12) 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.

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		$	490,000
Annual revenues and costs:
Sales revenues	$	340,000		$	440,000
Variable expenses	$	154,000		$	206,000
Depreciation expense	$	58,000		$	98,000
Fixed out-of-pocket operating costs	$	79,000		$	59,000

The companys discount rate is 15%.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables.

This is a great review problem that reinforces the individual concepts covered using a comprehensive example.

To answer the questions, you must first calculate the annual net cash inflows as follows: Sales revenue minus variable expenses minus fixed out-of-pocket operating costs.

Then you will calculate the following: payback period (even flows), net present value (NPV), internal rate of return (IRR) and profitability index.

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.