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 22% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product B Product A $ 350,000 $ 550,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 390,000 $ 178,000 $ 70,000 $ 87,000 470,000 $ 210,000 $ 110,000 $ 67,000 The company's discount rate is 20%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables. 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 project profitability index for each product. 5. Calculate the simple rate of return for each product. 6a. For each measure, identify whether Product A or Product B is preferred. 6b. Based on the simple rate of return, Lou Barlow would likely: Complete this question by entering your answers in the tabs below. Reg 1 Req 2 Reg 3 Reg 4 Reg 5 Req 6A Reg 6B Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period years years Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Req 5 Req 6A Reg 6B 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 Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Req5 Req 6A Reg 6B Calculate the internal rate of return for each product. (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%) Product B Product A % Internal rate of return % Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Req5 Reg 6 Req 6B Calculate the project profitability index for each product. (Round your answers to 2 decimal places.) Product Product B Project profitability index Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Req 6A Reg 6B Calculate the simple rate of return for each product. (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.) Product A % Product B % Simple rate of return Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Req3 Req4 Req5 Req 6A Reg 6B For each measure, identify whether Product A or Product B is preferred. Net Present Value Profitability Index Payback Period Internal Rate Simple Rate of of Return Return Complete this question by entering your answers in the tabs below. Req1 Reg 2 Reg 3 Reg 4 Reg 5 Req 6A Req 6B Based on the simple rate of return, Lou Barlow would likely: Accept Product A Accept Product B Reject both products
