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:
$$\begin{array}{lrr}
&\underline{\text{Product A}}&\underline{\text{Product B}}\
\text{Sales}&\$ 80,000&\$ 96,000\
\text{Direct materials}&3,000&6,000\
\text{Direct labor}&30,000&45,000\
\text{Other cash operating expenses}&7,500&9,000\
\
\text{New equipment costs}&75,000&100,000\
\text{Estimated useful life (no salvage)}&5 \text { years }&5 \text { years }
\end{array}
$$

The company has a 30% tax rate,uses the straight-line depreciation method,and 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?

Question

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:
 $$\begin{array}{lrr}
&\underline{\text{Product A}}&\underline{\text{Product B}}\
\text{Sales}&\$ 80,000&\$ 96,000\
\text{Direct materials}&3,000&6,000\
\text{Direct labor}&30,000&45,000\
\text{Other cash operating expenses}&7,500&9,000\
\
\text{New equipment costs}&75,000&100,000\
\text{Estimated useful life (no salvage)}&5 \text { years }&5 \text { years }
\end{array}
$$
 
The company has a 30% tax rate,uses the straight-line depreciation method,and 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?

Quizplus · Accepted Answer

The Answer of 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:
 $$\begin{array}{lrr}
&\underline{\text{Product A}}&\underline{\text{Product B}}\
\text{Sales}&\$ 80,000&\$ 96,000\
\text{Direct materials}&3,000&6,000\
\text{Direct labor}&30,000&45,000\
\text{Other cash operating expenses}&7,500&9,000\
\
\text{New equipment costs}&75,000&100,000\
\text{Estimated useful life (no salvage)}&5 \text { years }&5 \text { years }
\end{array}
$$
 
The company has a 30% tax rate,uses the straight-line depreciation method,and 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?

A Company Is Trying to Decide Which of Two New