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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:
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.
Payback period for liquid soap
Payback period for body lotion
B. The project with the_____net cash flows in the early years of the project life will be favored over the one with the______net cash flows in the initial years.

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Answer:

1a. Payback period for LIQUID SOAP =4 years

Payback period for BODY LOTION =6 years

1b. GREATEST; LESS

Explanation:

1a.Calculation for the Payback period for liquid soap

LIQUID SOAP

Year   Cash flow  Cumulative Cash flow

1 $170,000 $170,000

2 (150,000+170,000) =320,000

3 (120,000+320,000)=440,000

4 (100,000+440,000)=540,000

5 (70,000+540,000)= 610,000

6 (40,000+610,000)= 650,000

7 (40,000+650,000)= 690,000

8 (30,000+690,000)= 720,000

The Payback period for LIQUID SOAP will  be 4 years

Calculation for the Payback period of body lotion

BODY LOTIO

Year   Cash flow  Cumulative Cash flow

1  $90,000 $90,000

2  (90,000+90,000)=180,000

3  (90,000+180,000)=270,000

4  (90,000+270,000)=360,000

5 (90,000+360,000)=450,000

6 (90,000+450,000)=540,000

7 (90,000+540,000)=630,000

8  (90,000+630,000)=720,000

The Payback period for BODY LOTION will  be 6 years

Based on the calculation above for both liquid soap and body lotion the product offering i will recommend to Lily Products Company, based on the cash payback period for each product line will be LIQUID SOAP because it has a 4 years payback period.

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 LESS net cash flows in the initial years.

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