Answered step by step
Verified Expert Solution
Link Copied!

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. His

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 $ 52,000 $ 94,000
Fixed out-of-pocket operating costs $ 76,000 $ 58,000

The companys discount rate is 18%.

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 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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Managerial Accounting

Authors: Susan V. Crosson, Belverd E. Needles

10th edition

1133940595, 978-1133940593

More Books

Students also viewed these Accounting questions