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Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five- year
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: Product A Product B Initial investment: Cost of equipment (zero salvage value) $ 290,000 $ 490,000 Annual revenues and costs: Sales revenues $ 340,000 $ 440,000 $ 154,000 $ 206,000 $ 58,000 $ 98,000 Fixed out-of-pocket operating costs $ 79,000 $ 59,000 Variable expenses Depreciation expense The company's discount rate is 15%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables.
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