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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

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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 period. His annual pay raises are determined by his divisions return on investment (ROI), which has exceeded 25% each of the last three years. He computed the following cost and revenue estimates for each product:
Product A Product B
Initial investment:
Cost of equipment (zero salvage value) $ 340,000 $ 540,000
Annual revenues and costs:
Sales revenues $ 390,000 $ 490,000
Variable expenses $ 176,000 $ 226,000
Depreciation expense $ 68,000 $ 108,000
Fixed out-of-pocket operating costs $ 84,000 $ 64,000
The companys discount rate is 18%.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Calculate each products payback period.
2. Calculate each products net present value.
3. Calculate each products internal rate of return 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 25% each of the
last three years. He computed the following cost and revenue estimates for each product:
The company's discount rate is 18%.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
Calculate each product's payback period.
Calculate each product's net present value.
Calculate each product's internal rate of return.
Calculate each product's profitability index.
Calculate each product's simple rate of return.
6 a. 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?
Complete this question by entering your answers in the tabs below.
Required 2
Required 5
Required 6A%.
4. Calculate each products profitability index.
5. Calculate each products 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 Lous division accept?
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