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 19% 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) $ 180,000 $ 390,000 Annual revenues and costs: Sales revenues $ 270,000 $ 360,000 Variable expenses $ 130,000 $ 180,000 Depreciation expense $ 44,000 $ 86,000 Fixed out-of-pocket operating costs $ 80,000 $ 60,000 The company’s discount rate is 16%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables. Required: 3. Calculate the internal rate of return for each product. 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%.) the above was not A: 20 or 19.87 B:16 or 16.34 5. Calculate the simple rate of return for each product. 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%.) the above was not A: 17.78 B: 17.44

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 40P

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Question

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 19% 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)	$ 180,000	$ 390,000
Annual revenues and costs:
Sales revenues	$ 270,000	$ 360,000
Variable expenses	$ 130,000	$ 180,000
Depreciation expense	$ 44,000	$ 86,000
Fixed out-of-pocket operating costs	$ 80,000	$ 60,000

The company’s discount rate is 16%.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables.

Required:

3. Calculate the internal rate of return for each product.

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%.)

the above was not

A: 20 or 19.87

B:16 or 16.34

5. Calculate the simple rate of return for each product.

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%.)

the above was not A: 17.78 B: 17.44

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