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. 5b. Based on the simple rate of return, Lou Barlow would likely: Accept Product A Accept Product B Reject both products Lou Barlow, a
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5b. Based on the simple rate of return, Lou Barlow would likely:
Accept Product A
Accept Product B
Reject both products
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 24% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A $320,000 Initial investment Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $370,000 $168,000 $ 64,000 $ 82,000 Product B $ 515,000 $ 470,000 $ 218,000 $ 103,000 $ 62,000 The company's discount rate is 22%. Use Excel or a financial calculator to solve any time value of money problems. Required: 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product B Product A years Payback period years 2. Calculate the net present value for each product. (Round answers to the nearest dollar.) Product A Product B Net present value 3. Calculate the project profitability index for each product. (Round your answers to 2 decimal places.) Product A Product B Project profitability index 4. Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.) Product A Product B Simple rate of return % % 5a. For each measure, identify whether Product A or Product B is preferred. Net Present Profitability Value Index Payback PeriodStep by Step Solution
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