Lou Barlow, a divisional manager for Sage Company, has an ooportunity 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: S 380,000 $ 575,000 Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 410,000 $ 490,000 $ 186,000 $ 218,00e $ 76,000 $ 115,800 $ 89,800 s 70,80e The company's discount rate is 20%. Click here to view Exhibit 128-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables. Requlred: 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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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 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)
Annual revenues and costs:
$ 380,000
$ 575, 00e
Sales revenues
Variable expenses
Depreciation expense
Fixed out-of-pocket operating costs
$ 418,800
$ 186,800
76,000
$ 89,000
$ 498,00e
$ 218,080
$ 115,000
$ 78,000
The company's discount rate is 20%.
Click here to view Exhibit 12B-1 and Exhibit 12B-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 project 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, Lou Barlow would likely:
Complete this question by entering your answers in the tabs below.
Req 1
Req 2
Req 3
Reg 4
Reg 5
Req 6A
Reg 68
Calculate the payback period for each product. (Round your answers to 2 decimal places.)
Product A
Product B
Payback period
years
уears
< Reg 1
Req 2 >
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 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) Annual revenues and costs: $ 380,000 $ 575, 00e Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 418,800 $ 186,800 76,000 $ 89,000 $ 498,00e $ 218,080 $ 115,000 $ 78,000 The company's discount rate is 20%. Click here to view Exhibit 12B-1 and Exhibit 12B-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 project 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, Lou Barlow would likely: Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Reg 4 Reg 5 Req 6A Reg 68 Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period years уears < Reg 1 Req 2 >
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