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 25% 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)	$	370,000		$	530,000
Annual revenues and costs:
Sales revenues	$	400,000		$	510,000
Variable expenses	$	180,000		$	250,000
Depreciation expense	$	74,000		$	106,000
Fixed out-of-pocket operating costs	$	85,000		$	72,000

The companys discount rate is 19%.

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.

Requirement 1

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

	Product A		Product B
Payback period		years		years

Requirement 2

Using Excel, 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

Requirement 3

Using Excel, calculate the internal rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be considered as 12.3%.)

	Product A		Product B
Internal rate of return		%		%

Requirement 4

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

	Product A	Product B
Profitability index

Requirement 6a

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

Net Present Value	Profitability Index	Payback Period	Internal Rate of Return