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 20% 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: $250,000 $. 460,000 $300,000 $400,000 Sales revenues 190,000 $ 140,000 $ 39,000 Variable expenses $ 81,000 Depreciation expense Fixed out-of-pocket operating $ 75,000 $55,000 costs The company's discount rate is 18%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables. Required: Calculate the payback period for each product. (Round your answers to 2 decimal 1. places.) Product A Product B Payback period 2.94 years 2.97 years 4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.) Product A Product B Project profitability index 0.06 0.05 5. Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.) Product A Product B Simple rate of return
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 20% 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: $250,000 $. 460,000 $300,000 $400,000 Sales revenues 190,000 $ 140,000 $ 39,000 Variable expenses $ 81,000 Depreciation expense Fixed out-of-pocket operating $ 75,000 $55,000 costs The company's discount rate is 18%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables. Required: Calculate the payback period for each product. (Round your answers to 2 decimal 1. places.) Product A Product B Payback period 2.94 years 2.97 years 4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.) Product A Product B Project profitability index 0.06 0.05 5. Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.) Product A Product B Simple rate of return
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 20% 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:
$250,000
$.
460,000
$300,000
$400,000
Sales revenues
190,000
$ 140,000
$ 39,000
Variable expenses
$ 81,000
Depreciation expense
Fixed out-of-pocket operating
$ 75,000
$55,000
costs
The company's discount rate is 18%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount
factor using tables.
Required:
Calculate the payback period for each product. (Round your answers to 2 decimal
1.
places.)
Product A
Product B
Payback period
2.94 years
2.97
years
Transcribed Image Text:4. Calculate the project profitability index for each product. (Round discount factor(s)
to 3 decimal places. Round your answers to 2 decimal places.)
Product A Product B
Project profitability index
0.06
0.05
5. Calculate the simple rate of return for each product. (Round percentage answer to 1
decimal place. i.e. 0.1234 should be considered as 12.3%.)
Product A
Product B
Simple rate of return
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