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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Cash payback method

Bliss Beauty Products ¡s considering an investment ¡n one of two new product lines. Theinvestment required for either product line is $2,800,000. The net cash flows associatedwith cadi product arc shown below.

a. Recommend a product offering to Bliss Beauty Products, based on the cash payback periodfor each product line.

b. Why is one product line preferred over the other, even though they both have the sametotal net cash flows?

c. Assume thatinstead of $550.000 of cash flows in Year 3 and $450,000 in ‘ar 4, the Shampoo/Conditioner had cash flows of $600,000 in Year 3 and $550,000 in Year 4. What would be thecash payback period assuming that the cash flows occur uniformly throughout the year?

To determine

(a)

Concept Introduction:

The company invest huge amount in capital with the intention to retrieve it through returns on such capital outflow. So, it is better for the company to recover initial investment as soon as possible.

Cash payback period is the time taken for earning the amount of investment made through the net cash flows.

To Find out:

The payback period for the Shampoo and Body wash division for the company.

Explanation

Company has two product's division namely Shampoo and Body wash. Initial Investment in both the division is $2,800,000

For shampoo and conditioner, the cash flow are differed in every year thus cumulative cash flow for the calculation of [ayback period should be used which is as under:

    YearShampoo/Conditioner's ReturnCumulative Cash Flow
      1  $700,000  $700,000
      2  $650,000  $1,350,000
      3  $550,000  $1,900,000
To determine

(b)

Concept Introduction:

The company invest huge amount in capital with the intention to retrieve it through returns on such capital outflow. So, it is better for the company to recover initial investment as soon as possible.

Cash payback period is the time taken for earning the amount of investment made through the net cash flows.

To find out:

The one product that should be preferred by the company.

To determine

(c)

Concept Introduction:

The company invest huge amount in capital with the intention to retrieve it through returns on such capital outflow. So, it is better for the company to recover initial investment as soon as possible.

Cash payback period is the time taken for earning the amount of investment made through the net cash flows.

To find out:

The expected payback period for the Shampoo if cash flow is change from earlier.

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