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 22% 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)$350,000$550,000Annual revenues and costs:Sales revenues$390,000$470,000Variable expenses$178,000$210,000Depreciation expense$70,000$110,000Fixed out-of-pocket operating costs$87,000$67,000

The company's discount rate is 20%.

Use Excel or a financial calculator to solve any time value of money problems.

Required:

1.Calculate the payback period for each product.(Round your answers to 2 decimal places.)

2.Calculate the net present value for each product.(Round answers to the nearest dollar.)

3.Calculate the project profitability index for each product.(Round your answers to 2 decimal places.)

4.Calculate the simple rate of return for each product.(Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.)

5a.For each measure, identify whether Product A or Product B is preferred.

5b.Based on the simple rate of return, Lou Barlow would likely:

Accept Product AAccept Product BReject both products