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investment (ROI), which has exceeded 23% each of the last three years. He has computed the cos revenue estimates for each product as follows: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Salo vonuo Product A $ 290,000 $ 240.000 Product B $ 490,000 $ 440.000

investment (ROI), which has exceeded 23% each of the last three years. He has computed the cos revenue estimates for each product as follows: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Salo vonuo Product A $ 290,000 $ 240.000 Product B $ 490,000 $ 440.000

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 15%. Product A $ 290,000 $ 340,000 $ 154,000 $ 58,000 $ 79,000 Product B 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. $ 490,000 $ 440,000 $ 206,000 $ 98,000 $ 59,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables. 4. Calculate the 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, which of the two products should Lou's division accept?
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 15%. Product A $ 290,000 $ 340,000 $ 154,000 $ 58,000 $ 79,000 Product B 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. $ 490,000 $ 440,000 $ 206,000 $ 98,000 $ 59,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables. 4. Calculate the 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, which of the two products should Lou's division accept?
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