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 24% 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) $ 330,000 $ 515,000 Annual revenues and costs: Sales revenues $ 370,000 $ 470,000 Variable expenses $ 168,000 $ 218,000 Depreciation expense $ 66,000 $ 103,000 Fixed out-of-pocket operating costs $ 82,000 $ 68,000 The company’s discount rate is 15%. 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.
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 24% 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) $ 330,000 $ 515,000 Annual revenues and costs: Sales revenues $ 370,000 $ 470,000 Variable expenses $ 168,000 $ 218,000 Depreciation expense $ 66,000 $ 103,000 Fixed out-of-pocket operating costs $ 82,000 $ 68,000 The company’s discount rate is 15%. 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.
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
Product A | Product B | ||||
Initial investment: | |||||
Cost of equipment (zero salvage value) | $ | 330,000 | $ | 515,000 | |
Annual revenues and costs: | |||||
Sales revenues | $ | 370,000 | $ | 470,000 | |
Variable expenses | $ | 168,000 | $ | 218,000 | |
$ | 66,000 | $ | 103,000 | ||
Fixed out-of-pocket operating costs | $ | 82,000 | $ | 68,000 | |
The company’s discount rate is 15%.
Required:
1. Calculate the payback period for each product.
2. Calculate the
3. Calculate the
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