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

The companys discount rate is 20%.

Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor using tables.

3. Calculate the internal rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and round discount factor(s) to 3 decimal places.)

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

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

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

A	Accept Product B
B	Reject both products

EXHIBIT 8B-1 Present Value of $1; at 5 Periods 4% 596 696 7% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 2596 1 0.962 0.952 0.943 0.935 0.928 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.86 0.800 2 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.750 0.743 0.731 0.718 0.706 0.894 0.683 0.672 0.861 0.650 0.540 3 0.889 0.884 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.575 0.558 0.541 0.624 0.809 0.583 0.579 0.584 0.551 0.537 0.524 0.512 0.865 0.823 0.792 0.783 0.735 0.708 0.683 0.659 0.036 0.613 0.592 0.572 0.562 0.534 0.516 0.499 0.482 0.467 0.451 0.437 0.423 0.410 0.822 0.784 0.747 0.713 0.681 0.60 0.621 0.593 0.587 0.543 0.519 0.497 0.476 0456 0.437 0.419 0.402 0.386 0.370 0.356 0.341 0.328 6 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.458 0.432 0.410 0.390 0.370 0.352 0.335 0.319 0.303 0.299 0.275 0.262 7 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0482 0.452 0425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.263 0.249 0.235 0 222 0.210 B 0.731 0.677 0.627 0.562 0.540 0.502 0.467 0.434 0.404 0.378 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.218 0.204 0.191 0.179 0.168 9 0.703 0.645 0.582 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.283 0.243 0 225 0.209 0.194 0.180 0.167 0.155 0.144 0.134 10 0.676 0.614 0.558 0.508 0.463 0.422 0.388 0.362 0.322 0.295 0.270 0.247 0.227 0.200 0.191 0.176 0.162 0.149 0.137 0.126 0.116 0.107 11 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.123 0.112 0.103 0.094 0.086 12 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.162 0.137 0.124 0.112 0.102 0.092 0.083 0.076 0.069 13 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.084 0.075 0.068 0.061 0.055 14 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.206 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.044 15 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.005 0.084 0.074 0.065 0.057 0.051 0.045 0.040 0.035 16 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 0.047 0.042 0.038 0.032 0.028 17 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.000 0.009 0.060 0.052 0.045 0.039 0.034 0.030 0.025 0.023 18 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.061 0.044 0.038 0.032 0.028 0.024 0.021 0.018 19 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.027 0.023 0.020 0.017 0.014 20 0.456 0.377 0.912 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.025 0.022 0.019 0.016 0.014 0.012 21 0.439 0.359 0.294 0242 0.199 0.164 0.135 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.025 0.022 0.018 0.015 0.013 0.011 0.009 22 0.422 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.003 0.068 0.056 0.046 0.038 0.032 0.025 0.022 0.018 0.015 0.013 0.011 0.009 0.007 23 0.406 0.326 0.262 0.211 0.170 0.138 0.112 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015 0.012 0.010 0.000 0.007 0.006 24 0.390 0.310 0.247 0.197 0.158 0.125 0.102 0.002 0.066 0.063 0.043 0.035 0.028 0.023 0.019 0.015 0.013 0.010 0.008 0.007 0.006 0.005 25 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.009 0.007 0.006 0.005 0.004 26 0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 0.026 0.021 0.017 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.003 27 0.347 0.268 0.207 0.161 0.125 0.008 0.076 0.060 0.047 0.037 0.029 0.023 0.018 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.003 0.002 28 0.333 0.255 0.196 0.150 0.116 0.000 0.069 0.054 0.042 0.033 0.026 0.020 0.016 0.012 0.010 0.000 0.008 0.005 0.004 0.003 0.002 0.002 29 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0.037 0.029 0.022 0.017 0.014 0.011 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.002 30 0.308 0.231 0.174 0.131 0.099 0.075 0.067 0.044 0.033 0.025 0.020 0,015 0,012 0.000 0.007 0.005 0.004 0.003 0.003 0.002 0.002 0.001 0.208 0.142 0.097 0.067 0.046 0.032 0.022 0.015 0.011 0.008 0.005 0.004 0.003 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000 EXHIBIT BB-2 Present Value of an Arruly of 51 in Armers: 4-tal Periods 4% 5% 6% 7% 84 9 