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 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)	$ 300,000	$ 500,000
Annual revenues and costs:
Sales revenues	$ 350,000	$ 450,000
Variable expenses	$ 160,000	$ 210,000
Depreciation expense	$ 60,000	$ 100,000
Fixed out-of-pocket operating costs	$ 80,000	$ 61,000

The companys discount rate is 16%.

Click here to view Exhibit 14B-1 and Exhibit 14B-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 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, which of the two products should Lous division accept?

EXHIBIT 14B-1 Present Value of Sl: 1 (1+r) n Periods 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 40 4% 5% % 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 0.925 0.907 0.890 0.873 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.769 0.756 0.756 0.743 0.743 0.731 0.7180.706 0.694 0.683 0.672 0.661 0.650 0.640 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.564 0.551 0.537 0.524 0.512 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.572 0.5520.534 0.516 0.499 0.482 0.467 0.451 0.437 0.423 0.410 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 0.386 0.370 0.355 0.341 0.328 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.564 0.535 0.507 0.480 0.456 0.456 0.432 0.432 0.410 0.390 0.370 0.352 0.335 0.319 0.303 0.303 0.289 0.275 0.262 0.760 0.711 0.665 0.623 0.5830.547 0.513 0.482 0.482 0.452 0.425 0.400 0.376 0.376 0.354 0.333 0.314 0.296 0.279 0.263 0.249 0.235 0.2490.235 0.222 0.210 0.731 0.677 0.627 0.5820.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.2490.233 0.218 0.204 0.1910.179 0.168 0.703 0.6450.592 0.544 0.500 0.460 0.424 0.391 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.1940.180 0.167 0.155 0.144 0.134 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.149 0.137 0.126 0.116 0.107 0.650 0.585 0.527 0.475 0.429 0.3880.350 0.317 0.287 0.261 0.261 0.237 0.215 0.1950.178 0.162 0.148 0.135 0.123 0.112 0.1030.094 0.086 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.187 0.168 0.152 0.137 0.124 0.112 0.1020.092 0.083 0.076 0.069 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.084 0.075 0.068 0.061 0.055 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.044 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.057 0.051 0.0450.040 0.035 0.534 0.458 0.394 0.3390.292 0.252 0.218 0.1880.163 0.141 0.123 0.107 0.093 0.081 0.071 0.107 0.062 0.054 0.047 0.042 0.036 0.032 0.028 0.513 0.436 0.371 0.317 0.270 0.231 0.1980.170 0.146 0.125 0.108 0.093 0.080 | 0.069 0.060 0.052 0.045 0.039 0.034 0.030 0.026 0.023 0.494 0.416 0.350 0.296 0.250 0.212 0.1800.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.032 0.028 0.024 0.021 0.018 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.027 0.023 0.020 | 0.017 | 0.014 0.456 0.377 0.3120.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.022 0.019 0.016 0.014 0.012 0.439 0.359 0.294 0.242 0.242 0.199 0.1990.164 0.135 0.112 0.093 0.077 0.064 0.053 0.037 0.031 0.026 0.022 0.018 | 0.015 0.013 0.0110.009 0.422 0.342 0.278 0.226 0.184 0.150 0.150 0.123 0.123 0.101 0.083 0.068 0.056 0.046 0.046 0.038 0.032 0.026 0.022 0.018 | 0.015 0.013 0.011 0.009 0.007 0.4060.3260.262 0.211 0.1700.138 0.112 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 | 0.015 0.012 0.0100.009 0.007 0.006 0.390 0.310 0.247 0.197 0.158 0.126 0.1020.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013 0.010 0.008 0.007 0.006 0.005 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.0160.013 0.010 | 0.0090.007 0.006 0.005 0.004 0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 0.026 0.021 0.026 0.017 0.014 0.0110.009 0.007 0.006 0.005 0.0040.003 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 | 0.047 0.037 0.029 0.029 0.023 0.023 0.0180.014 0.014 0.011 0.0090.007 0.006 0.005 0.0040.003 0.002 0.333 0.255 0.1960.150 0.116 0.090 0.090 0.069 0.069 0.054 0.054 0.042 0.033 0.026 0.0200.0160.0120.010 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.321 0.243 0.185 0.141 0.107 | 0.082 0.082 0.063 0.048 0.037 0.029 0.022 0.017 | 0.014 0.011 0.017 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.002 0.308 0.231 0.231 0.174 0.174 0.131 0.131 0.099 0.099 0.075 0.075 0.057 0.044 0.033 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004 0.003 0.003 0.002 0.002 0.001 0.208 0.142 0.097 0.067 0.046 0.032 0.046 0.032 0.022 0.015 0.011 0.008 0.0110.008 0.005 0.0040.003 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000 0.044 EXHIBIT 14B-2 Present Value of an Annuity