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: Initial investment: Cost of equipment (zero salvage value). Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs i Product A Product B $ 350,000 $ 550,000 $ 390,000 $ 470,000 $ 178,000 $ 210,000 $ 70,000 $ 110,000 $ 87,000 $ 67,000 The company's discount rate is 20%. Click here to view Exhibit 281 and Exhibit ZB-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.
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: Initial investment: Cost of equipment (zero salvage value). Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs i Product A Product B $ 350,000 $ 550,000 $ 390,000 $ 470,000 $ 178,000 $ 210,000 $ 70,000 $ 110,000 $ 87,000 $ 67,000 The company's discount rate is 20%. Click here to view Exhibit 281 and Exhibit ZB-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.
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
N5.
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:
Initial investment:
Cost of equipment (zero salvage value).
Annual revenues and costs:
Sales revenues
Variable expenses
Depreciation expense
Fixed out-of-pocket operating costs
Product A
Required:
1. Calculate the payback period for each product.
2. Calculate the net present value for each product.
Product B
$ 350,000
$ 390,000
178,000
$
$
70,000
$
$ 550,000
$ 470,000
$ 210,000
$ 110,000
87,000 $ 67,000
The company's discount rate is 20%.
Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor using tables.
3. Calculate the internal rate of return for each product.
4. Calculate the project 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, Lou Barlow would likely:
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Step 1: Concept.
VIEWStep 2: Computation of annual cash inflows.
VIEWStep 3: answer to part 1. Computation of Payback period.
VIEWStep 4: answer to part 2. Computation of Net present value (NPV ).
VIEWStep 5: Computation of Net present value (NPV ) if rate of discount is 30% .
VIEWStep 6: answer to part 3. Computation of internal rate of return .
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