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 25% 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: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 340,000 $ 525,000 $ 380,000 $ 172,000 $ 68,000 $ 83,000 $ 480,000 $ 225,000 $ 105,000 $66,000 The company's discount rate is 17%. 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 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?
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 25% 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: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 340,000 $ 525,000 $ 380,000 $ 172,000 $ 68,000 $ 83,000 $ 480,000 $ 225,000 $ 105,000 $66,000 The company's discount rate is 17%. 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 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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 25% 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:
$ 340,000
$ 525,000
Sales revenues
Variable expenses
Depreciation expense
Fixed out-of-pocket operating costs
$ 380,000
$ 172,000
$68,000
$ 83,000
$ 480,000
$ 225,000
$ 105,000
$ 66,000
The company's discount rate is 17%.
Click here
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 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?
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