A Company Is Trying to Decide Which of Two New

question 7

Essay

A company is trying to decide which of two new product lines to introduce in the coming year. The predicted revenue and cost data for each product line follows:
$\begin{array}{lcc}&\underline{\text { Product A}} &\underline{\text {Product B }}\\ \text { Sales } & \$ 80,000 & \$ 96,000 \\\text { Direct materials } & 3,000 & 6,000 \\\text { Direct labor } & 30,000 & 45,000 \\\text { Other cash operating expenses } & 7,500 & 9,000 \\\text { New equipment costs } & 75,000 & 100,000 \\\text { Estimated useful life (no salvage } & 5 \text { years } & 5 \text { years }\end{array}$
The company has a 30% tax rate, it uses the straight-line depreciation method, and it predicts that cash flows will be spread evenly throughout each year. Calculate each product's payback period. If the company requires a payback period of three years or less, which, if either, product should be chosen?

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Definitions:

Reflective Style

A mode of expression that emphasizes thoughtful consideration and examination of one’s experiences and actions.

Supportive Style

An approach in communication or leadership that emphasizes encouragement, empathy, and listening to meet the needs and concerns of others.

Communication Styles Theory

An examination of how different methods of communication impact relationships and understanding among people.

Learned Behavior

Behavior that individuals acquire through interaction with the environment and through the experience of or observing others in their social contexts.