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 th 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 The company's discount rate is 20%. Click here to view Exhibit 14B-1 and Exhibit 148-2, to determine the appropriate discount factor using tables. Required: $ 370,000 $ 400,000 $ 180,000 $ 74,000 $ 88,000 $570,000 $ 480,000 $ 214,000 $ 114,000 $ 68,000
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 22% each of th 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 The company's discount rate is 20%. Click here to view Exhibit 14B-1 and Exhibit 148-2, to determine the appropriate discount factor using tables. Required: $ 370,000 $ 400,000 $ 180,000 $ 74,000 $ 88,000 $570,000 $ 480,000 $ 214,000 $ 114,000 $ 68,000
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
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 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
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 20%.
Click here to view Exhibit 14B-1 and Exhibit 148-2, to determine the appropriate discount factor using tables.
$ 370,000
$ 400,000
$ 180,000
$ 74,000
$ 88,000
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
$570,000
$ 480,000
$ 214,000
$ 114,000
$ 68,000
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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F338bbcc0-1926-4ea7-8639-5de1e572b613%2F938adeba-2d66-4278-b3d0-35f05ab5951a%2Fzve6qqc_processed.jpeg&w=3840&q=75)
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
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 20%.
Click here to view Exhibit 14B-1 and Exhibit 148-2, to determine the appropriate discount factor using tables.
$ 370,000
$ 400,000
$ 180,000
$ 74,000
$ 88,000
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
$570,000
$ 480,000
$ 214,000
$ 114,000
$ 68,000
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?
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