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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 23% 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) $ 290,000 $ 500,000
Annual revenues and costs:
Sales revenues $ 350,000 $ 450,000
Variable expenses $ 160,000 $ 210,000
Depreciation expense $ 58,000 $ 100,000
Fixed out-of-pocket operating costs $ 80,000 $ 60,000

The companys discount rate is 16%.

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.)

2.

Calculate the net present value for each product. (Round answers to the nearest dollar.)

3.

Calculate the project profitability index for each product. (Round your answers to 2 decimal places.)

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%.)

5a.

For each measure, identify whether Product A or Product B is preferred.

5b.

Based on the simple rate of return, Lou Barlow would likely:

Accept Product A
Accept Product B
Reject both products

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