Question
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
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 24% 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) | $ | 320,000 | $ | 515,000 | |
Annual revenues and costs: | |||||
Sales revenues | $ | 370,000 | $ | 470,000 | |
Variable expenses | $ | 168,000 | $ | 218,000 | |
Depreciation expense | $ | 64,000 | $ | 103,000 | |
Fixed out-of-pocket operating costs | $ | 82,000 | $ | 62,000 | |
|
The companys discount rate is 22%. |
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: | ||||||
|
Please answer in the exact format.
Thanks
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started