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 1 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.828 0.820 0.813 0.806 0.800 2 1.886 1.850 1.833 1.808 1.783 1.750 1.738 1.713 1.690 1.668 1.647 1.620 1.805 1.585 1.565 1.547 1.528 1.500 1.492 1.474 1.457 1.440 3 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2,361 2.322 2.283 2246 2210 2.174 2.140 2.108 2.074 2.042 2.011 1.981 1.952 4 3.630 3.5-46 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.890 2,639 2.589 2.540 2.494 2.448 2.404 2.362 5 4.452 4.329 4212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.068 2.991 2.928 2.864 2.803 2.745 2.689 6 5.2425.076 4.917 4.767 4.623 4.486 4.355 4231 4.111 3.990 3.889 3.784 3.685 3.589 3.498 3.410 3.328 3.245 3.167 3.092 3.020 2.951 ? 6.002 5.786 5.582 5.389 5.206 5,033 4.868 4.712 4.554 4.423 4.288 4.160 4.039 3.902 3.812 3.706 3.605 3.500 3.416 3.327 3.242 3.161 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.96 4.79 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.725 3.619 3.518 3.421 3.329 9 7.436 7.108 6.802 6.515 6.247 6.995 5.750 6.537 6.328 5.132 4.646 4.772 4.607 4.451 4.303 4.163 4.031 3.905 3.785 3.679 3.586 3.463 10 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.689 5,650 5.426 5.216 5,019 4.833 4.659 4.494 4.339 4.192 4.054 3.923 3.799 3.682 3.571 11 8.750 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 5,687 5.453 5.234 5.020 4.836 4.856 4.486 4.327 4.177 4.035 3.902 3.776 3.656 12 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5.918 5.000 5.421 5.197 4.968 4.793 4.611 4.439 4.278 4.127 3.985 3.851 3.725 13 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 4.362 4.203 4.063 3.912 3.780 14 10.563 9.899 9.295 8.745 8.244 7.788 7.567 6.962 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 4.432 4.265 4.108 3.962 3.824 15 11.118 10:380 9.712 9.108 8.569 8.061 7.606 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.878 4.675 4.489 4.315 4.153 4.001 3.859 16 11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.974 6.604 6.205 5.954 5.668 5.405 5.162 4.938 4.730 4.538 4.357 4.189 4.033 3.887 17 12.166 11 274 10.477 9.763 9.122 8.544 8.022 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 4.576 4.391 4.219 4.059 3.910 18 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5,033 4,812 4.608 4.419 4.243 4080 3.928 19 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.306 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 4.635 4.442 4.263 4,097 3.942 20 13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 4.657 4.480 4.279 4.110 3.954 21 14.029 12.821 11.764 10.836 10.017 9.292 8.549 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4,891 4.675 4.476 4.292 4.121 3.963 22 14.451 13.163 12.042 11.081 10.201 9.442 8.772 8.176 7.645 7.170 6.743 6.359 6.011 5.696 5410 5.149 4.909 4.890 4.488 4.302 4.130 3.970 14,857 13.489 12.303 11.272 10.371 9.580 8.883 8.206 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925 4.703 4499 4,311 4.137 3.976 24 15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.348 7.784 7.283 6.835 6.434 6.073 5.748 5451 5.182 4.937 4.713 4.507 4.318 4.143 3.981 25 15.622 14.094 12.783 11.654 10.875 9.823 9.077 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5467 5.195 4.948 4.721 4.514 4.323 4.147 3.985 15.96 14.375 13.000 11.826 10.810 9.929 9.161 8.488 7.896 7.372 6.906 6.491 6.118 5.783 5.480 5.208 4.968 4.728 4.520 4,328 4.151 3.988 27 16.330 14.643 13.211 11.987 10,935 10.027 9.237 8.548 7.943 7.409 6.935 6.514 6.136 5.798 5.492 5.215 4.964 4.734 4.524 4.332 4.154 3.900 28 16.663 14.89 13.406 12.137 11.051 10.116 9.307 8.602 7.984 7.441 6.961 6.534 6.152 5.810 5.502 5.223 4.970 4.739 4.528 4.335 4.157 3.992 16.984 15.141 13.591 12.278 11.158 10.198 9.370 8.650 8.022 7.470 6.983 6.551 6.166 5.820 5.510 5.229 4.975 4.743 4.531 4.337 4.159 3.994 30 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.056 7.496 7.003 6.506 6.177 5.829 5.517 5.235 4,979 4.746 4.534 4339 4.160 3.995 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 8.244 7.634 7.105 6.642 6.233 5.871 5.548 5.258 4.997 4.760 4.544 4.347 4.166 3.999 3. Calculate the internal rate of return for each product. (Round percentage places.) Product A Product B Internal rate of return % % 4. Calculate the project profitability index for each product. (Round discount factor's Product A Product B Project profitability index 5. Calculate the simple rate of return for each product. (Round percentage an Pr luct A Product B Simple rate of return % %