Question

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.

Answer 1

b) TRUE