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 20% 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)

$

260,000

$

470,000

Annual revenues and costs:

Sales revenues

$

310,000

$

410,000

Variable expenses

$

144,000

$

194,000

Depreciation expense

$

40,000

$

82,000

Fixed out-of-pocket operating costs

$

76,000

$

58,000

1. Calculate Payback Perod

Payback Period	Product A	Product B
	?	?

2. Calculate Net Present Value 18% discount Rate Using:

Product A	Product B
Period 1) 0.847	Period 1) 0.847
Period 2) 0.718	Period 2) 1.566
Period 3) 0.609	Period 3) 2.174
Period 4) 0.516	Period 4) 2.690
Period 5) 0.437	Period 5) 3.127

Net Present Value Product A ?

Net Present Vlaue Product B ?

3. Caculate Internal Rate of Return

IRR	Product A	Product B
	%	%

4. Calculate Profitability Index

PI	Product A	Product B

5. Calculate Simple Rate of Return

SRR	Product A	Product B

6. Which Product is Preferred

NPV	Profitability Index	Payback Period	IRR
A or B	A or B	A or B	A or B