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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

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 divisions return on investment (ROI), which has exceeded 18% 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) $ 170,000 $ 380,000
Annual revenues and costs:
Sales revenues $ 250,000 $ 350,000
Variable expenses $ 120,000 $ 170,000
Depreciation expense $ 34,000 $ 76,000
Fixed out-of-pocket operating costs $ 70,000 $ 50,000

The companys discount rate is 16%.

Calculate the project profitability index for each product.

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