Eastgate Electronics is considering a new product line that would require an investment of $140,000 in equipment and $180,000 in working capital. Store managers expect the following pattern of net cash inflows from the new product line over the life of the investment.
Year Amount
1 ......... $70,000
2 ......... 78,000
3 ......... 72,000
4 ......... 56,000
5 ......... 50,000
6 ......... 48,000
7 ......... 44,000
a. Compute the payback period for the proposed new product line. If Eastgate requires a 4-year pre-tax payback period on its investments, should the company invest in the new product line? Explain.
b. Should Eastgate use any other capital project evaluation method(s) before making an investment decision? Explain.