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:

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?

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:

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?

Orlando Villafane · Accepted Answer

Final Answer :  *Annual depreciation:A = $ 75,000/5 yrs. = $15,000; B = $100,000/5 yrs. = $20,000Payback periods:(A) ($75,000/$32,150) = 2.3 years; (B) ($100,000/$31,200) = 3.2 yearsBased on the payback period, Product A should be chosen

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