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.

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$)$ $ $370,000$ $ $570,000$

Annual revenues and costs:

Sales revenues $ $400,000$ $ $480,000$

Variable expenses $ $180,000$ $ $214,000$

Depreciation expense $ $74,000$ $ $114,000$

Fixed out$-$of$-$pocket operating costs $ $88,000$ $ $68,000$

The company$$s discount rate is $20\%.$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor using tables.

This is a great review problem that reinforces the individual concepts covered using a comprehensive example.

To answer the questions, you must first calculate the annual net cash inflows as follows: Sales revenue minus variable expenses minus fixed out$-$of$-$pocket operating costs.

Then you will calculate the following: payback period $($even flows$),$ net present value $($NPV$),$ internal rate of return $($IRR$)$ and profitability index.

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.