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 23% 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) $ 290,000 $ 490,000 Annual revenues and costs: Sales revenues $ 340,000 $ 440,000 Variable expenses $ 154,000 $ 206,000 Depreciation expense $ 58,000 $ 98,000 Fixed out-of-pocket operating costs $ 79,000 $ 59,000
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 23% 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) $ 290,000 $ 490,000 Annual revenues and costs: Sales revenues $ 340,000 $ 440,000 Variable expenses $ 154,000 $ 206,000 Depreciation expense $ 58,000 $ 98,000 Fixed out-of-pocket operating costs $ 79,000 $ 59,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
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) | $ | 290,000 | $ | 490,000 | |
| Annual revenues and costs: | |||||
| Sales revenues | $ | 340,000 | $ | 440,000 | |
| Variable expenses | $ | 154,000 | $ | 206,000 | |
| $ | 58,000 | $ | 98,000 | ||
| Fixed out-of-pocket operating costs | $ | 79,000 | $ | 59,000 | |
The company’s discount rate is 15%.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables.
4. Calculate the profitability index for each product.
5. Calculate the simple
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?
Transcribed Image Text:EXHIBIT 14B-2 Present Value of an Annulty of $1 In Arrears;
(1+ r)"
Periods
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
1
0.962
0.952 0.943
0.935
0.926
0.917
0.909 0.901 0.893 0.885 0.877
0.870 0.862
0.855 0.847
0.840
0.833
0.826
0.820 0.813
0.806 0.800
2
1.886
1.859
1.833
1.808
1.783
1.759
1.736
1.713
1.690
1.668
1.647
1.626 1.605
1.585
1.566 1.547
1.528
1.509
1.492 1.474
1.457
1.440
3
2.775
2.723
2.673
2.624
2.577
2.531
2.487
2.444
2.402 2.361
2.322 2.283 2.246 2.210
2.174
2.140
2.106
2.074
2.042 2.011
1.981
1.952
4
3.630
3.546
3.465
3.387
3.312
3.240
3.170
3.102
3.037 2.974
2.914
2.855 2.798
2.743
2.690 2.639 2.589 2.540 2.494 2.448 2.404 2.362
4.452
4.329
4.212
4.100
3.993
3.890
3.791
3.696
3.605 3.517
3.433
3.352
3.274 3.199
3.127
3.058 2.991
2.926 2.864 2.803 2.745
2.689
6
5.242
5.076
4.917
4.767
4.623
4.486
4.355 4.231
4.111
3.998 3.889
3.784 3.685 3.589 3.498 3.410
3.326 3.245 3.167
3.092 3.020 2.951
7
6.002
5.786
5.582
5.389
5.206
5.033
4.868
4.712
4.564 4.423
4.288 4.160
4.039 3.922 3.812
3.706
3.605 3.508 3.416
3.327
3.242 3.161
8
6.733
6.463
6.210
5.971
5.747
5.535
5.335 5.146
4.968 4.799
4.639 4.487
4.344 4.207
4.078 3.954 3.837
3.726
3.619
3.518
3.421
3.329
7.435
7.108
6.802
6.515
6.247
5.995
5.759
5.537
5.328 5.132
4.946 4.772
4.607 4.451
4.303 4.163
4.031
3.905 3.786
3.673
3.566 3.463
10
8.111
7.722
7.360
7.024
6.710
6.418
6.145
5.889 5.650 5.426
5.216
5.019
4.833 4.659
4.494 4.339
4.192
4.054 3.923 3.799
3.682 3.571
11
8.760
8.306
7.887
7.499
7.139
6.805
6.495 6.207
5.938 5.687
5.453 5.234 5.029 4.836 4.656 4.486
4.327 4.177
4.035 3.902 3.776
3.656
12
9.385
8.863
8.384
7.943
7.536
7.161
6.814
6.492 6.194
5.918
5.660 5.421 5.197
4.988
4.793
4.611
4.439 4.278
4.127
3.985 3.851
3.725
13
9.986
9.394
8.853
8.358
7.904
7.487
7.103
6.750
6.424 6.122
5.842 5.583
5.342 5.118
4.910
4.715
4.533
4.362 4.203 4.053
3.912
3.780
14
10.563 9.899
9.295
8.745
8.244
7.786
7.367
6.982 6.628 6.302 6.002 5.724
5.468 5.229 5.008 4.802 4.611
4.432
4.265 4.108
3.962 3.824
15
11.118
10.380 9.712
9.108
8.559
8.061
7.606
7.191
6.811
6.462 6.142
5.847 5.575
