Calculate the project profitability index for each product. 2. Calculate the simple rate of return for each product. 3. For each measure, identify whether Product A or Product B is preferred.
Calculate the project profitability index for each product. 2. Calculate the simple rate of return for each product. 3. For each measure, identify whether Product A or Product B is preferred.
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
Related questions
Question
1. Calculate the project profitability index for each product.
2. Calculate the simple
3. For each measure, identify whether Product A or Product B is preferred.
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:
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 20%.
Product A
$ 380,000
$ 410,000
$ 186,000
$ 76,000
$
89,000
Product B
$575,000
$ 490,000
$ 218,000
$ 115,000
$ 70,000
Transcribed Image Text:EXHIBIT 78-1 Present Value of $1
3
Periods 4% 5% 6% 7%
8% 9% 10% 11%
10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25%
1 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800
2 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0812 0.797 0.783 0.769 0.756 0.743 0.731 0718 0.706 0.694 0.683 0672 0.661 0.650 0.640
0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.564 0.551 0.537 0.524 0.512
0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.467 0.451 0.437 0.423 0.410
0.822 0.784 0.747 0.713 0681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0456 0.437 0.419 0402 0.386 0.370 0.355 0.341 0.328
0790 0.746 0.705 0666 0.630 0.596 0.564 0.535 0.507 0.480 0456 0432 0410 0.390 0.370 0.352 0.335 0.319 0.303 0.289 0.275 0.262
0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0263 0.249 0.235 0222 0.210
0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0218 0204 0.191 0.179 0.168
0.703 0645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0225 0.209 0.194 0180 0.167 0.155 0.144 0.134
0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0270 0247 0.227 0.208 0191 0176 0.162 0149 0137 0.126 0.116 0.107
0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261 0237 0.215 0.195 0178 0162 0148 0135 0123 0112 0.103 0.094 0.086
0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0187 0168 0152 0137 0124 0112 0102 0.092 0.083 0.076 0.069
0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0163 0145 0130 0116 0104 0.093 0.084 0.075 0.068 0.061 0.055
0.577 0.505 0.442 0.388 0.340 0.299 0.263 0232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.044
0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0140 0123 0108 0.095 0.084 0.074 0.065 0.057 0.051 0.045 0.040 0.035
0.534 0.458 0.394 0.339 0.292 0252 0.218 0188 0.163 0141 0123 0107 0.093 0.081 0.071 0.062 0.054 0.047 0.042 0.036 0.032 0.028
0.513 0.436 0.371 0.317 0.270 0.231 0198 0170 0146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 0.039 0.034 0.030 0026 0.023
0.494 0.416 0.350 0.296 0.250 0.212 0.180 0153 0130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.032 0.028 0.024 0.021 0.018
0.475 0.396 0.331 0.277 0.232 0.194 0.164 0138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.027 0.023 0.020 0.017 0.014
0.456 0.377 0.312 0.258 0.215 0.178 0.149 0124 0104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.022 0.019 0016 0.014 0.012
0164 0.135 0112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022 0.018 0.015 0.013 0.011 0.009
0123 0101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018 0.015 0.013 0.011 0.009 0.007
0112 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015 0.012 0.010 0.009 0.007 0.006
0.158 0.126 0.102 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013 0.010 0.008 0.007 0.006 0.005
0.146 0.116 0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0016 0.013 0.010 0.009 0.007 0.006 0.005 0.004
0.361 0281 0.220 0172 0135 0.106 0.084 0.066 0.053 0.042 0.033 0026 0.021 0.017 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.003
0.347 0268 0.207 0.161 0.125 0.098 0.076 0.060 0.047 0.037 0.029 0.023 0.018 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.003 0.002
0.333 0.255 0.196 0.150 0.116 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0016 0.012 0.010 0.008 0.006 0.005 0.004 0.003 0.002 0.002
0.321 0.243 0.185 0141 0.107 0.082 0.063 0.048 0.037 0.029 0.022 0.017 0.014 0.011 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.002
0.308 0.231 0.174 0131 0.099 0.075 0.057 0.044 0.033 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004 0.003 0.003 0.002 0.002 0.001
