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 AProduct BInitial investment: Cost of equipment (zero salvage value)$ 290,700$ 490,000Annual revenues and costs: Sales revenues$ 340,000$ 440,000Variable expenses$ 154,000$ 206,000Depreciation expense$ 58,000$ 98,000Fixed out-of-pocket operating costs$ 79,000$ 59,000

The companys discount rate is 15%.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables.

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 profitability index for each product.

5. Calculate the simple rate of return for each product.

6a. For each measure, identify whether Product A or Product B is preferred.

6b. Based on the simple rate of return, which of the two products should Lous division accept?

Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 500,000 shares of common stock were outstanding. The interest rate on the bond payable was 10%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the companys common stock at the end of this year was $27. All of the companys sales are on account.

Weller Corporation Comparative Balance Sheet (dollars in thousands) This YearLast YearAssets Current assets: Cash$ 1,230$ 1,340Accounts receivable, net10,1007,800Inventory12,30012,300Prepaid expenses600560Total current assets24,23022,000Property and equipment: Land10,30010,300Buildings and equipment, net39,48936,462Total property and equipment49,78946,762Total assets$ 74,019$ 68,762Liabilities and Stockholders' Equity Current liabilities: Accounts payable$ 19,000$ 18,900Accrued liabilities1,040710Notes payable, short term110110Total current liabilities20,15019,720Long-term liabilities: Bonds payable9,3009,300Total liabilities29,45029,020Stockholders' equity: Common stock500500Additional paid-in capital4,0004,000Total paid-in capital4,5004,500Retained earnings40,06935,242Total stockholders' equity44,56939,742Total liabilities and stockholders' equity$ 74,019$ 68,762

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands) This YearLast YearSales$ 70,000$ 65,000Cost of goods sold43,00039,000Gross margin27,00026,000Selling and administrative expenses: Selling expenses10,80010,800Administrative expenses6,6006,600Total selling and administrative expenses17,40017,400Net operating income9,6008,600Interest expense930930Net income before taxes8,6707,670Income taxes3,4683,068Net income5,2024,602Dividends to common stockholders375200Net income added to retained earnings4,8274,402Beginning retained earnings35,24230,840Ending retained earnings$ 40,069$ 35,242

Required:

Compute the following financial data and ratios for this year:

1. Working capital. (Enter your answer in thousands.)

2. Current ratio. (Round your answer to 2 decimal places.)

3. Acid-test ratio. (Round your answer to 2 decimal places.)