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