Question

Bliss Beauty Products is considering an investment in one of two new product lines. The investment required for either product line is $2,800,000. The net cash flows associated with each product are shown below.

Year		Shampoo/Conditioner				Body Wash
1			$700,000			$400,000
2			650,000			400,000
3			550,000			400,000
4			450,000			400,000
5			450,000			400,000
6			200,000			400,000
7			100,000			400,000
8			100,000			400,000
Total			$3,200,000			$3,200,000

a. Recommend a product offering to Bliss Beauty Products, based on the cash payback period for each product line.

Payback period for Shampoo/Conditioner:  

Payback period for Body Wash:  

b. All of the following statements are true regarding the product lines except:

1. The cash payback periods are different between the two product lines.
2. The Body Wash earns cash faster than does the Shampoo/Conditioner.
3. The cash payback method emphasizes the initial years' net cash flows in determining the cash payback period.
4. The project with the greatest net cash flows in the early years of the project life will be favored over the one with less net cash flows in the initial years.

c. Assume that instead of $550,000 of cash flows in Year 3 and $450,000 in Year 4, the Shampoo/Conditioner had cash flows of $600,000 in Year 3 and $550,000 in Year 4. What would be the cash payback period assuming that the cash flows occur uniformly throughout the year?

Answer 1

Answer to Part a. Calculation of Payback Period for Shampoo/ Conditioner Product: Year Cash Inflow Cumulative Cash Inflow 11 700,000 700,000 650,000 1,350,000 550,000 1,900,000 450,000 2,350,000 450,000 2,800,000 200,000 3,000,000 100,000 3,100,000 100,000 3,200,000 Payback Period for Shampoo/ Conditioner : 5 years 7 Calculation of Payback Period for Bodywash Product: Year Cash Inflow Cumulative Cash Inflow 1 400,000 400,000 2 400,000 800,000 400,000 1,200,000 400,000 1,600,000 400,000 2,000,000 6 400,000 2,400,000 400,000 2,800,000 400,000 3,200,000 Payback period for Bodywash : 7 years

Answer to Part b.

All the statements are true except Statement b i.e. The Body wash earns cash faster than does the Shampoo/ Conditioners, as its Payback period is more than Shampoo/ Conditioners.

Answer to Part c. Calculation of Payback Period for Shampoo/ Conditioner Product: Year Cash Inflow Cumulative Cash Inflow 700,000 700,000 650,000 1,350,000 600,000 1,950,000 550,000 2,500,000 450,000 2,950,000 200,000 3,150,000 100,000 3,250,000 100,000 3,350,000 Payback Period for Shampoo/ Conditioner: 4 years + ($2,800,000 - $2,500,000) / $450,000 Payback period for Shampoo/ Conditioner : 4.67 years