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 $ 500,000 Annual revenues and costs: Sales revenues $ 350,000 $ 450,000 Variable expenses $ 160,000 $ 210,000 Depreciation expense $ 58,000 $ 100,000 Fixed out-of-pocket operating costs $ 80,000 $ 60,000 The company’s discount rate is 16%. Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor using tables. Required: 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.) 2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.) 3. Calculate the internal rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and round discount factor(s) to 3 decimal places.)
Problem 8-23 Comprehensive Problem [LO8-1, LO8-2, LO8-3, LO8-5, LO8-6]
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
| Product A | Product B | ||||
| Initial investment: | |||||
| Cost of equipment (zero salvage value) | $ | 290,000 | $ | 500,000 | |
| Annual revenues and costs: | |||||
| Sales revenues | $ | 350,000 | $ | 450,000 | |
| Variable expenses | $ | 160,000 | $ | 210,000 | |
| $ | 58,000 | $ | 100,000 | ||
| Fixed out-of-pocket operating costs | $ | 80,000 | $ | 60,000 | |
|
|
The company’s discount rate is 16%.
Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor using tables.
Required:
1. Calculate the payback period for each product. (Round your answers to 2 decimal places.)
2. Calculate the
3. Calculate the
4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.)
5. Calculate the simple rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.)
6a. For each measure, identify whether Product A or Product B is preferred.
6b. Based on the simple rate of return, Lou Barlow would likely:
| Accept Product A | |
| Accept Product B | |
| Reject both products |
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