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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

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

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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1. Khesrow Sadiqi is chief operations officer for Herat Manufacturing, and has been given 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 18% 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). $170,000 $380,000 Annual revenues and costs: Sales revenues $250,000 $350,000 Variable expenses. $120,000 $170,000 Depreciation expense $34,000 $76,000 Fixed out-of-pocket operating costs $70,000 $50,000 The company's discount rate is 16%.
Transcribed Image Text:1. Khesrow Sadiqi is chief operations officer for Herat Manufacturing, and has been given 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 18% 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). $170,000 $380,000 Annual revenues and costs: Sales revenues $250,000 $350,000 Variable expenses. $120,000 $170,000 Depreciation expense $34,000 $76,000 Fixed out-of-pocket operating costs $70,000 $50,000 The company's discount rate is 16%.
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. Which of the two products should Lou's division pursue? Why?
Transcribed Image Text: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. Which of the two products should Lou's division pursue? Why?
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