Bath Works Products Company is considering an investment in one of two new produ

Question

Bath Works Products Company is considering an investment in one of two new product lines. The investment required for either product line is $660,000. The net cash flows associated with each product are as follows:

Year Liquid Soap Body Lotion
1 110,000 210,000
2 110,000 180,000
3 110,000 150,000
4 110,000 120,000
5 110,000 80,000
6 110,000 50,000
7 110,000 50,000
8 110,000 40,000
Total 880,000 880,000

a) Recommend a product offering to Bath Works Products Company, based on the cash payback period for each product line.
b) Why is one product line preferred over the other, even though they both have the same total net cash flows through eight periods?

Explanation / Answer

a. Liquid soap payback is 6 years. 110,00 + 110,000 + 110,000 + 110,00 + 110,000 + 110,000 = 660,000 Soap body lotion payback is 4 years. 210,000 + 180,000 + 150,000 + 120,000 = 660,000 Based on cash payback period, they should choose body lotion, since it has a shorter payback period. b. Because of the time value of money. THe money will be worth more in the future, the sooner they get it.

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