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 19% 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)$190,000 $400,000Annual revenues and costs: Sales revenues$270,000 $370,000Variable expenses$128,000 $178,000Depreciation expense$38,000 $80,000Fixed out-of-pocket operating costs$72,000 $52,000

The companys discount rate is 17%.

Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor using tables.

Required:

1. Calculate the payback period for each product. Round your answers to 2 decimal places.)

Product AProduct BPayback period years years

2. Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.)

Product AProduct BNet 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 AProduct BProject 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 AProduct BSimple rate of return % %

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

Net Present ValueProfitability IndexPayback PeriodInternal Rate of ReturnSimple Rate of Return

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

Accept Product Aradio button unchecked1 of 3Accept Product Bradio button unchecked2 of 3Reject both productsradio button unchecked3 of 3