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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 23% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs The company's discount rate is 21%. Product A $ 390,000 $ 420,000 $ 185,000 $ 78,000 $ 90,000 Product B $ 585,000 $ 500,000 $ 222,000 $ 117,000 $ 70,000 Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the profitability index for each product. 4. Calculate the simple rate of return for each product. 5a. For each measure, identify whether Product A or Product B is preferred. 5b. Based on the simple rate of return, which of the two products should Lou's division accept?

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 23% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs The company's discount rate is 21%. Product A $ 390,000 $ 420,000 $ 185,000 $ 78,000 $ 90,000 Product B $ 585,000 $ 500,000 $ 222,000 $ 117,000 $ 70,000 Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the profitability index for each product. 4. Calculate the simple rate of return for each product. 5a. For each measure, identify whether Product A or Product B is preferred. 5b. Based on the simple rate of return, which of the two products should Lou's division accept?

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter7: Allocating Costs Of Support Departments And Joint Products
Section: Chapter Questions
Problem 1CE: The expected costs for the Maintenance Department of Stazler, Inc., for the coming year include:...
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Please provide answers for the following requirements; Pay Back Period, Net Present value, Profitabilty Index, Simple Rate of Returna and Ranking. I need to understand it for my individual study after the completion of this assginment. Please don't give image format
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 23% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs The company's discount rate is 21%. Req 1 Req 2 Payback period Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the profitability index for each product. 4. Calculate the simple rate of return for each product. 5a. For each measure, identify whether Product A or Product B is preferred. 5b. Based on the simple rate of return, which of the two products should Lou's division accept? Complete this question by entering your answers in the tabs below. Req 3 Product A Req 4 Product A 5.82 x years $ 390,000 $ 420,000 $ 185,000 $ 78,000 $ 90,000 Answer is complete but not entirely correct. Req 5A Product B 6.42 years Product B $ 585,000 $ 500,000 $ 222,000 $ 117,000 $ 70,000 Req 5B Calculate the payback period for each product. (Round your answers to 2 decimal places.)
Transcribed Image Text: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 23% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs The company's discount rate is 21%. Req 1 Req 2 Payback period Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the profitability index for each product. 4. Calculate the simple rate of return for each product. 5a. For each measure, identify whether Product A or Product B is preferred. 5b. Based on the simple rate of return, which of the two products should Lou's division accept? Complete this question by entering your answers in the tabs below. Req 3 Product A Req 4 Product A 5.82 x years $ 390,000 $ 420,000 $ 185,000 $ 78,000 $ 90,000 Answer is complete but not entirely correct. Req 5A Product B 6.42 years Product B $ 585,000 $ 500,000 $ 222,000 $ 117,000 $ 70,000 Req 5B Calculate the payback period for each product. (Round your answers to 2 decimal places.)
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