A Company Is Trying to Decide Which of Two New

Essay

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