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 22% 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) $340,000 $540,000 Annual revenues and costs: Sales revenues Variable expenses Depreciation expense $ 380,000 $ 460,000 $ 170,000 $ 206,000 $ 68,000 $ 108,000 Fixed out-of-pocket operating costs $ 86,000 $ 66,000 The company's discount rate is 20%. Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the profitability index for each product. 4. Calculate the simple rate of return for each product. 5a. For each measure, identify whether Product A or Product B is preferred. 5b. Based on the simple rate of return, which of the two products should Lou's division accept? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5A Req 5B Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.) Product A Product B Net present value < Req 1 Req 3 >
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 22% 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) $340,000 $540,000 Annual revenues and costs: Sales revenues Variable expenses Depreciation expense $ 380,000 $ 460,000 $ 170,000 $ 206,000 $ 68,000 $ 108,000 Fixed out-of-pocket operating costs $ 86,000 $ 66,000 The company's discount rate is 20%. Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the profitability index for each product. 4. Calculate the simple rate of return for each product. 5a. For each measure, identify whether Product A or Product B is preferred. 5b. Based on the simple rate of return, which of the two products should Lou's division accept? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5A Req 5B Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.) Product A Product B Net present value < Req 1 Req 3 >
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
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 22% 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)
$340,000
$540,000
Annual revenues and costs:
Sales revenues
Variable expenses
Depreciation expense
$ 380,000
$ 460,000
$ 170,000
$ 206,000
$ 68,000
$ 108,000
Fixed out-of-pocket operating costs
$ 86,000
$ 66,000
The company's discount rate is 20%.
Required:
1. Calculate the payback period for each product.
2. Calculate the net present value for each product.
3. Calculate the profitability index for each product.
4. Calculate the simple rate of return for each product.
5a. For each measure, identify whether Product A or Product B is preferred.
5b. Based on the simple rate of return, which of the two products should Lou's division accept?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2
Req 3
Req 4
Req 5A
Req 5B
Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.)
Product A
Product B
Net present value
< Req 1
Req 3 >
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