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 21% each of the last three years. He has computed the cost and revenue estimates for each product as follows:

Product AProduct BInitial investment:Cost of equipment (zero salvage value)$270,000$480,000Annual revenues and costs:Sales revenues$320,000$420,000Variable expenses$148,000$198,000Depreciation expense$54,000$96,000Fixed out-of-pocket operating costs$77,000$57,000

The company's discount rate is 19%.

Click here to viewExhibit 7B-1andExhibit 7B-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: