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 22% 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)	$	380,000		$	575,000
Annual revenues and costs:
Sales revenues	$	410,000		$	490,000
Variable expenses	$	186,000		$	218,000
Depreciation expense	$	76,000		$	115,000
Fixed out-of-pocket operating costs	$	89,000		$	70,000

The companys discount rate is 20%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables.

Required:

1. Calculate the payback period for each product.

	Product A		Product B
Payback period		years		years

2: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

3:Calculate the internal rate of return for each product. (Round your answers to 1 decimal place i.e. 0.123 should be considered as 12.3%.)

	Product A		Product B
Internal rate of return		%		%

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

	Product A	Product B
Project profitability index

5:Calculate the simple rate of return for each product. (Round your answers to 1 decimal place i.e. 0.123 should be considered as 12.3%.)

	Product A		Product B
Simple rate of return		%		%

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

Net Present Value	Profitability Index	Payback Period	Internal Rate of Return	Simple Rate of Return

6B:Based on the simple rate of return, Lou Barlow would likely:

Check Box:

	Accept Product A Accept Product B Reject both products