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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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.

 b.    Why is one product line preferred over the oilier even though they both have the same total net cash flows through eight periods?

a.

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Cash flow:

Cash flow is the monetary consideration (return or income) received by the business for its long-term capital investment.

To recommend: A product to L Products Company based on the cash payback period for each product line.

Explanation

Liquid soap product line is recommended, because liquid soap has a four year cash payba...

(b)

To determine

To explain: Which product line is preferred, if both have the same total net cash flow for eight years.

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