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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.
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 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 490,000 $280,000 $ value) Annual revenues and costs: 440,000 Sales revenues $340,000 $ Variable expenses $156,000 $206,000 Depreciation expense $ 56,000 $98,000 Fixed out-of-pocket operating $ 79,000 $59,000 costs The company's discount rate is 15%. Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period years years Required: 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period years years 2. Calculate the net present value for each product. (Use the appropriate table to determine the discount factor(s).) Net present value Product A Product B 3. Calculate the project profitability index for each product. (Use the appropriate table to determine the discount factor(s). Round your answers to 2 decimal places.) Project profitability index Product A Product B 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% and use the appropriate table to determine the discount factor(s).) Simple rate of return Product A Product B % % 5a. For each measure, identify whether Product A or Product B is preferred. Net Present Profitability Value Index Payback Period 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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