Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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.
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 21% each of the last three years. He computed the following cost and revenue estimates for each product: Initial investment: Product A Product B Cost of equipment (zero salvage value). Annual revenues and costs: $ 270,000 $ 480,000 $ 320,000 $ 420,000 $ 148,000 $ 54,000 $ 198,000 $ 96,000 $ 77,000 $ 57,000 Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs The company's discount rate is 19%. Click here to view Exhibit 148-1 and Exhibit 148-2. to determine the appropriate discount factor(s) using tables. Required: 1. Calculate each product's payback period. 2. Calculate each product's net present value. 3. Calculate each product's internal rate of return. 4. Calculate each product's profitability index. 5. Calculate each product's simple rate of return. 6a. For each measure, identify whether Product A or Product B is preferred. 6b. Based on the simple rate of return, which of the two products should Lou's division accept?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started