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: 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 21%. Product A $ 390,000 $ 420,000 $ 185,000 $ 78,000 $ 90,000 Product B $ 585,000 $ 500,000 $ 222,000 $ 117,000 $ 70,000 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?
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: 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 21%. Product A $ 390,000 $ 420,000 $ 185,000 $ 78,000 $ 90,000 Product B $ 585,000 $ 500,000 $ 222,000 $ 117,000 $ 70,000 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Please provide answers for the following requirements; Pay Back Period, Net Present value , Profitabilty Index, Simple Rate of Returna and Ranking. I need to understand it for my individual study after the completion of this assginment.
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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 23% each of the
last three years. He has computed the cost and revenue estimates for each product as follows:
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 21%.
Req 1
Req 2
Payback period
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 3
Product A
Req 4
Product A
5.82 x years
$ 390,000
$ 420,000
$ 185,000
$ 78,000
$ 90,000
Answer is complete but not entirely correct.
Req 5A
Product B
6.42 years
Product B
$ 585,000
$ 500,000
$ 222,000
$ 117,000
$ 70,000
Req 5B
Calculate the payback period for each product. (Round your answers to 2 decimal places.)
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