Cash Payback Method a. Recommend a product offering to Lily Products Company, ba

Question

Cash Payback Method

a. Recommend a product offering to Lily Products Company, based on the cash payback period for each product line.
SelectBody LotionLiquid SoapItem 1

b. The project with the SelectgreatestsmallestItem 4 net cash flows in the early years of the project life will be favored over the one with the SelectgreatestsmallestItem 5 net cash flows in the initial years.

Check My Work (2 remaining)

Cash Payback Method

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:

a. Recommend a product offering to Lily Products Company, based on the cash payback period for each product line.
SelectBody LotionLiquid SoapItem 1

Payback period for liquid soap Select1 year2 years3 years4 years5 years6 years7 years8 yearsItem 2 Payback period for body lotion Select1 year2 years3 years4 years5 years6 years7 years8 yearsItem 3

b. The project with the SelectgreatestsmallestItem 4 net cash flows in the early years of the project life will be favored over the one with the SelectgreatestsmallestItem 5 net cash flows in the initial years.

Explanation / Answer

Answer

a)

Item 1) Recomendation : Liquid Soap

Item 2) Payback period for liquid soap = Year 4

Item 3) Payback period for body lotion = Year 6

b)

The project with the greatest net cash flows in the early years of the project life will be favored over the one with the smallest net cash flows in the initial years.

Working

Payback period for liquid soap = Period at which intial cost

Payback period for liquid soap = 4 Years .

Payback period for body lotion= Initial cost/Annual cash flow

Payback period for body lotion= 540000/90000

Payback period for body lotion= 6 years

Therefore as per Payback period method , Liquid Soap would be recomened as it took lesser Cash Payback period time.

In Cash Payback period The project with the greatest net cash flows in the early years of the project life will be favored over the one with the smallest net cash flows in the initial years.

Year Liquid Soap Cummulative Cash Flow 0 -540000 -540000 1 170000 -370000 2 150000 -220000 3 120000 -100000 4 100000 0 5 70000 70000 6 40000 110000 7 40000 150000 8 30000 180000

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