Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 22% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B Initial investment: Cost of equipment (zero salvage value) $ 370,000 $ 570,000 Annual revenues and costs: Sales revenues $ 400,000 $ 480,000 Variable expenses $ 180,000 $ 214,000 Depreciation expense $ 74,000 $ 114,000 Fixed out-of-pocket operating costs $ 88,000 $ 68,000 The company’s discount rate is 20%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables. Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the internal rate of return for each product. 4. Calculate the profitability index for each product. 5. Calculate the simple rate of return for each product. 6a. For each measure, identify whether Product A or Product B is preferred. 6b. Based on the simple rate of return, which of the two products should Lou’s division accept? alculate the payback period for each product. (Round your answers to 2 decimal places.)
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 22% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
| Product A | Product B | ||||
| Initial investment: | |||||
| Cost of equipment (zero salvage value) | $ | 370,000 | $ | 570,000 | |
| Annual revenues and costs: | |||||
| Sales revenues | $ | 400,000 | $ | 480,000 | |
| Variable expenses | $ | 180,000 | $ | 214,000 | |
| $ | 74,000 | $ | 114,000 | ||
| Fixed out-of-pocket operating costs | $ | 88,000 | $ | 68,000 | |
The company’s discount rate is 20%.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables.
Required:
1. Calculate the payback period for each product.
2. Calculate the
3. Calculate the
4. Calculate the profitability index for each product.
5. Calculate the simple rate of return for each product.
6a. For each measure, identify whether Product A or Product B is preferred.
6b. Based on the simple rate of return, which of the two products should Lou’s division accept?
alculate the payback period for each product. (Round your answers to 2 decimal places.)
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Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.)
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Calculate the internal rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be considered as 12.3%.)
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Calculate the profitability index for each product. (Round your answers to 2 decimal places.)
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Calculate the simple rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be considered as 12.3%.)
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For each measure, identify whether Product A or Product B is preferred.
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Based on the simple rate of return, which of the two products should Lou’s division accept?
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