Problem 7-23 (Algo) Comprehensive Problem [LO7-1, L07-2, L07-3, 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: 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 $ 190,000 $ 270,000 $ 128,000 $ 38,000 $72.PAR Product B $ 480,000 $ 370,000 $ 178,000 $ 80,000 $ 52.999
Problem 7-23 (Algo) Comprehensive Problem [LO7-1, L07-2, L07-3, 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: 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 $ 190,000 $ 270,000 $ 128,000 $ 38,000 $72.PAR Product B $ 480,000 $ 370,000 $ 178,000 $ 80,000 $ 52.999
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 | $120,000 | $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%.
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 1
- Req 2
- Req 3
- Req 4
- Req 5
- Req 6A
- Req 6B
**Based on the simple rate of return, which of the two products should Lou’s division accept?**
**[Decision]**
---
This problem involves evaluating two potential production investments for a company's division, taking into account initial costs, revenues, variable and fixed expenses, and the company's discount rate. Various financial metrics need](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff8bc4f6a-99bf-411e-9b9f-cf84a2eda9c4%2Ff9cbb4d5-d71d-42f7-8ba7-113979e52a15%2Fm95c0i_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 | $120,000 | $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%.
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 1
- Req 2
- Req 3
- Req 4
- Req 5
- Req 6A
- Req 6B
**Based on the simple rate of return, which of the two products should Lou’s division accept?**
**[Decision]**
---
This problem involves evaluating two potential production investments for a company's division, taking into account initial costs, revenues, variable and fixed expenses, and the company's discount rate. Various financial metrics need
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