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 thelast 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 revenuesVariable expensesDepreciation expenseFixed out-of-pocket operating costsReq 1The 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.Complete this question by entering your answers in the tabs below.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 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?Req 2Payback periodReq 3Product AReq 4yearsProduct A$ 290,700$ 340,000$ 154,000$ 58,000$ 79,000Product BReq 5yearsProduct BCalculate the payback period for each product. (Round your answers to 2 decimal places.)$ 490,000$ 440,000$ 206,000$ 98,000$ 59,000Req 6AReq 6B

Discount rate = 15%ParticularsProduct AProduct BCost of equipment (Zero salvage…

Answered: Lou Barlow, a divisional manager for…

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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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 19% 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 Req 1 Req 2 Complete this question by entering your answers in the tabs below. The company's discount rate is 16%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables. Req 3 Internal rate of return 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 profitability index for…
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 18% 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 16%. Product A Product B $ 170,000 $ 380,000 $ 250,000 $ 350,000 $ 120,000 $ 34,000 $ 70,000 $ 170,000 $ 76,000 $ 50,000 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. 2. Calculate the net present value for each product. 3. Calculate the internal rate of return for each product. 4. Calculate the profitability…
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Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 24% each of the last three years. Casey is considering a capital budgeting project that would require a $6,100,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 20%. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out- of-pocket costs Depreciation Total fixed expenses Net operating income Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Req 1 $ 900,000 1,220,000 Required: 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 project's simple rate of return? 4-a. Would the…
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 20% 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) $ 260,000 $ 470,000 Annual revenues and costs: Sales revenues $ 310,000 $ 410,000 Variable expenses $ 144,000 $ 194,000 Depreciation expense $ 52,000 $ 94,000 Fixed out-of-pocket operating costs $ 76,000 $ 58,000 The company’s discount rate is 18%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables. 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…
Juniper Design Limited of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of $470,000 on sales of $1,200,000. The company's average operating assets for the year were $1,400,000 and its minimum required rate of return was 15%. Required: Compute the company's residual income for the year. Residual income
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 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) Annual revenues and costs: $ 170,000 $ 380,000 Sales revenues Variable expenses $350,000 $ 250,000 $ 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 15% Click here to view Exhibit 148-1 and Exhibit 148-2, to determine the appropriate discount factor using tables 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 profitability Index for…
Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows: Division 1: Sales: Expenses: Asset investment: $200,000 $150,000 $1,000,000 Division 2: Sales: $45,000 Expenses: $35,000 Asset investment: $200,000 Conner currently requires investments to meet a rate of return on asset investment of 5%. Which division has the greatest level of "residual income"? Select one: O a. Division 1 O b. Division 2 O c. Both divisions have the same return on investment ratio
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises 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 $5,800,000 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 $ 5,100,000 Variable expenses 2,280,000 Contribution margin 2,820,000 Fixed expenses: Advertising, salaries, and otherfixed out-of-pocket costs $ 870,000 Depreciation 1,160,000 Total fixed expenses 2,030,000 Net operating income $ 790,000 Required: 2. What is the project’s internal rate of return to the nearest whole percent? 3. What is the project’s simple rate of return?
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 24% each of the last three years. Casey is considering a capital budgeting project requiring a $4,200,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 20%. The project would provide net operating income each year for five years as follows: Sales $ 4,100,000 Variable expenses 1,880,000 Contribution margin 2,220,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 770,000 Depreciation 840,000 Total fixed expenses 1,610,000 Net operating income $ 610,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the project’s net present value? 2. What is the project’s internal rate of return to the nearest whole…
Juniper Design Limited of Manchester, England, provides design services to residential developers. Last year, the company had net operating income of $440,000 on sales of $1,700,000. The company's average operating assets for the year were $1,900,000 and its minimum required rate of return was 16%. Required: Compute the company's residual income for the year. Residual income
Juniper Design Limited of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of $460,000 on sales of $1,400,000. The company's average operating assets for the year were $1,600,000 and its minimum required rate of return was 11%. Required: Compute the company's residual income for the year. Residual income

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