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: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: sales revenues Variable expenses Depreciation expense fixed out-of-pocket operating costs

Product A

Initial Investment: Cost of equipment - $ 280,000

Annual revenues and costs:

Sales Revenue - $ 330,000

Variable expenses - $ 152,000

Depreciation expense - $ 56,000

Fixed out-of-pocket operating costs - $ 78,000

Product B

Initial Investment: Cost of equipment - $ 480,000

Annual revenues and costs:

Sales Revenue - $ 430,000

Variable expenses - $ 202,000

Depreciation expense - $ 96,000

Fixed out-of-pocket operating costs - $ 60,000

The company's discount rate is 14% Required (Use Excel for 2 - 4):

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.

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