Gentle Care Products Company is considering an investment in one of two new prod

Question

Gentle Care Products Company is considering an investment in one of two new product lines the investment required for either product line is $500,000. The net cash flows associated with each product are shown as follows:

Year Liquid Soap Body Lotion
1 $190,000 $100,000
2 180,000 100,000
3 130,000 100,000
4 110,000 100,000
5 80,000 100,000
6 50,000 100,000
7 30,000 100,000
8 30,000 100,000
Total 800,000 800,000

A.) Recommend a product offering to Gentle Care Products Company, based on the cash payback period for each product line.
B.) Why is one product line preferred over the other, even though they both have the same total net cash flows through eight periods?

Explanation / Answer

Liquid soap payback peiod = 3 + 50000/110000 = 3.5 years approx
Body lotion payback peiod = 5 + 50000/100000 = 5.5 years approx

Liquid soap is recommended due to shorter payback period

Because it gives same cash flows..early so less risk

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