A Company Is Trying to Decide Which of Two New

question 54

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

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