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 20% each of the last three years. He has computed the cost and revenue estimates for each product as follows:

Product

AB

Initial investment:

Cost of equipment (zero salvage value260,000470,000

Annual revenues and cost:

Sales revenues310,000410,000

Variable expense144,000194,000

Depreciation expense52,00094,000

Fixed out of pocket operating cost76,00058,000

The company's discount rate is 18%.

Required:

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

Product A: 2.89 years

Product B: 2.97 years

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

Product A: 21,430

Product B: 24,066

3. Calculate the internal rate of return for each product. (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.)

Product A: ?

Product B: ?

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

Product A: 0.08

Product B: 0.05

5. Calculate the simple rate of return for each product. (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.)

Product A: 14.6%

Product B: 13.6%

6a. For each measure, identify whether Product A or Product B is preferred.

Net Present Value?

Profitability Index?

Payback Period?

Internal Rate of Return?

Simple Rate of Return?

6b. Based on the simple rate of return, Lou Barlow would likely:

A.Accept product A

B.Accept product B

C.Reject both products