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.

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

Section: Chapter Questions

Problem 1Q

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Casey Nelson Is a divisional manager for Pigeon Company. His annual pay ralses are largely determined by his division's return on Investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $4,100,000 Investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 19%. The project would provide net operating Income each year for five years as follows: Sales $ 4,000, 000 1,840, e0e Variable expenses Contribution margin 2,160,000 Fixed expenses: Advertising, salaries, and other fixed out- of-pocket costs $ 760, 000 820, 000 Depreciation Total fixed expenses 1,580, e00 Net operating income $ 580, 000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Requlred: 1. What is the project's net present value? 2. What is the project's Internal rate of return to the nearest whole percent? 3. What Is the…
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