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 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A 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 17%. Click here to view Exhibit 7B-1 and Exhibit 7B-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. Product B $ 400,000 $ 370,000 $ 178,000 $ 190,000 $ 270,000 $ 128,000 $ 38,000 $ 72,000 $ 80,000 $ 52,000 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 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A 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 17%. Click here to view Exhibit 7B-1 and Exhibit 7B-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. Product B $ 400,000 $ 370,000 $ 178,000 $ 190,000 $ 270,000 $ 128,000 $ 38,000 $ 72,000 $ 80,000 $ 52,000 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?
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
Section: Chapter Questions
Problem 1PS
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![**Problem 7-23 (Algo) Comprehensive Problem [LO7-1, LO7-2, LO7-3, LO7-5, LO7-6]**
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 19% 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) | $190,000 | $400,000 |
| **Annual revenues and costs:** | | |
| Sales revenues | $270,000 | $370,000 |
| Variable expenses | $138,000 | $178,000 |
| Depreciation expense | $38,000 | $88,000 |
| Fixed out-of-pocket operating costs | $72,000 | $52,000 |
The company’s discount rate is 17%.
Click here to view Exhibit 7B-1 and Exhibit 7B-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?
**Complete this question by entering your answers in the tabs below.**
**Req 4**
*Calculate the profitability index for each product.*
*Note: Round your answers to 2 decimal places.*
| | **Product A** | **Product B** |
|------------------|---------------|---------------|
| Profitability index | | |
\[ < Req 3 \] \[ Req 5 > \]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff8bc4f6a-99bf-411e-9b9f-cf84a2eda9c4%2F7941e64f-e1d3-44bb-899a-f00dc2037a89%2Fc5v32gq_processed.png&w=3840&q=75)
Transcribed Image Text:**Problem 7-23 (Algo) Comprehensive Problem [LO7-1, LO7-2, LO7-3, LO7-5, LO7-6]**
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 19% 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) | $190,000 | $400,000 |
| **Annual revenues and costs:** | | |
| Sales revenues | $270,000 | $370,000 |
| Variable expenses | $138,000 | $178,000 |
| Depreciation expense | $38,000 | $88,000 |
| Fixed out-of-pocket operating costs | $72,000 | $52,000 |
The company’s discount rate is 17%.
Click here to view Exhibit 7B-1 and Exhibit 7B-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?
**Complete this question by entering your answers in the tabs below.**
**Req 4**
*Calculate the profitability index for each product.*
*Note: Round your answers to 2 decimal places.*
| | **Product A** | **Product B** |
|------------------|---------------|---------------|
| Profitability index | | |
\[ < Req 3 \] \[ Req 5 > \]
![**Problem 7-23 (Algo) Comprehensive Problem [LO7-1, LO7-2, LO7-3, LO7-5, LO7-6]**
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 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
### Product Details
| Description | Product A | Product B |
|------------------------------------------|-----------|-----------|
| Initial investment: | | |
| Cost of equipment (zero salvage value) | $190,000 | $400,000 |
| Annual revenues and costs: | | |
| Sales revenues | $270,000 | $370,000 |
| Variable expenses | $136,000 | $178,000 |
| Depreciation expense | $38,000 | $80,000 |
| Fixed out-of-pocket operating costs | $72,000 | $52,000 |
The company's discount rate is 17%.
You need to view **Exhibit 7B-1 and Exhibit 7B-2** to determine the appropriate discount factor using tables.
### Required Calculations
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.
6. **For each measure**:
- Identify whether Product A or Product B is preferred.
- Based on the simple rate of return, determine which of the two products Lou’s division should accept.
### Input Section
Enter your answers in the tabs below for each requirement:
- **Req 1** through **Req 6B**.
**Example Requirement**:
- Calculate the internal rate of return for each product.
*Note*: Round your percentage answers to 1 decimal place.
#### Input Fields
- **Product A - Internal rate of return: %**
- **Product B - Internal rate of return: %**
This structured approach helps in understanding the financial implications of each investment option available to Lou Barlow,](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff8bc4f6a-99bf-411e-9b9f-cf84a2eda9c4%2F7941e64f-e1d3-44bb-899a-f00dc2037a89%2Fh2uavdc_processed.png&w=3840&q=75)
Transcribed Image Text:**Problem 7-23 (Algo) Comprehensive Problem [LO7-1, LO7-2, LO7-3, LO7-5, LO7-6]**
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 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
### Product Details
| Description | Product A | Product B |
|------------------------------------------|-----------|-----------|
| Initial investment: | | |
| Cost of equipment (zero salvage value) | $190,000 | $400,000 |
| Annual revenues and costs: | | |
| Sales revenues | $270,000 | $370,000 |
| Variable expenses | $136,000 | $178,000 |
| Depreciation expense | $38,000 | $80,000 |
| Fixed out-of-pocket operating costs | $72,000 | $52,000 |
The company's discount rate is 17%.
You need to view **Exhibit 7B-1 and Exhibit 7B-2** to determine the appropriate discount factor using tables.
### Required Calculations
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.
6. **For each measure**:
- Identify whether Product A or Product B is preferred.
- Based on the simple rate of return, determine which of the two products Lou’s division should accept.
### Input Section
Enter your answers in the tabs below for each requirement:
- **Req 1** through **Req 6B**.
**Example Requirement**:
- Calculate the internal rate of return for each product.
*Note*: Round your percentage answers to 1 decimal place.
#### Input Fields
- **Product A - Internal rate of return: %**
- **Product B - Internal rate of return: %**
This structured approach helps in understanding the financial implications of each investment option available to Lou Barlow,
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