of $1 in Arrears: 11[1-1(1+r)n] Periods 1 2 3 4 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 40 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 1.886 1.859 1.833 1.808 1.783 1.759 1.736 | 1.713 1.690 1.668 1.647 1.626 1.605 1.585 | 1.566 1.547 | 1.528 | 1.509 1.492 1.474 1.457 1.440 2.775 2.723 2.673 2.624 2.577 2.531 | 2.487 2.487 2.444 | 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 2.074 2.042 2.011 1.981 1.952 3.630 3.546 | 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 | 2.914 | 2.855 2.798 2.743 2.690 2.639 2.589 2.540 2.494 | 2.448 2.404 2.362 4.452 4.329 4.212 4.100 3.993 3.890 3.791 | 3.696 3.605 3.696 3.605 3.517 3.433 3.352 3.274 3.1993.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689 5.242 5.0764.917 4.767 4.623 4.4864.355 4.231 4.111 3.9983.889 | 3.784 3.685 3.589 | 3.498 3.410 3.326 3.245 3.167 3.092 3.020 2.951 6.002 5.786 5.582 5.389 5.206 5.033 4.8684.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 3.508 3.416 3.327 3.242 3.161 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.335 5.146 4.968 4.799 4.639 | 4.487 4.344 | 4.207 4.078 3.954 3.837 | 3.726 3.619 3.518 3.421 3.329 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 5.132 4.946 | 4.772 4.607 4.451 4.303 4.163 4.163 4.031 4.031 | 3.905 3.905 3.786 3.673 3.566 3.463 8.111 7.722 7.360 7.0246.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.1924.054 3.923 3.799 3.682 3.571 8.760 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.0294.836 | 4.656 4.486 4.327 4.1774.035 3.902 3.776 3.656 9.385 8.863 8.384 7.943 7.536 7.161 | 6.814 6.4926.1945.918 5.660 5.421 5.1974.988 4.793 4.611 4.439 | 4.278 4.127 3.985 3.851 | 3.725 9.986 | 9.394 8.853 8.358 7.904 7.487 7.487 7.103 6.750 6.424 6.122 5.8425.583 5.342 5.118 5.1184.910 4.715 4.533 4.3624.203 4.053 3.912 3.780 10.563 9.899 9.295 8.745 8.244 7.786 7.3676.982 6.628 6.302 6.002 5.724 5.468 5.229 5.0084.802 4.611 4.432 4.265 4.108 3.962 3.824 11.118 | 10.380 9.712 9.108 8.559 8.061 7.6067.191 6.8116.462 6.142 5.847 5.575 5.324 5.092 4.8764.675 4.489 4.315 4.1534.001 3.859 11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 7.3796.974 6.9746.604 6.265 5.954 5.668 5.405 5.1624.9384.730 4.536 4.357 4.189 4.033 3.887 12.166 | 11.274 10.477 | 9.763 9.122 8.544 8.022 7.549 7.1206.7296.373 6.047 7.120 6.7296.373 6.047 5.749 5.475 5.222 4.990 4.775 4.576 4.391 4.391 4.219 4.2194.059 4.059 3.910 12.659 11.690 10.828 10.0599.372 8.756 8.201 8.7568.201 7.702 7.250 6.840 6.467 | 6.128 5.818 5.534 5.273 5.033 5.033 4.812 4.608 4.419 4.243 | 4.080 3.928 13.134 | 12.085 | 11.158 10.336 9.604 8.950 8.950 8.365 8.365 7.839 7.839 7.366 7.3666.938 6.550 6.1985.8775.584 5.316 5.070 4.843 4.635 4.442 4.263 4.097 3.942 13.590 12.462 | 11.470 10.594 | 9.818 9.129 8.514 7.963 7.469 | 7.025 6.623 6.259 5.929 5.628 5.353 5.3535.101 4.870 4.657 4.460 4.279 4.110 | 3.954 14.029 12.821 11.764 10.836 | 10.017 | 9.292 8.649 8.075 | 7.562 7.1026.6876.3125.973 5.9735.665 5.384 5.127 4.891 4.6754.476 4.292 4.121 3.963 14.451 13.163 12.042 11.061 | 10.201 | 9.442 8.7728.176 7.645 7.170 6.743 6.359 6.011 | 5.696 5.696 5.410 5.149 4.909 4.690 4.488 4.302 4.130 3.970 14.857 13.489 12.303 11.272 10.371 9.5808.8838.266 8.266 7.718 7.230 6.7926.399 6.044 5.7235.432 5.167 4.925 4.703 4.499 4.311 4.137 3.976 15.247 | 13.799 12.550 11.469 10.529 9.707 8.9858.348 7.784 7.283 6.835 6.434 6.073 5.746 5.746 5.451 5.451 5.182 5.182 4.937 4.713 4.937 4.713 4.507 4.318 4.507 4.318 4.143 3.981 15.622 14.094 12.783 11.654 10.675 9.8239.077 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.1954.948 4.721 4.514 4.323 4.147 3.985 15.983 14.375 13.003 11.826 10.810 | 9.929 9.161 8.488 7.896 7.896 7.372 6.906 6.491 6.118 5.783 5.480 5.2064.956 4.728 4.520 4.328 4.151 3.988 16.330 14.643 13.211 11.987 10.935 10.027 | 9.237 8.548 8.548 7.943 7.409 6.935 6.514 6.136 5.798 5.492 5.215 4.964 4.734 4.524 4.332 | 4.154 4.154 | 3.990 16.663 | 14.898 13.406 12.137 11.051 | 10.116 | 9.307 | 8.602 7.9847.441 7.441 6.9616.534 6.1525.810 5.810 5.502 5.223 4.970 4.739 4.528 4.335 4.157 3.992 16.984 15.141 13.591 | 12.278 11.158 10.1989.370 8.650 8.0227.470 6.9836.551 6.166 5.820 5.510 5.2294.975 4.7434.531 4.337 4.159 3.994 17.292 | 15.372 13.765 12.409 | 11.258 10.274 9.4278.694 8.055 7.496 7.0036.566 6.177 5.8295.517 5.235 4.9794.7464.534 4.3394.160 3.995 19.793 17.159 15.046 13.332 11.925 10.757 | 9.7798.951 8.244 7.634 7.1056.642 6.233 5.871 6.2335.8715.548 5.258 5.548 5.258 4.997 4.760 4.544 4.347 4.166 3.999