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 21% 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) $ 210,000 $ 420,000 Annual revenues and costs: Sales revenues $ 290,000 $ 390,000 Variable expenses $ 136,000 $ 186,000 Depreciation expense $ 42,000 $ 84,000 Fixed out-of-pocket operating costs $ 74,000 $ 54,000 The company’s discount rate is 19%. Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor using tables. Required: 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period years years 2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.) Product A Product B Net present value 3. Calculate the internal rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and round discount factor(s) to 3 decimal places.) Product A Product B Internal rate of return % % 4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.) Product A Product B Project profitability index 5. Calculate the simple rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.) Product A Product B Simple rate of return % % 6a. For each measure, identify whether Product A or Product B is preferred. Net Present Value Profitability Index Payback Period Internal Rate of Return

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 21% 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) $ 210,000 $ 420,000 Annual revenues and costs: Sales revenues $ 290,000 $ 390,000 Variable expenses $ 136,000 $ 186,000 Depreciation expense $ 42,000 $ 84,000 Fixed out-of-pocket operating costs $ 74,000 $ 54,000 The company’s discount rate is 19%. Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor using tables. Required: 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period years years 2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.) Product A Product B Net present value 3. Calculate the internal rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and round discount factor(s) to 3 decimal places.) Product A Product B Internal rate of return % % 4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.) Product A Product B Project profitability index 5. Calculate the simple rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.) Product A Product B Simple rate of return % % 6a. For each measure, identify whether Product A or Product B is preferred. Net Present Value Profitability Index Payback Period Internal Rate of Return

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter14: Quality And Environmental Cost Management

Section: Chapter Questions

Problem 43P: The following environmental cost reports for 20x3, 20x4, and 20x5 (year end December 31) are for the...

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	Product A	Product B
Initial investment:
Cost of equipment (zero salvage value)	$	210,000	$	420,000
Annual revenues and costs:
Sales revenues	$	290,000	$	390,000
Variable expenses	$	136,000	$	186,000
Depreciation expense	$	42,000	$	84,000
Fixed out-of-pocket operating costs	$	74,000	$	54,000

The company’s discount rate is 19%.

Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor using tables.

Required:

1. Calculate the payback period for each product. (Round your answers to 2 decimal places.)

	Product A	Product B
Payback period		years		years

2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.)

	Product A	Product B
Net present value

3. Calculate the internal rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and round discount factor(s) to 3 decimal places.)

	Product A		Product B
Internal rate of return		%		%

4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.)

	Product A	Product B
Project profitability index

5. Calculate the simple rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.)

	Product A	Product B
Simple rate of return		%		%

6a. For each measure, identify whether Product A or Product B is preferred.

Net Present Value	Profitability Index	Payback Period	Internal Rate of Return

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