Response to the following problem:
Charisma Beauty Products is considering an investment in one of two new product lines. The investment required for either product line is $1,125,000. The net cash flows associated with each product are shown on the next page:
|
Year
|
Shampoo/Conditioner
|
Body Wash
|
|
1
|
$ 450,000
|
$ 187, 500
|
|
2
|
375,000
|
187,500
|
|
3
|
300,000
|
187,500
|
|
4
|
100,000
|
187,500
|
|
5
|
85,000
|
187,500
|
|
6
|
80,000
|
187,503
|
|
7
|
60,000
|
187,500
|
|
8
|
50,000
|
187,500
|
|
Total
|
$ 1 ,500,000
|
$1,500000
|
a. Recommend a product offering to Charisma Beauty Products, based on the cash payback period for each product line.
b. Why is one product line preferred over the other, even though they both have the same total net cash flows through eight periods?
c. Assume that instead of $300,000 of cash flows in Year 3 and $100,000 in Year 4, the Shampoo/Conditioner had cash flows of $250,000 in Year 3 and $150,000 in Year 4. What would be the cash payback period assuming that the cash flows occur uniformly throughout the year?