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
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) | $ 180,000 | $ 390,000 |
| Annual revenues and costs: | ||
| Sales revenues | $ 270,000 | $ 360,000 |
| Variable expenses | $ 130,000 | $ 180,000 |
| $ 44,000 | $ 86,000 | |
| Fixed out-of-pocket operating costs | $ 80,000 | $ 60,000 |
The company’s discount rate is 16%.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables.
Required:
2. Calculate the
3. Calculate the
4. Calculate the profitability index for each product.
5. Calculate the simple rate of return for each product.
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