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:
Product a Product B
sales $80,000 $96,000
Direct material 3,000 6,000
direct labor 30,000 45,000
other cash expenses 7,500 9,000
new equip cost 75,000 100,000
estimated useful life 5 yrs 5yrs
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?