5.324 5.092 4.876
4.675 4.489
4.315
4.153
4.001
3.859
16
11.652
10.838 10.106
9.447
8.851
8.313
7.824
7.379
6.974 6.604
6.265 5.954 5.668 5.405 5.162
4.938 4.730
4.536 4.357 4.189
4.033 3.887
17
12.166
11.274
10.477
9.763
9.122
8.544
8.022 7.549
7.120
6.729
6.373
6.047 5.749
5.475
5.222 4.990 4.775
4.576
4.391
4.219
4.059 3.910
18
12.659 11.690
10.828 10.059 9.372
8.756
8.201
7.702
7.250
6.840
6.467 6.128
5.818
5.534 5.273 5.033
4.812
4.608
4.419
4.243 4.080 3.928
19
13.134
12.085 11.158
10.336 9.604
8.950
8.365 7.839
7.366 6.938 6.550 6.198
5.877
5.584 5.316 5.070
4.843 4.635
4.442
4.263 4.097
3.942
20
13.590 12.462 11.470
10.594 9.818
9.129
8.514
7.963 7.469
7.025
6.623 6.259 5.929 5.628 5.353 5.101
4.870
4.657 4.460 4.279
4.110
3.954
21
14.029 12.821
11.764
10.836 10.017
9.292
8.649
8.075 7.562
7.102
6.687
6.312
5.973 5.665 5.384
5.127
4.891
4.675
4.476 4.292 4.121
3.963
22
14.451
13.163
12.042 11.061
10.201 9.442
8.772
8.176
7.645
7.170
6.743
6.359 6.011
5.696 5.410
5.149
4.909 4.690
4.488
4.302 4.130
3.970
23
14.857
13.489 12.303 11.272
10.371 9.580
8.883
8.266 7.718
7.230
6.792 6.399 6.044 5.723 5.432 5.167
4.925 4.703
4.499 4.311
4.137
3.976
24
15.247 13.799
12.550 11.469
10.529 9.707
8.985 8.348 7.784
7.283
6.835 6.434 6.073 5.746
5.451 5.182
4.937
4.713
4.507 4.318
4.143
3.981
25
15.622 14.094 12.783
11.654
10.675 9.823
9.077
8.422 7.843
7.330
6.873
6.464 6.097 5.766
5.467 5.195
4.948 4.721
4.514
4.323 4.147
3.985
26
15 983 14.375
13.003 11.826
10.810 9.929
9.161
8.488
8 488 7.896 7.372
6.906 6.491
6.118
5.783
5.480 5.206 4.956 4.728
4.520 4.328 4.151
3.988
27
16.330 14.643
13.211
11.987
10.935 10.027
9.237
8.548
7.943
7.409
6.935 6.514 6136
5.798
5.492 5.215
4.964 4.734
4.524 4.332
4.154
3.990
28
16.663 14.898 13.406
12.137
11.051
10.116
9.307 8.602 7.984
7.441
6.961
6.534 6.152
5.810
5.502 5.223 4.970 4.739
4.528 4.335 4.157
3.992
29
16.984 15,141
13.591
12.278 11.158
10.198
9.370 8.650 8.022 7.470
6.983 6.551
6.166
5.820 5.510 5.229 4.975
4.743
4.531
4.337
4.159
3.994
30
17.292
15.372 13.765
12.409 11.258 10.274 9.427
8.694 8.055 7.496 6.566 6.177
7.003
5.829 5.517 5.235 4.979
4.746
4.534 4.339
4.160
3.995
40
19.793
17.159
15.046 13.332 11.925 10.757 9.779
8.951
8.244 7.634
7105
6.642
6.233 5.871
5.548 5.258 4.997 4.760
4.544 4.347
4.166
3.999
Transcribed Image Text:EXHIBIT 14B-2 Present Value of an Annulty of $1 In Arrears;
(1+ r)"
Periods
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
1
0.962
0.952 0.943
0.935
0.926
0.917
0.909 0.901 0.893 0.885 0.877
0.870 0.862
0.855 0.847
0.840
0.833
0.826
0.820 0.813
0.806 0.800
2
1.886
1.859
1.833
1.808
1.783
1.759
1.736
1.713
1.690
1.668
1.647
1.626 1.605
1.585
1.566 1.547
1.528
1.509
1.492 1.474
1.457
1.440
3
2.775
2.723
2.673
2.624
2.577
2.531
2.487
2.444
2.402 2.361
2.322 2.283 2.246 2.210
2.174
2.140
2.106
2.074
2.042 2.011
1.981
1.952
4
3.630
3.546
3.465
3.387
3.312
3.240
3.170
3.102
3.037 2.974
2.914
2.855 2.798
2.743
2.690 2.639 2.589 2.540 2.494 2.448 2.404 2.362
4.452
4.329
4.212
4.100
3.993
3.890
3.791
3.696
3.605 3.517
3.433
3.352
3.274 3.199
3.127
3.058 2.991
2.926 2.864 2.803 2.745
2.689
6
5.242
5.076
4.917
4.767
4.623
4.486
4.355 4.231
4.111
3.998 3.889
3.784 3.685 3.589 3.498 3.410
3.326 3.245 3.167
3.092 3.020 2.951
7
6.002
5.786
5.582
5.389
5.206
5.033
4.868
4.712
4.564 4.423
4.288 4.160
4.039 3.922 3.812
3.706
3.605 3.508 3.416
3.327
3.242 3.161
