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 24% 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) $ 330,000 $ 515,000 Annual revenues and costs: Sales revenues $ 370,000 $ 470,000 Variable expenses $ 168,000 $ 218,000 Depreciation expense $ 66,000 $ 103,000 Fixed out-of-pocket operating costs $ 82,000 $ 68,000 The company’s discount rate is 15%. 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. Product A (Years) Product B (Years) Payback Period 2. Calculate the net present value for each product. Product A Product B Net present value 3. Calculate the internal rate of return for each product. Product A Product B Internal rate of return % (Round to one decimal place)
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
| Product A | Product B | |
|---|---|---|
| Initial investment: | ||
| Cost of equipment (zero salvage value) | $ 330,000 | $ 515,000 |
| Annual revenues and costs: | ||
| Sales revenues | $ 370,000 | $ 470,000 |
| Variable expenses | $ 168,000 | $ 218,000 |
| Depreciation expense | $ 66,000 | $ 103,000 |
| Fixed out-of-pocket operating costs | $ 82,000 | $ 68,000 |
The company’s discount rate is 15%.
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.
| Product A (Years) | Product B (Years) | |
| Payback Period |
2. Calculate the
| Product A | Product B | |
| Net present value |
3. Calculate the
| Product A | Product B | |
| Internal rate of return % (Round to one decimal place) |
4. Calculate the profitability index for each product.
| Product A | Product B | |
| Profitability Index |
5. Calculate the simple rate of return for each product.
| Product A | Product B | |
| Simple rate of return % (Round to 1 decimal place) |
6a. For each measure, identify whether Product A or Product B is preferred.
| Net present value | Profitability Index | Payback Period | Internal Rate of Return | Simple Rate of Return |
6b. Based on the simple rate of return, which of the two products should Lou’s division accept? (Multiple Choice - Choose 1)
| Accept Product A |
| Accept Product B |
| Reject both products |
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