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 21% 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 Product A Product B $ 210,000 $ 290,000 $ 138,000 42,000 $ $ 74,000 $ $ 420,000 $ 390,000 $ 186,000 $ 84,000 54,000

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
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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 21% 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 19%.
Product A
$ 210,000
$ 290,000
$
$
$
Product B
$ 420,000
$ 390,000
$ 186,000
138,000
42,000
74,000 $ 54,000
$ 84,000
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 21% 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 19%. Product A $ 210,000 $ 290,000 $ $ $ Product B $ 420,000 $ 390,000 $ 186,000 138,000 42,000 74,000 $ 54,000 $ 84,000
Req 1
Req 2
Payback period
Req 3
Product A
Calculate the payback period for each product. (Round your answers to 2 decimal places.)
Req 4
years
Product B
Req 6A
2.80 years
Transcribed Image Text:Req 1 Req 2 Payback period Req 3 Product A Calculate the payback period for each product. (Round your answers to 2 decimal places.) Req 4 years Product B Req 6A 2.80 years
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