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Discount rate is 15% Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for
Discount rate is 15%
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 exceede 17% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B $180,000 $ 390,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $260,000 $124,000 $ 36,000 $ 71,000 $ 350,000 $ 174,000 $ 78,000 $ 51,000 2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.) Product A Product B Net present value 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.) Product A Product B Internal rate of return % 4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.) Product A Product B Project profitability index 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%.) Product A Product B Simple rate of return 6a. For each measure, identify whether Product A or Product B is preferred. Net Present Value Profitability Index Payback Period Internal Rate of Return 6b. Based on the simple rate of return, Lou Barlow would likely: Accept Product A O Accept Product B Reject both productsStep by Step Solution
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