0208 0.142 0.097 0.067 0.046 0.032 0.022 0.015 0.011 0.008 0.005 0.004 0.003 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000
0.439 0.359 0.294 0242 0.199
0.422 0.342 0.278 0.226 0184
0150
0.406 0.326 0262 0.211 0170
0138
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EXHIBIT 78-2 Present Value of an Annuity of $1 in Arrears;
2
11.118 10.380 9712 9.108
Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24 % 25 %
1 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800
1886 1859 1833 1808 1783 1759 1736 1713 1690 1668 1647 1626 1605 1585 1566 1547 1528 1509 1492 1474 1457 1440
2.775 2.723 2.673 2624 2.577 2.531 2.487 2444 2.402 2361 2322 2283 2246 2210 2174 2140 2106 2074 2042 2011 1981 1952
3.630 3.546 3.465 3.387 3.312 3.240 3170 3.102 3.037 2.974 2914 2.855 2798 2743 2.690 2.639 2.589 2.540 2.494 2448 2404 2362
5 4.452 4.329 4212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3274 3199 3.127 3.058 2.991 2.926 2.864 2803 2745 2689
6 5.242 5.076 4.917 4.767 4623 4.486 4.355 4231 4111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 3.245 3.167 3.092 3.020 2.951
6.002 5.786 5.582 5.389 5.206 5.033 4.868 4712 4.564 4.423 4288 4160 4.039 3.922 3.812 3706 3.605 3.508 3.416 3.327 3.242 3161
6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4799 4.639 4.487 4344 4.207 4.078 3.954 3.837 3.726 3.619 3.518 3.421 3.329
7.435 7108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4772 4.607 4.451 4.303 4163 4031 3.905 3.786 3.673 3.566 3.463
8.111 7722 7.360 7024 6710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4339 4192 4.054 3.923 3.799 3.682 3.571
8.760 8.306 7887 7499 7139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4836 4656 4.486 4.327 4.177 4035 3.902 3.776 3.656
9.385 8.863 8.384 7943 7536 7161 6.814 6.492 6.194 5.918 5.660 5.421 5197 4988 4.793 4611 4.439 4.278 4127 3.985 3.851 3.725
9.986 9.394 8.853 8.358 7.904 7487 7103 6.750 6.424 6122 5.842 5.583 5.342 5.118 4.910 4715 4.533 4.362 4203 4053 3.912 3.780
10.563 9.899 9.295 8.745 8.244 7786 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4802 4611 4.432 4265 4108 3.962 3.824
8.559 8061 7.606 7191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4876 4.675 4.489 4.315 4153 4.001 3.859
11652 10.838 10106 9.447 8.851 8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4938 4.730 4.536 4357 4189 4.033 3.887
12.166 11.274 10.477 9763 9122 8.544 8.022 7549 7120 6729 6.373 6.047 5749 5.475 5.222 4.990 4775 4.576 4.391 4219 4.059 3.910
12.659 11690 10.828 10.059 9.372 8.756 8.201 7702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 4.608 4.419 4243 4.080 3.928
13134 12.085 11158 10.336 9.604 8.950 8.365 7839 7366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 4.635 4442 4263 4.097 3.942
13 590 12.462
462 11.470 10.594 9818
818 9129 8.514 7963 7.469 7025 6623 6.259 5.929 5.628 5.353 5101 4.870 4657 4.460 4279 4110 3.954
21 14.029 12.821 11.764 10.836 10.017 9.292 8.649 8.075 7562 7102 6.687 6.312 5.973 5.665 5.384 5.127 4.891 4.675 4.476 4.292 4.121 3.963
22 14.451 13.163 12.042 11.061 10.201 9.442 8.772 8176 7.645 7170 6.743 6.359 6.011 5.696 5.410 5149 4.909 4.690 4.488 4.302 4130 3.970
23 14.857 13.489 12.303 11272 10.371 9.580 8.883 8.266 7718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925 4.703 4.499 4.311 4.137 3.976
24 15 247 13.799 12.550 11.469 10.529 9707 8.985 8.348 7784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937 4713 4.507 4318 4143 3.981
25 15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948 4721 4.514 4.323 4.147 3.985
15.983 14.375 13.003 11.826 10.810 9.929 9.161 8.488 7.896 7372 6.906 6.491 6118 5.783 5.480 5.206 4.956 4728 4520 4328 4151 3.988
16.330 14.643 13.211 11.987 10.935 10.027 9.237 8.548 7943 7409 6.935 6.514 6136 5.798 5.492 5.215 4.964 4734 4.524 4332 4154 3.990
16.663 14.898 13.406 12.137 11.051 10.116 9.307 8602 7984 7441 6.961 6.534 6152 5.810 5.502 5.223 4.970 4739 4528 4.335 4157 3.992
16.984 15.141 13.591 12.278 11.158 10.198 9.370 8.650 8.022 7470 6983 6.551 6166 5.820 5.510 5229 4.975 4743 4531 4.337 4.159 3.994
17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7003 6.566 6.177 5.829 5.517 5.235 4.979 4.746 4534 4339 4.160 3.995
19.793 17159 15.046 13.332 11.925 10.757
15.046 13.332 11.925 10.757 9.779 8.951 8.244 7.634 7105 6.642 6233 5.871 5.548 5.258 4.997 4.760 4544 4.347 4.166 3.999
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0.390 0.310 0.247 0197
0.375 0.295 0.233 0184
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