A Company Is Trying to Decide Which of Two New

question 116

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:
$\begin{array} { l | l | l } \hline & \text { Product A } & \text { Product B } \\\hline \text { Sales } & \$ 80,000 & \$ 96,000 \\ \hline \text { Direct materials } & 3,000 & 6,000 \\\hline \text { Direct labor } & 30,000 & 45,000 \\\hline \text { Other cash operating expenses } & 7,500 & 9,000 \\\hline \text { New equipment costs }& 75,000 & 100,000 \\\hline \text { Estimated useful life (no salvage) }& 5 \text { years } & 5 \text { years }\end{array}$
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:

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A social unit in the United States that can include nuclear families, extended families, or other configurations, characterized by diverse structures and relationships.

Economic Impact

The effect of an event, policy, or market fluctuation on the economy of a specific area, sector, or the global economy as a whole.

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Financial or material assistance provided by the government to individuals, groups, or institutions in need.