8
6.733
6.463
6.210
5.971
5.747
5.535
5.335 5.146
4.968 4.799
4.639 4.487
4.344 4.207
4.078 3.954 3.837
3.726
3.619
3.518
3.421
3.329
7.435
7.108
6.802
6.515
6.247
5.995
5.759
5.537
5.328 5.132
4.946 4.772
4.607 4.451
4.303 4.163
4.031
3.905 3.786
3.673
3.566 3.463
10
8.111
7.722
7.360
7.024
6.710
6.418
6.145
5.889 5.650 5.426
5.216
5.019
4.833 4.659
4.494 4.339
4.192
4.054 3.923 3.799
3.682 3.571
11
8.760
8.306
7.887
7.499
7.139
6.805
6.495 6.207
5.938 5.687
5.453 5.234 5.029 4.836 4.656 4.486
4.327 4.177
4.035 3.902 3.776
3.656
12
9.385
8.863
8.384
7.943
7.536
7.161
6.814
6.492 6.194
5.918
5.660 5.421 5.197
4.988
4.793
4.611
4.439 4.278
4.127
3.985 3.851
3.725
13
9.986
9.394
8.853
8.358
7.904
7.487
7.103
6.750
6.424 6.122
5.842 5.583
5.342 5.118
4.910
4.715
4.533
4.362 4.203 4.053
3.912
3.780
14
10.563 9.899
9.295
8.745
8.244
7.786
7.367
6.982 6.628 6.302 6.002 5.724
5.468 5.229 5.008 4.802 4.611
4.432
4.265 4.108
3.962 3.824
15
11.118
10.380 9.712
9.108
8.559
8.061
7.606
7.191
6.811
6.462 6.142
5.847 5.575
5.324 5.092 4.876
4.675 4.489
4.315
4.153
4.001
3.859
16
11.652
10.838 10.106
9.447
8.851
8.313
7.824
7.379
6.974 6.604
6.265 5.954 5.668 5.405 5.162
4.938 4.730
4.536 4.357 4.189
4.033 3.887
17
12.166
11.274
10.477
9.763
9.122
8.544
8.022 7.549
7.120
6.729
6.373
6.047 5.749
5.475
5.222 4.990 4.775
4.576
4.391
4.219
4.059 3.910
18
12.659 11.690
10.828 10.059 9.372
8.756
8.201
7.702
7.250
6.840
6.467 6.128
5.818
5.534 5.273 5.033
4.812
4.608
4.419
4.243 4.080 3.928
19
13.134
12.085 11.158
10.336 9.604
8.950
8.365 7.839
7.366 6.938 6.550 6.198
5.877
5.584 5.316 5.070
4.843 4.635
4.442
4.263 4.097
3.942
20
13.590 12.462 11.470
10.594 9.818
9.129
8.514
7.963 7.469
7.025
6.623 6.259 5.929 5.628 5.353 5.101
4.870
4.657 4.460 4.279
4.110
3.954
21
14.029 12.821
11.764
10.836 10.017
9.292
8.649
8.075 7.562
7.102
6.687
6.312
5.973 5.665 5.384
5.127
4.891
4.675
4.476 4.292 4.121
3.963
22
14.451
13.163
12.042 11.061
10.201 9.442
8.772
8.176
7.645
7.170
6.743
6.359 6.011
5.696 5.410
5.149
4.909 4.690
4.488
4.302 4.130
3.970
23
14.857
13.489 12.303 11.272
10.371 9.580
8.883
8.266 7.718
7.230
6.792 6.399 6.044 5.723 5.432 5.167
4.925 4.703
4.499 4.311
4.137
3.976
24
15.247 13.799
12.550 11.469
10.529 9.707
8.985 8.348 7.784
7.283
6.835 6.434 6.073 5.746
5.451 5.182
4.937
4.713
4.507 4.318
4.143
3.981
25
15.622 14.094 12.783
11.654
10.675 9.823
9.077
8.422 7.843
7.330
6.873
6.464 6.097 5.766
5.467 5.195
4.948 4.721
4.514
4.323 4.147
3.985
26
15 983 14.375
13.003 11.826
10.810 9.929
9.161
8.488
8 488 7.896 7.372
6.906 6.491
6.118
5.783
5.480 5.206 4.956 4.728
4.520 4.328 4.151
3.988
27
16.330 14.643
13.211
11.987
10.935 10.027
9.237
8.548
7.943
7.409
6.935 6.514 6136
5.798
5.492 5.215
4.964 4.734
4.524 4.332
4.154
3.990
28
16.663 14.898 13.406
12.137
11.051
10.116
9.307 8.602 7.984
7.441
6.961
6.534 6.152
5.810
5.502 5.223 4.970 4.739
4.528 4.335 4.157
3.992
29
16.984 15,141
13.591
12.278 11.158
10.198
9.370 8.650 8.022 7.470
6.983 6.551
6.166
5.820 5.510 5.229 4.975
4.743
4.531
4.337
4.159
3.994
30
17.292
15.372 13.765
12.409 11.258 10.274 9.427
8.694 8.055 7.496 6.566 6.177
7.003
5.829 5.517 5.235 4.979
4.746
4.534 4.339
4.160
3.995
40
19.793
17.159
15.046 13.332 11.925 10.757 9.779
8.951
8.244 7.634
7105
6.642
6.233 5.871
5.548 5.258 4.997 4.760
4.544 4.347
4.166
3.999
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