Cash Payback Method
Bath Works Product 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
|
- Recommend a product offering to Bath Works Products Company, based on the cash payback period for each product line. Please explain your reasoning.
- Why is one product line preferred over the other, even though they both have the same total net cash flows through eight periods?
- In general, what are the principal limitations of the cash payback method for evaluating capital investment proposals?