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Limitations of the cash payback method

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Cash Payback Method

Bath Works Product Company is considering an investment in one of two new product lines. The investment required for either product line is $660,000. The net cash flows associated with each product are as follows:

Year Liquid Soap 
 Body Lotion
1 
 $110,000 
 $210,000
2
 110,000
 180,000
3
 110,000
 150,000
4
 110,000
 120,000
5
 110,000
 80,000
6
 110,000
 50,000
7
 110,000
 50,000
8
 110,000
 40,000
Total
 $880,000 $880,000

  1. Recommend a product offering to Bath Works Products Company, based on the cash payback period for each product line. Please explain your reasoning. 
  2. Why is one product line preferred over the other, even though they both have the same total net cash flows through eight periods? 
  3. In general, what are the principal limitations of the cash payback method for evaluating capital investment proposals?

Reference no: EM13510853

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