 5 70,000 90,000 6 40,000 90,000 7 40,000 90,000 8 30,000 90,000 Total $720,000 $720,000 a. Recommend a product offering to Lily Products Company, based on the cash payback period for each product line.

Answer 1

Answer and Explanation:

The computation of the payback period for each product line is as follows

                               (in dollars)

Year Liquid Soap    Cumulative   Body lotion   Cumulative

1       170,000             170,000        90,000          90,000

2      150,000             320,000      90,000          180,000

3      120,000             440,000      90,000          270,000

4      100,000            540,000     90,000         360,000

5      70,000               610,000       90,000        450,000

6      40,000               650,000     90,000          540,000

7      40,000               690,000     90,000          630,000

8     30,000                720,000     90,000         720,000

So, the Payback period for Liquid soap is 4 years and Payback Period for Body Lotion is 6 Years  respectively

Therefore we suggest liquid soap as it contains better paypack period as compared with the body lotion