Homework

Problem 12-23 Comprehensive Problem [LO12-1, LO12-2, LO12-3, LO125, LO126] 35? Lou Barlow, a divisional managerfor Sage Company, has an opportunity to manufacture and sell one oftwo new products fora ve points year period. His annual pay raises are determined by his division's return on investment (ROI), which has exceeded 25% each ofthe last three years. He has computed the cost and revenue estimates for each product as follows: El Product A Product B Initial investment: eBook Cost of equipment (zero salvage value) $ 3?B,m $ 538,860 Annual revenues and costs: Sales revenues $ 488,606 $ 518,860 , Variable expenses $ 138,606 $ 258,860 ASK Depreciation expense $ ?4,66 $ 166,860 Fixed outofpocket operating costs $ 35,606 $ 72,860 | 5 Print , . . The company s dIscount rate Is 19%. IE Click here to view Exhibit 12B1 and Exhibit 12B2, to determine the appropriate discount factor using tables. References 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 project protability index for each product. 5. Calculate the simple rate of return for each product. 6a. For each measure, identify whether Product A or Product Bis preferred. 6b. Based on the simple rate of return, Lou Barlow would likely: Complete this question by entering your answers in the tabs below. Red 1 Red 2 Red 3 Red 4 Red 5 Req 6A Req EB Based on the simple rate of return, Lou Barlow would likely: OAccept Produd A OAccept Produd B OReject both products 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 Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.) Product A Product B Net present value $ 42,781Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5 Req 6A Req 6B Calculate the internal rate of return for each product. (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.) Product A Product B Internal rate of return 24.1 % %Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5 Req 6A Reg 6B Calculate the project profitability index for each product. (Round your answers to 2 decimal places.) Product A Product B Project profitability indexComplete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5 Req 6A Req 6B Calculate the simple rate of return for each product. (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.) Product A Product B Simple rate of return %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 For each measure, identify whether Product A or Product B is preferred. Net Present Profitability Payback Internal Rate Simple Rate of Value Index Period of Return ReturnComplete 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, Lou Barlow would likely: OAccept Product A OAccept Product B OReject both products35? aolnts Skipped eBook References Problem 12-25 Net Present Value Analysis ofa Lease or Buy Decision [LO12-2] The R'rteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the ca rs after three years of use. The company's present eet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase otternotive: The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $28,388 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: Annual cost of servicing, taxes, and licensing $ 3,680 Repairs, first year $ 1,560 Repairs, second year $ 4,860 Repairs, third year $ 6,868 l At the end ofthree years, the eet could be sold for onehalf ofthe original purchase price. tease alternative: The company can lease the cars under a threeyear lease contract. The lease cost would be $55,808 per year (the first payment due at the end of Year 1]. As part of this lease cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes. Ritewayr would be required to make a $13,688 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end of the lease contract. Riteway Ad Agency's required rate of return is 19%. l[Slick here to view Exhibit 123-1 and Exhibit 123-2, to determine the appropriate discount factor(s:r using tables. Required: 1. What is the net present value of the cash ows associated with the purchase alternative? 2. What is the net present value of the cash flows associated with the lease alternative? 3. Which alternative should the company accept? Required: 1. What is the net present value of the cash flows associated with the purchase alternative? 2. What is the net present value of the cash flows associated with the lease alternative? 3. Which alternative should the company accept? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the net present value of the cash flows associated with the purchase alternative? (Round your final answer to the nearest whole dollar amount. Enter negative amount with a minus sign.) Net present valueComplete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the net present value of the cash flows associated with the lease alternative? (Round your final answer to the nearest whole dollar amount. Enter negative amount with a minus sign.) Net present valueComplete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Which alternative should the company accept? OLease alternative OPurchase alternative